LAND & ENERGY QUARTERLY
PREMIER ISSUE
About the Firm… Lawrence D. Brudy & Associates, Inc. is a regionally positioned Appalachian Basin Law Firm comprised of Attorneys, Certified Public Accountants, Paralegals, Legal Assistants, Title Examiners, Title Analysts, Licensed Title Insurance Agents, Real Estate Brokers, Marketing, and Public Relations Personnel.
Practice Groups Energy – The Professional staff provides abstracting services and oil, gas, mineral, and coal Certified Title Opinions detailing ownership/leasehold of surface and subsurface interests for multi-national corporations, regional and local gas exploration/production companies, real estate professionals, developers, investors, buyers, sellers, and lessors of land. • • • • • •
Cost effective “curative” legal services removing defects in the chain of title. Oil and gas valuations, family limited partnerships, corporations, limited liability companies, severance deeds, lease assignments, and estate planning documents to reduce income taxes and minimize or eliminate inheritance taxes on subsurface interests. Negotiation services for Rights of Way and Easements for production distribution. Representation for multi-million dollar sale of several hundred acre site and related assets for multiple well pad and compression station. Lease agreements between exploratory production companies and not for profit organizations [501 (C) (3) (6) (7)] forming for profit entities as the depository of severed subsurface interests and related documentation to enable not-for-profits to receive unrelated business income (UBI) while maintaining non-profit and/or charitable tax status. Counsel to national midstream company for over the limit weight claims successfully reducing fines.
Real Estate – Legal services to local, regional, and national real estate companies, banks, investors, exploration and production companies, homeowners associations, third party employee relocation companies, buyers, and sellers. • • •
Representation of clients in over 10,000 residential, commercial, and relocation real estate transactions. Counsel to developers for the acquisition, sale, and improvement of residential housing lots and condominium developments. Counsel for regional and national real estate brokerages involving oil, gas, mineral, and coal interests including quarterly accredited continuing education for realtors and appraisers.
Litigation – Legal services in the areas of personal injury, insurance company bad faith, real property, landlord tenant, oil and gas contracts, and curatives. • • • •
Twenty-five (25) years and over 50 jury trials of experience throughout state and federal courts in Pennsylvania and West Virginia. Received $1.6 million dollar verdict against a major insurance company for breach of contract and bad faith. Negotiation for six figure settlements. Successfully litigated products liability case to the Pennsylvania Superior and Supreme Courts.
Estate Planning – Administration, counsel clients on the importance of properly prepared estate plans to minimize inheritance taxes and direct assets after death. • • • •
Preparation of hundreds of Estate Plans including Last Will and Testaments, Durable General and Health Care Powers of Attorney, living wills, revocable and irrevocable trusts. Representation in Orphan’s Court for probatable assets of testate and intestate decedents. Preparation and filing of state and federal inheritance tax packages. Counseling for wealth preservation.
Business, Tax, Accounting – Counsel and represent clients on selection of business entitles, income, and inheritance tax liabilities. • • • • • •
Advise clients as to business entity selection for protection of personal and corporate assets. Form limited liability partnerships, companies, and corporations. Quick books reconciliation. Preparation of personal tax returns and business tax returns. Accounting and controller services. Representation at IRS audits and before the United States Tax Court.
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TABLE OF CONTENTS Enhanced Title Insurance Policies…………………………………………………….
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Oil, Gas and Mineral Rights Disclosure and Addendum…………………………….
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What is “Title Washing”?……………………………………………………………..
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2013 Pennsylvania Housing Market…………………………………………………..
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Enhanced Title Opinions: The Use of Comprehensive Well Data Tools……………
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The Oil and Gas Lease: Inside the Controversy……………………………………..
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Oil & Gas Interests & Lease Negotiations…………………………………………….
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How Oil and Gas Production Affects “Clean and Green” Properties……………….
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Before you Sign… Tips for Pennsylvania Farmers…………………………………..
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Pennsylvania Supreme Court Rules in Butler v. Charles Powers Estate to Affirm Dunham Rule………………..……………………………………..………..
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What is a Deed?……………………………………..………………………………….
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The Use of Mapping Data Programs………………………………………………….
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Summer 2013, Lawrence D. Brudy & Associates, Inc., was a proud sponsor of the Butler BlueSox.
“The way a team plays as a whole determines its success. You may have the greatest bunch of individual stars in the world, but if they don't play together, the club won't be worth a dime.” - Babe Ruth
REAL ESTATE: RESIDENTIAL • COMMERCIAL • RELOCATION • TITLE INSURANCE • RIGHT OF WAY AGREEMENTS • SURFACE/SUBSURFACE DEED PREPARATION • ‘SIXTY YEAR’ TITLE SEARCHES • ASSIGNMENTS • LAND AGREEMENTS • SALE / PURCHASE AGREEMENTS DEED PLOT SURVEY PRINTS
CLOSINGS • TITLE INSURANCE • LITIGATION 855.935.1400 www.ldbassoc.com
Very few buyers realize that, like other insurance products, the title insurance industry has insurance products that offer different coverage. An enhanced policy, which offers additional coverage from the standard coverage, is available to the homeowner. Although the enhanced policy premium is 10% higher than the standard policy premium, the reality is a minimal cost to the homeowner for the ability to substantially reduce their risk and exposure on one of the largest investments they will make in a lifetime. Both the enhanced policy and the standard policy include protection against any defect in title existing at the time of purchase. Also included in a standard policy is protection against prior instruments of record that would be in a first lien position, title if vested in someone other than the seller, the unmarketability of title, and the right of pedestrian access to the property.
The enhanced policy, however, covers a number of other issues that may arise, including building permit violations, subdivision problems, and instances of forgery even after the policy is issued. Furthermore, the enhanced policy includes automatic increases in coverage for five years, to account for the increase of value in your home. Because of the added coverage and the low cost offered by the enhanced policy, it is important that purchasers are aware it exists. Buyers who decide to add this coverage will be required to have a survey completed, which should always be recommended as a precaution. A buyer should be aware of what they are buying, since again this is likely one of the biggest purchases they will make in their lifetime.
