You have just received a commitment for title insurance and an exception appears:
“Oil and gas lease filed for record at book 300, page 242, on August 2, 1996.”
What is this? Why is it here? Do I need to do something about it? Are the “mineral rights intact?” “Will there be an oil well pump jack in my front yard?” The purpose of this post is to arm you with the basic knowledge to answer these questions and to take the confusion out of your transaction.
Oil and gas rights, also known as “mineral interests” are the right to the oil and gas potentially existing under the surface of real estate. A deed from one person to another automatically passes both the surface rights and the oil and gas rights to the new owners unless the deed specifically states otherwise. If the oil and gas rights have been “severed” or are not “intact,” your commitment will clearly state this fact in the legal description and/or in the exceptions. Simply put, one person can own the oil and gas rights below the surface and another can own the surface rights. Both may be passed to different buyers by deed to the surface and deed to the mineral rights. Typically, in Kansas, surface rights and oil and gas rights are not severed. Most commonly, oil and gas rights are “leased.”
An oil and gas lease is like a surface lease in that the owner gives the right to use real estate for a period of time in exchange for payment. Therefore, the owner is giving the right to another person (typically an oil and gas company) to explore and produce oil from the subsurface for a period of time. Most oil and gas leases in Kansas range from five to ten years unless production or exploration is active. If production or exploration is active, an oil and gas lease continues until such time as it is inactive for the term of the lease. Interestingly, the vast majority of real estate subject to an oil and gas lease is never explored. Companies purchase the lease and in the event oil and gas is found in the area, they can continue the exploration and production.
A title insurance company will list the oil and gas lease on a commitment to make the buyer aware of the fact that a lease exists on the real estate; that somebody potentially has the right to drill an oil well or place an oil well in your front yard. Quite often though, the lease period has expired and no oil has been produced. If this is the case, and somebody familiar with the land will swear to this fact, the exception can be removed from the commitment.
Oil and gas rights can be a complicated subject for even the most seasoned buyer, seller, real estate agent or banker. If you have any questions about mineral rights in a transaction, Tallgrass Title has real estate attorneys that specialize in oil and gas law who are happy to discuss these questions with you. It’s our job!