Ultimately, every sale of an oil and gas property involves the transfer of a real estate interest. And, ultimately, the conveyance document(s) (deed or deeds) need to be recorded of record (“for the world to see and be on notice of”) in the official records of the county or parish in which the property is located. This assures and informs the world that “record” title to the oil and gas properties are now owned by the buyer and no longer owned by the seller. Until this is done, records reflect, to third parties, that the property is still owned by the seller and, accordingly, these third parties will look to the seller if issues regarding the property should arise. To protect both seller and purchaser, timely recordation of these conveyance documents is highly advisable. You would be surprised how many documents –
1. Never get filed due to inadvertence
2. Get filed many months after the transfer “closing”
There are significant risks to a purchaser when the conveyance documents are not filed in a timely manner (the property may get sold out from under you); reciprocally, the seller may retain certain liabilities until the conveyance documents are properly recorded. Therefore, an investment is someone “charged” with the responsibility of seeing that these documents are properly filed in the public records is a good investment.
Although it is unnecessary to be an expert with the recording laws where the oil and gas property is located, it is a good idea to have a basic understanding and an understanding of the risks incurred if documents are inadvertently not filed or are only filed after a very long time.
Lawyers refer to recording laws as “recording statutes.” In the US, there are basically three types of recording statutes:
Under a race statute, whoever records first wins. Thus, if Hoss purports to sell a piece of land to Adam for $100,000, and the next day Hoss purports to sell exactly the same piece of land to Little Joe for another $100,000, then whichever of the two buyers (Adam and Little Joe) is the first to reach the recording office and have the sale recorded will be deemed the owner of the property. Thus, if Little Joe is the first to record the conveyance, he will be the owner even if he knew about the prior conveyance to Adam. Now, of course, Adam may have a lawsuit against Hoss, if Hoss can be found. Race statutes are unusual because many view it inappropriate to protect a party who had actual notice of a prior conveyance.
Under a notice statute, a subsequent purchaser for value wins if, at the time of conveyance, that subsequent purchaser had no actual or constructive notice of the prior conveyance. In short, a subsequent bona fide purchaser wins. Thus, if Hoss purports to sell a piece of land to Adam for $100,000, and the next day Hoss purports to sell exactly the same piece of land to Little Joe for another $100,000, then Little Joe will own the land so long as he was not aware of the prior sale to Adam. However, note that if Adam recorded his interest before Little Joe’s purchase, this recordation will be deemed to give Little Joe “constructive notice.” If Little Joe purchases the land without notice, and Adam then records his prior purchase before Little Joe records his own purchase, then Little Joe will still prevail in ownership of the land. Of course, the loser has a claim against Hoss, if Hoss can be found. Texas is a notice statute state.
Under a race/notice statute, a subsequent purchaser for value wins if (1) at the time of conveyance, that subsequent purchaser had no actual or constructive notice of the prior conveyance, and (2) the subsequent purchaser records before the prior purchaser. In short, a subsequent purchaser in good faith wins only if he records before the prior purchaser does. In this type of system, if Hoss purports to sell a piece of land to Adam for $100,000, and the next day Hoss purports to sell exactly the same piece of land to Little Joe for another $100,000, then Little Joe will own the land only if he was not aware of the prior sale to Adam, and if Little Joe actually records his interest before Adam does. Of course, the loser has a claim against Hoss, if Hoss can be found. This is the most frequent statute, and Arkansas, for instance, is a race/notice statute.
Recently, we had a client that secured a bundle of oil and gas leases. Rather than record these leases promptly, the client waited several months until “all of the leases in the area” had been acquired. In the interim, between the lease execution dates and the recordation dates, several landowners (mineral estate owners), either intentionally or by neglect, leased the land, again, to a third party. That third party recorded its newly secured, subsequent leases first. Because Texas is a notice statute, this third party’s leasehold rights will prevail over my client’s leasehold rights unless we can show that the “leasing” landowners” advised the third party purchaser that they had already leased the land to my client. This is just but one reason why it is important to timely record conveyance documents.
In conclusion, it is important to designate an individual(s) in your acquisition or divestiture team with the responsibility to assure that all conveyance documents are timely filed in the public records.
by Jack M. Wilhelm
Edward Wilhelm and Jack Wilhelm provide assistance to buyers and sellers of oil and gas properties.
THE WILHELM LAW FIRM, 5524 Bee Caves Road, Suite B5, Austin, Texas 78746; (512) 236 8400 (phone); (512) 236 8404 (fax); www.wilhelmlaw.net
DISCLAIMER: The information on this site is not intended to and does not offer legal advice, legal recommendations or legal representation on any matter. You need to consult an attorney in person for legal advice regarding your individual situation.