Lawrence D. Brudy, a licensed Pennsylvania attorney, real estate broker, title insurance agent and notary public, has provided accredited continuing education for the Education Development School of Real Estate, Career Growth Real Estate Academy, Butler County Association of Realtors, Appraisal Institute Pittsburgh Metropolitan Chapter and the Institute for Paralegal Education. The focus of the continuing education has been on oil, gas, coal and minerals and the affects on buying, selling and financing all or a portion of subsurface interests in tandem with the surface estate.
The importance of the Pennsylvania Association of Realtors Oil, Gas, and Mineral Rights Disclosure and Addendum. This addendum is recommended by the firm’s attorneys for every Real Estate purchase and sale transaction. The addendum and disclosure should be completed by all sellers to identify what subsurface interests are excepted, reserved, or to be conveyed. Paragraph No. 1 is to be completed by the seller or often referred to as the Grantor. This paragraph discloses whether the seller is aware or not aware that the oil, gas, and/or mineral interests have been previously conveyed. This section does not pertain to any interests that are leased. This paragraph specifically provides that the warranty in the agreement of sale (special, general) does not apply to the oil, gas, and/or mineral interests. Paragraph No. 2 is also to be completed by the seller to identify that the seller is or is not reserving all or a portion of the oil, gas, and/or mineral rights. For example, if agreed upon between buyer and seller, seller could reserve all of the oil, gas or coal interests. Another option is to reserve an undivided percentage of all of the subsurface interests while conveying the balance. In Pennsylvania, if one severs the subsurface coal from the surface estate, the party owning the coal will receive a separate tax assessment. Paragraph No. 3 details what percentage of free, reserve, domestic, or mansion house gas is to be conveyed. Most Pennsylvania oil and gas leases provide for a certain amount of free gas (150,000-200,000 cubic feet) requiring the landowner to provide their own connection, to use the same at their own risk, and to be responsible to pay for any excess gas used. Most often, deep well gas cannot be used directly from the wellhead and therefore landowners may elect a “payment in lieu of the allotted free gas.” Free gas is available to the landowner who has the producing well on his/her property. In certain circumstances where a property has been sub-divided, the leased property may be supplying gas to a home now identified as a different lot. If a seller has excepted or is reserving oil and gas interests there is an option to reserve the free gas or convey (assign) the same to
“run with the land.” Generally, this covenant can be embodied in the deed of conveyance or by a separate recorded document. Paragraph No. 4 provides for the conveyance of all surface damages from seller to buyer. If a seller is excepting and reserving the oil, gas, and mineral interests, the subsurface is considered the dominant estate and the surface servient, thus resulting in the oil, gas, and mineral owner receiving an easement encompassing as much of the surface as is “reasonably necessary” for subsurface development. Buyers of property where un-leased subsurface interests are being severed can restrict surface development by adding a covenant to the deed. Paragraph No. 5 is documentation generally, and in more modern times, a lease package, will include (a) Oil and Gas lease, Paid Up or Delay Rentals (b) Addendum thereto (c) Memorandum of Lease (d) Order for Payment. The memorandum of lease is the document that will be recorded of public record. This document provides a scintilla* of the oil and gas lease, primarily names of lessor, lessee, property/parcel
identifier, and lease term. The most important documents to be reviewed are the oil and gas lease and the addendum. The lease will outline the exploration and production company’s terms and conditions for leasing. The addendum modifies the boiler plate terms of the lease pursuant to the negotiations between the landowner and the exploration and production company. Paragraph Nos. 6 & 7 provide the opportunity for the buyer to conduct a title examination to determine the status of the oil, gas, minerals, and coal. This examination should include an attorney’s certification (interpretation of the public record search and “curatives” to enable subsurface development of the property). This process will take 30-45 days and costs $5,000.00 or more. If a seller is conveying the subsurface interests, a Certified Title Opinion should be prepared to verify the ownership and leasehold of all subsurface interests. Because a property is under lease, this is not conclusive evidence that the lessor owns or is entitled to royalties or subsurface interests. Paragraph No. 8 is the area where by the seller is to provide the “reservation” language (see paragraph No. 2) if the seller is reserving the non-excepted subsurface interests. The seller is to provide the buyer with the reservation language to be incorporated into the deed of conveyance. Paragraph No. 9 provides for the review of the seller’s reservation language. As with other paragraphs of the PAR Agreement of Sale, both paragraphs 8 and 9 default to a fifteen (15) day response. In Western Pennsylvania it is customary practice for the law firm or title insurance agency working for the buyer or mortgage lender to prepare the deed on behalf of the seller, at a charge to the seller. Our firm, as part of the representation whether representing a buyer or a seller, prefers to prepare the deed of conveyance at a cost to our client to ensure our clients contractual obligations are accurately memorialized in the document(s).
The Firm’s Attorneys and Certified Public Accountants involved in providing tax planning and the preparation of estate plans for clients are often asked what items and/or documents should be stored in a Safe Deposit Box. Last Will and Testaments, Powers of Attorney and Living Wills are not filed or recorded in Pennsylvania, [generally] with the exception of a real property conveyance or death [probate]. Our Attorneys prepare estate planning documents, in triplicate originals (Last Will and Testaments, Powers of Attorney and Living Wills). We suggest a set remains with the client, a set with the Executor/Executrix and the last kept in the file or place where all of the “important papers” are kept. In the event changes need to be made to the documents, we recommend those changes be through our office as the documents are retained on our computer systems. These are items or documents we do not recommend you keep in a Safe Deposit Box: Last Will and Testament; Durable General and Health Care Powers of Attorney; Intervivos and Testamentary Trusts; Living Wills; Funeral / Burial Arrangements; Financial documents including computer logins, passwords and usernames; and, Cash. These are items or documents we do recommend you keep in a Safe Deposit Box: Sentimental or heirloom items; Impossible to replace photographs; Rare coins and stamps; Military medals; and Inventory of all home items (lists, video, DVD) including the combination of home safe. Most important is to provide your person of trust with the information, direction and location of where the “important papers” can be found.
