Blogging Tulsa Real Estate: The Unintended Consequences of the New Oklahoma Real Estate Contract Forms

The Unintended Consequences of the New Oklahoma Real Estate Contract Forms

The unintended consequences of the new Oklahoma real estate contract forms are numerous and complex. On Friday the Oklahoma Real Estate Commission (OREC) unveiled the new real estate contract forms. The OREC has recommended that licensed real estate brokers and their associates begin using the new forms on November 1, 2009. It's not too late to comment and request that changes be made. Our future economic well being and our national security could potentially be at risk.

The new forms will put into limbo all mineral rights that are not now active or leased, because unproduced oil & gas rights are not tracked nor taxed. Mineral rights will be put in limbo where no one will know what is going on until the State of Oklahoma comes along and takes them as unclaimed property, thereby depriving the landowners of the State of Oklahoma of a significant portion of their wealth.

The county tax assessors only track and tax the surface owners. Oil & gas producers track producing mineral holders in order to distribute royalty checks. Because they are never taxed and do not receive royalty checks, descendants of unproduced mineral holders are unaware of their ownership of severed oil & gas rights. Moreover, privacy laws make it difficult for landmen to find heirs. Detailed census data is closed for seventy years -- that's three generations of tough genealogical work for anyone trying to find holders of mineral rights.

The lawyers, the landmen, the abstract companies, and the title insurance companies will be the big winners of the new contract forms. The consumers, landowners, undeclared mineral holders, and real estate brokers who do not broker oil & gas rights will be the biggest losers.

Potentially the economic engine of the State of Oklahoma will be crippled to the extent that the state may eventually have to quiet title undeclared mineral holders in order to prevent foreign investors from quietly investing in these precious personal property rights that will be regularly severed through the use of the new contract forms.

Only the Osage Nation, who already owns most of the mineral rights in Osage County (all but about 800 acres or so) will be able to conduct business unimpeded by legal problems.

Those of us who sell rural land have been aware of the problems caused by the previous Vacant Land contract forms and have been hoping to get them changed so that the personal property rights would no longer be severed by the vacant land contract forms for "surface rights only." Instead we were shocked to discover that all the new contract forms are written for the purchase of surface rights only. Knowlegable brokers and associates will be crossing out certain words in the new contracts. However, that will not prevent damage being done by ignorant real estate sales associates who will not be realizing that they are not representing the best interests of their buyers and their descendants.

Does this mean that the OREC wants all real estate brokers and associates using these new forms to be representing their clients as transaction brokers? This must be the case, because by law a single party broker must advocate for and work in the best interest of their clients. Any buyer's broker using the new forms without alteration will not be representing the best interest of their buyers and therefore will be leaving themselves open for legal action if they act as a single party broker.

Yeah, yeah, yeah, how can that be? Just wait until the D6 dozers and the drilling rigs start pulling up on your buyer's land! They'll cry when they realize that the mineral estate is dominant over the surface estate. Then they'll call their lawyer who will then call you. You will be responsible for not having explained to your buyer the unintended consequences of their having purchased only the surface rights.

At least with the old forms our buyers were able to purchase all of the rights owned by the seller -- however many and kind of rights those may have been.

Moreover, we can all kiss goodbye to the concept of quiet enjoyment.

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Comment balloon 8 commentsDebbie Durkee • October 25 2009 10:44AM

Comments

Interesting Debbie, I did not know this. I am going to do research as to the consequences. I don't do land sales, but anything that has an impact on our business and the State of Oklahoma is important. Thanks for the heads up.

Posted by Joe Pryor, REALTOR® - Oklahoma Investment Properties (The Virtual Real Estate Team) almost 9 years ago

Debbie,

Thanks for the post.

I have had buyers actually get a mineral rights abstract because as pointed out, those are not always picked up on.

