State of Michigan
JENNIFER M. GRANHOLM governor	DEPARTMENT OF NATURAL RESOURCES Lansing	K. L. COOL director

BILL ANALYSIS

BILL NUMBER: Senate Bill No. 704 as introduced

SPONSOR: Michelle McManus

CO-SPONSORS: Liz Brater, Wayne Kuipers, Jim Barcia, Patricia L. Birkholz, and Jason Allen

COMMITTEE: Committee on Natural Resources and Environmental Affairs

Analysis Done: October 13, 2003

POSITION

The Department supports the legislation amendments.

PROBLEM/BACKGROUND

Real estate transactions are often completed without a full understanding of mineral ownership. Individuals may purchase surface rights where mineral ownership is severed (owned by a different party), and subsequently learn that mineral development will occur on their surface. The mineral estate generally has the right to explore and develop the mineral estate.

DESCRIPTION OF BILL

The Bill amends 1994 PA 451, “Natural Resources and Environmental Protect Act” (NREPA), by amending the title of Part 610, adding a title for subchapter 1A of Chapter 3 and creating Part 611. Part 611 requires that a “Notice to Purchaser” be included in sale agreements where the oil and gas rights are severed. The notice informs the potential buyer:

· That the oil and gas rights are severed.

· That the severed owner of the oil and gas rights may have expressed or implied rights to enter and use the surface of the land for exploration and production.

· Advises buyer to fully investigate the rights of the severed oil and gas owner.

· Defines severed oil and gas interest.

The Bill also provides a list of exceptions whereby the “Notice to Purchaser” is not required:

· Transaction value is less than $100.00.

· The buyer is not acquiring the surface interest.

· The buyer is acquiring a severed interest in oil and gas.

· There is a written agreement which is binding on the severed oil and gas owner prohibiting the use of the surface of the land for oil or gas exploration.

· A transaction in which the real property is conveyed as security for an obligation, such as a mortgage.

The Bill established a civil fine of $1,000.00 for a person who violates the Section.

SUMMARY OF ARGUMENTS

Pro

The Bill provides a needed mechanism to inform potential buyers of the impacts of purchasing property where the oil and gas rights are severed and explains the potential impacts.

Con

The Bill only deals with severed oil and gas rights rather than addressing all severed mineral rights.

FISCAL/ECONOMIC IMPACT

There does not appear to be any revenue or budgetary implications for State or local government.

OTHER STATE DEPARTMENTS

The Department of Environmental Quality has concerns with this Bill, which are reflected below in the recommendations for amendments.

ANY OTHER PERTINENT INFORMATION

While the DNR supports the concept of this Bill, there are recommended amendments which would strengthen the Bill and locate it in a more appropriate statute.

• The Bill is more appropriate for the Seller Disclosure Act, 1993 PA 92, rather than NREPA. The Bill does not directly relate to protection or management of natural resources, and neither the DNR nor DEQ has any responsibility for this provision, other than DNR’s responsibility as a seller of real property to provide notice. The placement could mistakenly lead the public to believe that DNR has the ability to enforce this provision. The proposed placement in NREPA would not make it readily apparent to the Real Estate industry, which will be most directly impacted.

• The problems and concerns resulting from severed mineral rights are similar whether those severed rights involve interests in oil and gas, or metallic and non-metallic minerals. The notice should be made generic and applicable to any severed minerals, not just to oil and gas severed minerals. DNR and DEQ recommend striking “oil and gas” and replacing it with “mineral” wherever the terms occur in the Bill.

• The exception in subdivision (2)(d) negates the need to make this disclosure if there is no severed interest existing prior to the transaction or created by the transaction. Yet the notice starts out, "If there is a severed oil and gas interest . . ." [emphasis added]. We suggest removing subdivision (2)(d) to conform to the prospective language in the notice. Additionally, it may not always be clear whether a severed interest exists in a property, and the proposed Bill does not assign responsibility for determining whether such an interest exists. Removing this exception would give every purchaser the knowledge, and therefore the option, to investigate the matter to their satisfaction prior to concluding a purchase.
• Subchapter 1A title is “Unification or Severance of Surface and Subsurface Rights”, which implies that the Subchapter deals with all subsurface rights. Both Part 610 and the proposed Part 611 only address severed oil and gas rights. If Part 611 remains in NREPA as is, this title needs to be modified to “Unification or Severance of Surface and Oil and Gas Rights.”

ADMINISTRATIVE RULES IMPACT

Administrative rules are not necessary to administer the act.

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K. L. Cool

Director

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Date

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