Many consider the drilling of Edwin Drake’s oil well in 1859 the beginning of what we know today as the oil and gas industry in this country. In the years thereafter, subsurface interests began to be severed from surface ownership. What also followed were attempts to recover those interests by subsequent owners in title. One such method in the early 20th Century was the practice of “title washing.” A reading of the pertinent sections of Pennsylvania Oil and Gas Law and Practice (First Edition, George T. Bisel Co., Inc. 2012) provides the following as to the practice’s concept: To understand the manner in which a parcel of land is to be taxed, it must first be determined how the property in question is assessed. Local assessors have traditionally divided real property into two distinct classes of property, Seated Land and Unseated Land (See 72 P.S. §5511.21). Seated Land applied to those parcels of real estate that were improved through building, cultivation or otherwise, while Unseated Land was that which was unimproved or wild, typically consisting of unimproved forest land. The difference in distinctions created a good deal of litigation, as could be expected, with the state legislature ultimately validating all tax sales regardless of classification. The importance of the distinction between seated and unseated lies in the underlying premise that taxes on unseated land constitute a tax against the land itself, i.e., in rem, and conversely taxes on seated land constitute a tax against the owner, i.e., in personam. As such there is no personal liability for taxes on unseated land. Historically then, notice requirements varied between the two classifications, with personal notice not being required for unseated land. In Mullane v. Central Hanover Bank and Trust, 339 U.S. 306 (1950), the Supreme Court held that
the distinction between “in personam” and “in rem” jurisdiction is not the basis for difference in notice procedures (“Notice by publication cannot simply bear the normative weight expected of it. Chance alone brings to the attention of even a local resident an advertisement in small type inserted in the back pages of a newspaper, and if he makes his home outside the area of the newspaper’s normal circulation the odds that the information will never reach him are large indeed”). Early case law has held that a tax sale of unseated land, as it is a tax against the land itself and not any particular identified owner, carries with it all estates within the unseated parcel that have not been separately assessed. Hutchison v. Kline 199 Pa. 564 (1901); F.H. Rockwell & Co. v. Warren County, 228 Pa. 430 (1910). Thus, an unseated parcel of land that was subject to a prior severance of the surface and subsurface interests could be sold at a tax sale and the buyer would take title to the parcel in fee, in spite of the prior different ownership of the surface and subsurface. This transformation of prior split estate ownership into a single fee ownership has been termed by commentators as the unique Pennsylvania “Title Wash.” The practice of title washing was popularly employed by large lumber companies in north-central Pennsylvania beginning at the turn of the 20thcentury. Companies such as the Central Pennsylvania Lumber Company (CPL) held vast holdings of primarily unseated land in Elk, Potter, Sullivan and Lycoming Counties, among others. It’s been estimated that these companies controlled hundreds of thousands of acres in Pennsylvania’s timber lands. A review of tax sale records in any of the counties in which CPL operated reveals that most of their holdings were exposed to tax sales as a result of the nonpayment of taxes due thereon. Often, a related individual (officer, attorney, etc.) would purchase the lands at tax sale, hold the divestible title for the twoyear redemption period, and then convey whatever
interest was obtained as a result of the sale back to CPL (or any other timber company employing the same tactic) upon the expiration of the two-year redemption period. As much of the lands owned by CPL and similar companies were surface parcels subject to prior reservations of subsurface rights, the tax sales against the unseated parcels would arguably extinguish the rights of those holding under prior reservations. As the 20th Century progressed, owners (or their heirs) of lost subsurface interests argued principally that the alleged tax sale was made under such attendant circumstances to render inequitable or actually fraudulent any claim of divestiture of the subsurface interests. As case history progressed, courts began to view subsurface interests as being something apart from the surface interests and their attendant tax sales. In Day v. Johnson, 31 Pa. D. & C.3d. 556 (1983), the Judge reasoned that an assessment of unproduced oil and gas would be an act of “clairvoyance” and held that the tax sale of unseated land had no effect on the severed subsurface oil and gas interest irrespective of its classification as unseated land. Today, title washing is not possible due to changes in tax sale statutes that prohibit owners from purchasing their own property and the current advances in the due process notice requirements needed for the divestiture of liens and other interest holders brought into the tax-sale statutory schemes as a result of recent United States Supreme Court rulings. Presently, 72 P.S. §5860.609 pertaining to UpsetTax Sales provides: 72 P.S. §5860.609. Nondivestiture of liens. Every such sale shall convey title to the property under and subject to the lien of every recorded obligation, claim, lien, estate, mortgage…with which said property may have or shall become charged or for which it may become liable. [emphasis added] A properly noticed Judicial Sale under 72 P.S. §5860.610 could divest a severed mineral interest owner if the owner received actual notice of the pending judicial sale.
Should I have a survey done prior to buying my new home? Attorneys always recommend having a “staked survey” done prior to the closing of the purchase. It is not uncommon that neighboring driveways, tree lines or gardens encroach on the subject property, or outbuildings, wood piles, doghouses have been located on the new buyers property. In many situations relocating the misplaced structure or a recorded easement can solve the issue prior to closing.
I own oil and gas interests that have been severed from the surface estate of land. Can I leave those assets to my children and grandchildren in my Will? Yes. Those interests can be left in percentage assignments as “in kind” distributions as a specific devise or in the residuary clause of the Will. These oil and gas assets are taxable for Inheritance tax purposes. Additionally, if the interests are producing royalties, you will need to contact the Lessee for an assignment, ratification and division agreement to receive the royalties.
My husband, who recently passed away, and I owned our home as “tenants by the entireties.” Do I need to have a new deed prepared and recorded? No. Property held as “tenants by the entireties” is a form of ownership by husband and wife, whereby each owns the entire property. In the event of death of one of the tenants, the survivor owns the property by operation of law without the necessity of probate.