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Posted by 1 ~Judi & Don Barrett & Chassy Eastep - Integrity, BS Ed, Integrity Real Estate Services -IDABEL OK (Integrity Real Estate Services 118 SE AVE N, Idabel, OK 74745) almost 9 years ago

Debbie,

I have not read the changes but will do so and comment at that time.  I own mineral rights on a rent house where the previous owner failed to reserve them and I now own them and receive a monthly check.  I can guarantee you they will stay with me even after I have sold that rental.

Posted by Russell Benson (Berkshire-Hathaway HomeServices/Anderson Properties) almost 9 years ago

Joe, Judi, and Russell:

Thank you for your comments. 

Judi:  a mineral rights abstract will help the buyer understand the split estate when it is severed from the fee estate.  It will then have to be interpreted by a qualified oil & gas attorney.  A landman can help your buyers negotiate the purchase of the rights that are not owned and negotiate leases with oil and gas companies for the rights that are owned.  

It's easy to find the owner if the land is in production as in the case of Russell's mineral rights.  That's because produced mineral rights are taxed.  The purchasers (the guys who send the trucks to pick of the oil from the tanks) are the ones who keep track of production for the purpose of taxation of the produced oil & gas.  My understanding is that the severed oil & gas rights are, in effect, personal property at this point and are taxed as such.

The difficulty comes in when the land is not in production and the owners of the mineral rights die and a few generations later no one remembers that they own them -- meanwhile the severed rights will have been split in a similar fashion as when the surface is divided when owned by tenants in common. 

It's the constant unrecorded dividing up of the unproduced mineral estate that will cause havoc with our economy years down the road.  It will get complicated legally and further drive up the price of oil.

 

Posted by Debbie Durkee, ALC, CRS -- Land & Country Estates near Tulsa (Coldwell Banker Select, Realtors -- Tulsa, Oklahoma) almost 9 years ago

I just responded to a direct message from Arleene, who asked:  How can we prevent our mineral rights, that are not now leased, from being taken by the State of Oklahoma as unclaimed property?

Her question was a good one, and so I want to share my response.  She asked how to prevent the undeveloped mineral rights from escheating to the State as unclaimed property. I don't think it's an issue until the property is produced. Then the royalty money will go to the state.

However, I have seen real estate developers quiet title the mineral holders under their developments. Why couldn't the state or federal government quiet title in this era of grabbing for cash?

I was recently told by the president of an oil company (that recently drilled an unexplored section of Tulsa County) that the royalty money would escheat to the state after 7 years (that's a case where the oil & gas rights were pooled because the heirs of the owner who died in 1953 had not been found).

I had a conversation last night with another Tulsa oilman who has been the president of the Tulsa Association of Petroleum Landmen. He told me that the state will not actually own the mineral rights when the property gets produced. The royalties will escheat to the state. They will stay there waiting in perpetuity as unclaimed property. The problem is that the state will be earning the interest on the money in the account rather than the rightful owners. That will help the state coffers, but not the rightful owners of the minerals.

My fear is that the federal government and the states will start grabbing the mineral rights. There is currently a battle in Pennsylvania going on between the state and the federal government who only bought the surface when they bought the land for the Allegheny National Forest. I blogged about that about a month ago.

Posted by Debbie Durkee, ALC, CRS -- Land & Country Estates near Tulsa (Coldwell Banker Select, Realtors -- Tulsa, Oklahoma) almost 9 years ago

Why would OREC even consider severing the rights on the new contracts?  There HAS to be a rationale for it -- I'd really like to see/hear that before using the new forms.

Posted by Greg Peterson, Broker/Property Manager Oklahoma City Metro Area (Favor Real Estate) almost 9 years ago

Greg:

The rationale was not explained at the meeting I attended.  I can only conjecture.

Posted by Debbie Durkee, ALC, CRS -- Land & Country Estates near Tulsa (Coldwell Banker Select, Realtors -- Tulsa, Oklahoma) almost 9 years ago
Alakazaam-information found, problem solved, thnaks!
Posted by Jacey about 7 years ago

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