2013 Pennsylvania Housing Market According to the February residential real estate report from the West Penn Multi-List, Inc., the Southwestern Pennsylvania market strengthened for those selling their homes. “It’s a spring for selling in our region. Compared to last year at this time, we now are seeing fewer homes listed for sale, coupled with a significant increase in the number of homes being sold, which is depleting our housing inventory faster than it’s being replenished,” said George Hackett , current president of the West Penn Multi-List, Inc. and president of Coldwell Banker Real Estate Services, Pittsburgh. “This is helping homes sell more quickly and for a higher average price than they did last year at this time.” A comparison of February 2012 to February 2013 data for the 13-county region the West Penn Multi-List serves shows new listings decreased 6.96 percent (2,746 homes versus 2,555), and residential homes placed under agreement increased 18.23 percent (2,633 homes versus 3,113). For the same time period, average home sale price increased 6.08 percent ($140,861 to$149,424), and average days on market decreased 10.62 percent (113 versus 101 days). “People are taking advantage of the continued low interest rates and entering the housing market,” Hackett said. “We hope to see more sellers following suit in the coming months. Working with a professional real estate sales associate can really help people price their homes to sell quickly in today’s market.” These numbers represent the 13-county area serviced by the West Penn Multi-List, Inc., the definitive source for real estate information for its service area – Allegheny, Armstrong, Beaver, Butler, Washington, Westmoreland, Fayette, Greene, Clarion, Lawrence, Mercer, Somerset and Indiana Counties. According to RealtyPIN (¨Philadelphia Real Estate Outlook for Spring 2013,¨ Feb. 8, 2013), Philadelphia
real estate professionals eagerly awaited spring of 2013. Here are the reasons why: Sales prices are on the rise According to recently-released data, the median sales price for a home in the Philadelphia area during the fourth quarter of 2012 was $137,450. That’s a 16.1 percent increase from the same time period in 2011. Like other metropolitan areas, Philadelphia is starting to see consumer confidence in the housing market return, meaning more prospective buyers are now actively searching to purchase a home. The result? Steadily increasing home prices. The higher demand means sellers can charge more for their homes, essentially creating bidding wars between buyers, and that’s always good news for homeowners and their realtors! Listing Prices are holding steady Oftentimes, a homeowner’s listing price and the actual sale price of the home can be very different. This is especially true in a market that is flooded with distressed properties due to foreclosure and short sales. Basically what happens is that the distressed properties end up selling for prices well below what the homes are actually worth, and in an effort to compete, “normal” sellers have to drop their prices, too. In the end, the value of every home on the market is affected because no one wants their home viewed as “overpriced” by prospective buyers. In Philadelphia, the average listing price last week was $213,135. That number has stayed relatively the same throughout the Winter, which is when home sales tend to drop off. The fact that we are seeing listing prices hold steady during the real estate market’s slow period means sellers are confident that they can get the price they are asking for when sales pick back up in the Spring – which is, typically, the busiest time of year for homebuyers. Homes in all price ranges are selling No matter how much your home is worth, if it’s located in Philadelphia, someone may be interested in purchasing it! If you take a look at the five most popular
neighborhoods for home sales in the area, both Rittenhouse Square and Manayunk make the list. That’s significant when you compare the average listing price of homes in those two communities. Real estate statistics show that the average listing price in Rittenhouse Square was $1,068,422 last week, which is almost four times higher than the average listing price in Manayunk ($273,982). Because both of these neighborhoods are among the most popular with buyers, it proves that a well -maintained home in good condition will sell, regardless of its size and/or price. More listings Many homeowners are leery of listing their homes during the winter months because they know there are fewer buyers actively searching the market for a home during that time of year. When spring rolls around, many of those same homeowners decide to list their home, and experts expect even more inventory this year since sellers know that buyer confidence is on the rise. Here are brief summaries of real estate market conditions in March, 2013, in several Pennsylvania cities, courtesy of Movoto: - Lancaster’s home resale inventories increased, with a 50 percent increase since March 2013. Distressed properties such as foreclosures and short sales increased as a percentage of the total market in April. The median listing price in Lancaster went down from March to April. There were a total of 0 price increases and 4 price decreases. - Philadelphia’s home resale inventories stayed the same, with a 0 percent change since March 2013. Distressed properties such as foreclosures and short sales remained the same as a percentage of the total market in April. The median listing price in Philadelphia went up from March to April. There were a total of 111 price increases and 1056 price decreases. - West Chester’s home resale inventories increased, with a 8 percent increase since March 2013. Distressed properties such as foreclosures and short sales increased as a percentage of the total market in April. The median listing price in West Chester went down from March to April. There were a total of 16 price increases and 76 price decreases.
By housingpredictor.com
With the increasing awareness of Marcellus Shale and natural gas activity - often described as no less than a “boom” - has come an increasing need for information, and nowhere is this more apparent than in the real estate field. Accordingly, Lawrence D. Brudy, Esq., President of Lawrence D. Brudy & Associates, Inc., has been called on to explain the complexities of buying, selling and leasing real estate in what is becoming the Natural Gas Age. Mr. Brudy, who is also a licensed Pennsylvania Real Estate Broker, has lectured on Marcellus Shale drilling at Realtor Continuing Education classes for the Educational Development School of Real Estate. He explained the use of the disclosure and addendum used in conjunction with the Pennsylvania Association of Realtors Agreement of Sale, emphasizing the importance of using it on every real estate transaction identifying the estates in land to be “sold,” “excepted,” and “reserved.” Recognizing the need for understanding in this relatively new field, the firm’s attorneys and certified public accountants are available to speak at organizations, company or realtor meetings on the development of oil, gas and mineral interests, the determination of subsurface ownership, the valuation of oil and gas interests, buying and selling land, estate and tax planning involving oil, gas and coal interests.
ENERGY PRACTICE OIL & GAS / MINERAL VALUATIONS • CERTIFIED TITLE OPINIONS • SUBSURFACE SALES / PURCHASES • SEVERENCE DEEDS • LEASE AGREEMENTS • ADDENDUMS • RATIFICATIONS • ASSIGNMENTS • LEASE AGREEMENTS • ADDENDUMS • TITLE ABSTRACTING AND CURATIVES • RATIFICATIONS • ASSIGNMENTS • BUSINESS ENTITY PARTNERSHIPS • LITIGATION • RIGHT OF WAYS •
TITLE • DUE DILIGENCE • VALUATIONS • LITIGATION 855.935.1400 www.ldbassoc.com
Often in title opinions the Firm’s attorneys find older oil and gas leases that have expired by primary term, but have no surrender or release of record. This is particularly evident in the leases from the late 1800’s and early 1900’s. There are several reasons why a release or Surrender may never have been recorded with the Recorder of Deeds in the county where the land is located; perhaps the Lessee is deceased, or the operating company went out of business. Whatever the reason, an unreleased oil and gas lease represents the looming possibility of an unknown well holding an older oil and gas lease by production. One of the ways to confront this potential problem is the use of a resource providing a comprehensive and integrated database of land, well mapping and production information. With the use of a comprehensive well mapping tool, such as drillinginfo, our attorneys are able to locate the site of any recorded well location in relation to any parcel of land. We are then able to view the information on record for a well that may affect a particular parcel of land, including the Lessor name, well operator, well American Petroleum Institute number and name, permits, unitization declarations, depth of the well, and production figures for oil and gas.
Cross referencing the information available from the Department of Environmental Protection with the chain of title, we have been able to enhance the quality of our title opinions. With this resource, and the depth of information it provides, we are able to better determine the current leasehold status of a parcel of land and also provide a more definitive determination as to the unreleased oil and gas leases in a title opinion.
The Oil and Gas Lease Act: Inside the Controversy
On September 7th, Act 66 will officially become effective; yet questions, controversy, and even outrage will remain. Exactly what is Act 66, how does it affect my oil and gas lease, and why all the controversy, are just a few of the questions being asked by thousands of landowners. Act 66, or “The Oil and Gas Lease Act” was intended to create more transparency for landowners regarding the royalties from oil and gas leases, and the deductions that were being taken from the royalties. Companies must now affix a check stub, or financial record, to the royalty checks. The check stubs will include financial information such as the total barrels of crude oil or number of one-thousand cubic feet (Mcf) of gas or volume of natural gas liquids sold, the price the company received per barrel, Mcf, or gallon, the net value of total sales from the property less taxes and deductions, the royalty owner’s interest, the owner’s share of the total value of sales, etc. The source of the controversy, however, comes from Section 2.1 entitled “Apportionment,” which reads: “Where an operator has the right to develop multiple contiguous leases separately, the operator may develop those leases jointly by horizontal drilling unless expressly prohibited by a lease. In determining the royalty where multiple contiguous leases are developed, in the absence of an agreement by all affected royalty owners, the production shall be allocated to each lease in such proportion as the operator reasonably determines to be attributable to each lease.”
Opponents to the Act raise as arguments that this language creates a “forced pooling” statute, that it takes away a landowner’s ability to renegotiate older leases, and that the provision was not properly vetted. It is important to distinguish the difference between “pooling” and “forced pooling.” Besides the obvious that forced pooling is done without one’s authorization, forced pooling is including an owner’s property without a lease into a well unit, and extracting oil and gas that may lie underneath their property, for which landowners would still receive a royalty. Forced pooling must be approved by the state, and some states require an overwhelming majority of landowners in favor of drilling before such forced pooling can be authorized. The reasoning behind forced pooling is that the will of the vast majority to develop the oil and gas they own should not be hindered by a small minority of holdouts. Currently, Pennsylvania allows forced pooling only for shallow wells, or a depth of about 3,800 feet below the surface. In 2009, an unsuccessful attempt was made to allow forced pooling pertaining to wells that penetrate the Marcellus Shale horizon. Governor Tom Corbett has said publicly that he would not sign any legislation that allowed forced pooling. Pooling is condensing multiple leases into one well unit. Most current oil and gas leases contain a unitization clause, which expressly allows the Lessee to combine the leased lands into much larger units. One of the largest advantages to pooling is that companies are able to drill fewer wells, which greatly reduces the environmental impact of the surface. Prior to the hydraulic fracturing method of drilling, well units were much smaller because wells were vertical, not horizontal. A
typical well unit was 40 or 80 acres. Today, a well unit can be well over 640 acres. That is where the controversy begins. When older leases were signed, both the landowners and the oil and gas companies could not anticipate current drilling technology and capability. Thus, as well units were smaller, many leases were silent as to pooling and unitization. Older leases are still relevant today. This is because, generally, oil and gas leases contain two terms of duration in which the lease will remain in effect: The “primary term” and the “secondary term.” The primary term is the term that most people understand the lease to be: one year, three years, five-years, etc. The secondary term contains something to the effect of “and so much longer as oil, gas, or either of them is produced in paying quantities.” Leases that have expired primary terms, but continue to produce are leases that are “held by production.” This means that an oil and gas lease signed in 1875, with a one -year primary term, can still be in effect, given that the well has been producing oil and/or gas. Furthermore, the amount of production may be of little consequence. A Washington County case recently decided that even free gas supplied to the landowner was enough to satisfy the secondary term. Another term that can be found in secondary terms is the Storage Clause. The Storage Clause allows the Lessee to store oil and gas on the property; as long as oil and / or gas is stored on the premises, the lease will remain in effect. It is primarily the older leases that remain held by production that are affected by Apportionment Clause of Act 66. As noted earlier, most modern leases contain unitization or pooling clauses in the lease that allows the Lessee to merge lands into larger well units. One of the most highlighted points made by proponents of Act 66 is that the Act only applies to lands that have already been
leased, and that the Lessee already has the right to drill each land independently, “Where an operator has the right to develop multiple contiguous leases separately…” The owners have already entered into an oil and gas lease, and the Lessee has the right to drill. Pennsylvania State Senator Gene Yaw, who introduced the bill said, “There is nothing that forces any landowner who doesn’t have a current lease to do so.” Pooling also has environmental advantages. “All leases must be held by the same company, and that company could drill a separate well on each property under its existing leases,” Yaw said. “The provision is proenvironment in an attempt to have less wells, but the same opportunities for those who have elected to lease.” The controversy occurs because landowners who missed out on the enormous bonus payments and higher royalty interests by signing leases before the Marcellus and Utica gas boom want to renegotiate the lease. Act 66 does not pertain to a lease that expressly prohibits unitization or pooling, or establishes a maximum unit size. Leases that contain such limitations would need to be renegotiated before that property could be pooled into a unit. The Act also does not apply to leases that contain depth restrictions, where only rights to drill shallow wells were leased. The lack of depth restrictions is also a source of contention, because it was not known that future drilling technology would allow for drilling to such depths. As the leases simply state “all the oil and gas underlying the parcel…” it is presumed that what is leased is all quantities of oil/gas from the surface of the earth to the center of the earth. Opponents of the Act feel that a lack of a unitization or pooling clause should allow the landowner to renegotiate the terms of the lease, demanding a higher royalty amount or bonus payment. Even though Act 66 may thwart any attempts in renegotiation, the landowners still stand to see a significant increases in royalty payments as a much larger volume of gas will be extracted.
Oil & Gas Interests & Lease Negotiations Oil and Gas Lease Negotiations generally begin with the landowner being contacted by a “landman” – an agent representing a gas exploration/development company, and presenting a lease. There are multiple paragraphs and clauses embodied within the lease. This article’s focus will be limited to the forms and types of payments to the landowner. The Landowner is referred to as the “Lessor” and is the party who owns the oil, gas and mineral interests. The exploration/development company is referred to as the “Lessee,” the party that is leasing the interests and responsible for the development of the land. Development includes but is not limited to exploring, drilling, extracting, conducting seismic tests and installing production equipment such as compressing, gathering, treating, dehydrating and separating stations. The standard boiler plate lease agreements typically contain provisions for Lessor payments all of which are negotiable. Paid-Up Lease Bonuses – Negotiated by the landman and landowner or their Attorney, bonus payments vary from county to county and depend upon the shale thickness of the area, well production, and competition for the oil, gas and mineral interests. Lease bonus payments are a dollar amount per acre multiplied by the number of years for the lease. For example, a five-year “paid up” lease at $100.00 / acre / year for 100 acres would calculate as follows: $100.00 / acre x five-year term x 100 acres = $50,000.00 paid-up bonus payment.
Delay Rental Payments – Payments made on an annual basis calculated on dollar amount / acre x the number of acres. For example, leasing of 100 acres at $100.00 / acre for a five-year term. $100.00 x 100 acres x 1 year = $10,000.00 annual payment. Unlike the Paid-Up Lease Bonus, if a well is drilled or the lands are unitized and the property owner begins receiving royalty payments before the expiration of the lease primary term (i.e. five-years) no other delay rental payments are required as the royalty compensation will maintain the lease most often referred to as being “held by production” (HBP). Royalty Percentage Payments – These are the monthly or quarterly payments to the landowner based upon well production and unitization. Variables such as price / thousand cubic feet of gas, unit size, well production and royalty percentage with / without costs impact the payment. For example, using the following sample numbers annual royalty payments would be as follows: Royalty interest 15% without costs, $4.00 / thousand cubic feet of gas, 100 acres of landowner property, 640-acre unit size, 2.5 million cubic feet of gas produced / day = annual royalty payment of $85,546.88. Depending upon how the royalty percentage has been negotiated is determinative along with the other aforementioned variables of the annual payments. Paid-Up Lease Bonus, Delay Rental Payments and Royalties may be treated differently for federal income tax purposes, and questions should be referred to a tax professional for answers.
How Oil and Gas Production Affects “Clean and Green” Properties The Pennsylvanian Department of Agriculture reports that currently, over 9.3 million acres statewide are enrolled in the Clean and Green Program [Pennsylvania Farmland and Forest Land Assessment Act of 1974: Act 319]. The Clean and Green Program is a land conservation program that gives preferential assessment values to landowners who qualify for the program. In short, the program is a tool that serves as an incentive to landowners to preserve agricultural and forest land. In order to qualify, generally a landowner must own 10 acres of land that are used for either Agricultural Use, Agricultural Reserve, or Forest Reserve. If a landowner uses their land for agricultural use, but owns less than ten acres, he/she may still qualify for the program if the landowner can show that the land can produce at lease $2,000 annually in farm income. In 2010, The Clean and Green Act was amended to allow for Clean and Green landowners to engage in oil and gas exploration while maintaining their lands eligible for the program and being subjected to limited roll-back tax penalties. Typically, when a portion of Clean and Green properties cease to be utilized for purposes other than the program qualifying requirements, a split-off occurs and the portion of the split-off ceases to receive the preferential assessment value and is assessed by its fair market value, and that portion is subject to a roll-back tax. The roll -back tax is the difference between the taxes paid based on the Clean and Green assessment and the taxes that would have been paid or payable had that land not been valued, assessed and taxed under the program. The Amended version of the Clean and Green Act of 1974 provides that Clean and Green land may be used for the exploration and removal of gas and oil, including the extraction of coal bed methane. The portion of the lands that are subject to roll-back taxes are those developed for the exploration and removal of gas and oil, including the development of appurtenant facilities, such as new roads,
bridges, pipelines, and other buildings or structures, and of course, the well site itself. The restored well site and land that are no longer capable of being immediately used for the Clean and Green qualifying purposes will be subject to the roll-back tax. The measurement of the restored well site and land is taken from the well site restoration report approved by the PA Department of Environmental Protection. The landowner is responsible for the roll-back tax due upon the filing of the approved well site restoration report with the county assessor. However, the landowner is not responsible for the payment of the roll-back tax if the oil and gas activities are conducted by other parties who hold the oil and gas rights, as long as the transfer of the rights occurred before the land was enrolled in the Clean and Green program and before the Amendment took effect in December, 2010. It is important to mention that oil and gas exploration and drilling companies that lease Clean and Green properties have no obligation in paying the roll-back taxes unless specifically designated in the oil and gas lease.
about the AUTHOR Jonathan D. Hall, Esq. is a licensed attorney in Pennsylvania, where he was admitted in 2011 to the Pennsylvania Bar Association. He earned his Bachelor’s degree from Edinboro University of Pennsylvania with a double concentration in Comprehensive Business Management and Financial Services. He earned his Juris Doctor from Duquesne University School of Law in Pittsburgh, where he was awarded the CALI Award for Academic Excellence in PA Civil Procedure. He is a member of the Energy Practice Group, where his focus is on oil and gas, coal, and subsurface evaluation. He is an active member of the American Association of Professional Landmen (AAPL).
References: PENNSYLVANIA FARMLAND AND FOREST LAND ASSESSMENT ACT OF 1974: ACT 319; PENNSYLVANIA FARMLAND AND FOREST LAND ASSESSMENT ACT - RESPONSIBILITIES OF COUNTY ASSESSORS, SPLIT-OFF, SEPARATION OR TRANSFER AND ROLL-BACK TAXES AND SPECIAL CIRCUMSTANCES; Act of Oct. 27, 2010, P.L. 866, No. 88 Session of 2010 No. 2010-88; PENNSYLVANIA DEPARTMENT OF ENERGY
According to the Department of Agriculture, Pennsylvania is made up of more than 7.8 million acres of farmland. For many farmers who experience financial setbacks or devastating natural disasters, there are appealing alternatives to commercial credit lenders – Farm Loan Programs. In 2010, the Farm Service Agency (“FSA”) administered over $131.9 million in loans for Pennsylvania farmers. Farm Ownership Loans, designed to assist farm purchasers, and sometimes Farm Operations Loans, are secured by an interest in the land itself. For most landowners this consideration has never registered as an impediment to financing. Enter the Natural Gas Age. Pennsylvania farmers and ranchers are warming up to the idea of natural gas extraction, which has been, for many, a real boost for putting money back into the farm for long overdue improvements. Farmers, with existing FSA loans, should take a close look at their security instrument before signing any oil and gas lease. The FSA security instruments contain language that requires borrowers to obtain prior consent from the Agency before entering into any transactions that may affect the real estate security. (7 CFR 765.351). In fact, the FSA regulates that for the “sale” of oil, gas, coal or other minerals, the borrower must receive written consent prior to engaging in such transactions (7. CFR 765.351(b)). Arguably, this includes the leasing of oil and gas interests to a third party. What’s more, an even closer inspection of the loan document (executed on or after December 23, 1985) could reveal that the FSA actually has a security interest in the oil, gas, coal or other minerals if their valuation was included in the appraisal. For loans executed before December 23, 1985 the FSA has a per se security interest in the oil and gas underlying the farm. With this in mind, a potential impediment exists for the farmer who is in negotiations with a gas company. There are some alternatives available, He can negotiate with the gas company for a payoff of the loan so that both
parties can proceed free and clear of the looming “acceleration” clause in the loan document. The borrower/farmer can submit to the local FSA office a FSA-2060 application requesting a partial release of the security interest (i.e. oil and gas) and/or consent to enter into the lease. The former alternative requires a degree of finesse at the bargaining table so as to ensure a fair but profitable lease. The latter alternative has some long standing implications. First, the application requires you to calculate and disclose the “anticipated proceeds” of the transaction. Next, it requires applicant to identify what the proceeds will be used for. The first foreseeable problem is that calculating projected earnings from royalty streams is a complex task. Guesswork is not recommended nor will it serve the applicant in the long run. Another problem an applicant may have is trying to honestly disclose what the proceeds will be used for. Obviously, perpetuating the success of farm operations is number one on the list. However, does the applicant have to disclose the arguably superfluous purchases – grandson’s new truck, the trip to Florida, or the new kitchen counter? What level of detail is required? These are all important questions for the applicant/borrow/potential Lessor. What’s even more compelling is the notation on the very bottom of the application which discretely discloses that the information you put in the application “may be furnished” to almost every federal, state or local agency you can think of, including the Internal Revenue Service and private individuals/entities. It does include the proviso that information requested is “voluntary.” However, failure to disclose could result in a rejection or delay. The complexities of leasing encumbered farmland do not outweigh the benefits. The most important step you can take in protecting your assets and ensuring you are in compliance with your pre-existing contractual arrangements is to consult with professionals and get educated.
Pennsylvania Supreme Court Rules in Butler v. Charles Powers Estate to Affirm Dunham Rule On April 24, 2013, the Pennsylvania Supreme Court issued an Opinion wherein it reversed the Superior Court in the case of Butler v. Powers Estate. At issue was a deed dated back to 1881 which conveyed 244 acres situated in Susquehanna County. The deed reserved one-half of the oil and mineral rights underlying the property to the heirs of Charles Powers. The 244 acres are currently owned by John and Josephine Butler, who in 2010, filed an action to quiet title claiming that they owned the oil and gas under the property. The trial court, relying on the “Dunham Rule,” agreed with the Butlers. The Dunham Rule came into being in 1882 when the Pennsylvania Supreme Court held that a reservation of “minerals” without the explicit mention of oil and gas created a rebuttable presumption that the grantor did not intend to convey oil and gas. The heirs of the Powers Estate appealed to the Supreme Court arguing that the Dunham Rule was not applicable because Marcellus Shale gas is an unconventional gas unlike other natural gas which is a conventional gas. The appellants also argued that a previous case held that if gas was present in coal, it belonged to the owner of the coal. By the same logic, gas found in Marcellus Shale should belong to the owner of the shale, accordingly to appellants. The Supreme Court agreed and reversed the trial court. However, the Supreme Court found that neither the appellees nor the Superior Court provided any justification for limiting or overruling the Dunham Rule, and in the con-
text of a private deed conveyance the term “minerals” does not include oil and gas. The Supreme Court further held that the term “natural gas” was not contained anywhere in the plain language of the deed reservation. Therefore, the burden was on appellees under the Dunham Rule to present clear and convincing evidence that it was the intent of the parties when executing the deed in 1881 to also include the natural gas. The Supreme Court reiterated that the rule in Pennsylvania is that natural gas and oil simply are not minerals because they are not of metallic nature, as the common person would understand minerals. The Supreme Court also distinguished the Butler case from the case which stated that natural gas found in coal belongs to the owner of the coal, U.S. Steel Corp. v. Hoge, 468 A.2d 1380 (Pa. 1983), stating, “We therefore find no merit in any contention that because Marcellus Shale natural gas is contained within shale rock, regardless of whether shale rock is or is not a mineral, such consequentially renders the natural gas therein a mineral. Accordingly, the Pennsylvania Supreme Court reaffirmed the rule that natural gas is not included in a deed reservation or grant without either: (1) natural gas being explicitly contemplated within the reservation or grant; or (2) clear and convincing parol evidence that the parties intended for natural gas to be included within the deed reservation or grant, despite only a general reservation or grant of minerals. Because neither existed, the court held that the trial court correctly concluded that Marcellus shale gas was not included in the deed reservation.
A Deed is a written instrument which conveys
•
Special Warranty Deeds convey the grantor’s
(transfers) ownership in all or a portion of an interest in
interest and “warrants” (guarantees) the interest
real property. The conveyed property can be described
conveyed against any acts, omissions, or defects by
by metes and bounds, landmarks, lot or parcel numbers,
the grantor for the period of time grantor has owned
or residual acreage less outsales. The person or entity
the property but NOT for predecessors in the chain
transferring the property is the “grantor” and the person
of title. A special warranty can be conveyed
or entity receiving the property is the “grantee”. Deeds
regardless of the warranty previously conveyed.
are executed, witnessed, and notarized and recorded in the deed records of the county where the property is
•
to the quality of the chain of title. Quit claim deeds
located. Pennsylvania is a “race-notice” jurisdiction
are often used to convey or relinquish whatever
meaning if there are multiple purchasers who are not
interest the grantor possessed in the property. A quit
aware of the others’ purchase, the first to record their
claim deed can be used to add or remove a spouse's
interest will have a valid purchase. In Pennsylvania, the
name to title as a result of a marriage or divorce.
grantee does not need to sign a deed for the instrument to be recorded. The most common types of deeds used
Quit Claim Deeds carry or provide no warranty as
•
Fiduciary Deeds provide when an estate or trust is
in real estate transactions are identified as General, Spe-
conveying property. When a person dies, whether
cial, Quit Claim, and Fiduciary.
testate (with a will) or intestate (without a will), and an estate is opened to provide the appointment of an executor or executrix, that person takes the
•
General Warranty Deeds convey the grantor’s
fiduciary oath to gather and protect the Estate’s as-
interest and warrants (guarantees) the interest
sets. This fiduciary can also be the trustee of a
conveyed against any acts, omissions, or defects by
“living,” “Inter vivos,” “revocable” or irrevocable
the grantor or any predecessor in the chain of title as
trust. Living, inter vivos, or revocable trusts become
to the quality of title. A general warranty deed
irrevocable upon the death of the settler. A fiduciary
provides a grantee with the most protection against
deed provides to the grantee that the property has
title defects and/or claims. Grantors can provide a
not been encumbered by the Estate. A grantee of a
“general warranty” regardless of the warranty
Fiduciary Deed can convey any type of future
previously conveyed.
warranty deed.
The task of a Title Examiner is to verify the chain of ownership of a subject tract. To do this, we use a variety of documents - tax cards and tax maps, deeds, estates, historical maps, history websites and mapping. All have a grantor and grantee, the date, and usually some type of description of the property. The description can be as little as being “Parcel A of Subdivision B” with no acreage, or a full metes and bounds description giving north and south direction in degrees, minutes and seconds, and measurements in feet, perches or chains. When the metes and bounds are given, a plot of the deed description can be created. With this primary “map” of the land being conveyed, we can follow the land conveyances as the acreage changes by way of acreage being added or acreage sold off. In this manner we can verify the current acreage is correct, that it concurs with the tax map and location, and compare the acreage to subterranean interest like coal, oil and gas. As an example of what can be determined from plotting the deed description, take a look at the following: Exhibit #1: First, the legal description of the subject property is entered by using the directions, degrees, and distances. If there is more than one parcel all must be plotted individually. Where there are multiple parcels being conveyed on one deed, several deed plots are needed to find the correct parcel. In other instances, the subject parcel is a combination of parcels made up of different deeds conveyed in different years. In this demonstration, our subject parcel starts with three (3) tracts from the same deed. Subsequently, there is a sale of 18 acres, show in green.
Exhibit #1
Exhibit #2
Exhibit #3
third tracts begin or end at a point on the first tract or a common landmark is mentioned which enables us to position the next tract. The metes and bounds are also used to position the tracts into the subject tract. Just as the individual tracts are combined to form the entire parcel, the sold tract can be deducted from the parcel to reduce the parcel size. Exhibit #3: This title abstract also included a search to determine coal ownership. The coal vein was “excepted and reserved” through two (2) coal deeds. Both of the coal deeds were then plotted, again, by using the legal description provided on the deed. In this instance, the first coal deed was twenty-one calls and the second coal deed was twenty-seven calls. When the deed plotter is entering that many calls, that person has no idea how the map will look or if it will “close.” Consider the difficulty a surveyor had attempting to survey a tract of this size (over one hundred acres) in the late 1800’s or early 1900’s. Notice that on Coal Deed One the boundary lines do not “close.” Also, since one direction was not readable on Coal Deed Two, the deed plotter allowed the system to estimate the direction and distance in order to close the boundaries. The legal descriptions are not always exact, but are surprisingly accurate for the times. Exhibit #4: As with the subject parcel plot, the coal deeds are then combined and the subject property plot is overlaid;
Exhibit #4
Exhibit #2: Once the individual tracts are plotted, they are combined to form the total parcel. This is accomplished by reading the legal description. Usually the second and Exhibit #5
Exhibit #5: This deed plot confirms that all of the coal underlying the subject property has been sold, i.e. that a part of the subject property is not outside of the coal deed area. It also confirms the size and shape of the remainder of the original parcel. This information is then compared to the current tax map, tax card and current deed description to verify that the conveyance through the chain of title is correct. By: Linda Eaves
1. According to trulia.com, Florida is known to have the most bathrooms per bedroom, averaging 1.28. 2. Throughout history a red door has symbolized many things - in the early days of America, it meant the home was a safe place for travelers to stop for the night and in feng shui a red door invites positive energy into a home. 3. Pittsburg, Pittsburgh or Pittsbourgh? The town was named in 1758 by Scotsman John Forbes, who was honoring William Pitt the Elder. Forbes sent a letter to Pitt the same year to let him know that the city had been named for him, and in the letter he spelled it "Pittsbourgh." Most experts agree that as a Scotsman, Forbes probably pronounced it the same way we pronounce Edinburgh. It wasn't until 1769 that the "Pittsburgh" spelling first turned up on a surveying document, but the real controversy came with the 1891 United States Board on Geographic Names ruling that all towns with the spelling "burgh" needed to drop the "h." Many people were outraged at the decision and refused to follow the rules, even the Pittsburgh Gazette, the University of Pittsburgh and the Pittsburgh Stock Exchange. In 1911, the Geographic Board gave in and officially restored the "h" that was never really missing for most people anyway.
LAWRENCE D. BRUDY & ASSOCIATES, INC. was a Bronze Sponsor of the NAPE East Expo Charity Luncheon which Benefits the Wounded Warriors Project
Note: Former Pittsburgh Steelers running back and four-time Super Bowl Champion, Rocky Bleier, was the keynote speaker at the inaugural NAPE East Charities Industry Luncheon. Since 2007, NAPE Charities has donated more than $2.5 million dollars to benefit veterans.
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