North Carolina Department of Justice
North Carolina Department of Justice
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AG’s Office issues consumer protection report on fracking

Release date: 5/2/2012

More legal protections needed if NC pursues oil and gas exploration

Raleigh: Landowners and homebuyers need additional legal protections if North Carolina is to pursue fracking, according to a report issued  by Attorney General Roy Cooper’s Office.
 
Cooper’s Consumer Protection Division studied legal and consumer protection issues relevant to shale gas extraction and the leasing process, including impacts on landowners, ownership of oil and gas rights, and existing legal protections. The report issued Tuesday recommends several legislative changes to strengthen protections and identifies areas needing further study.
 
“Property owners need to be protected if North Carolina is going to move forward with fracking,” Cooper said. “Consumers who are considering leasing their land for gas exploration need to be aware of the risks, and they also deserve to have critical legal protections in place.”
 
The General Assembly is currently considering whether or not to allow fracking, or hydraulic fracturing, in North Carolina. Fracking is a method of extracting natural gas from underground rock formations.
 
Issues for consumers
The report outlines a number of issues that landowners need to consider before they agree to sell or lease their mineral rights and allow fracking to occur on their land. Entering into an oil and gas lease may violate the terms of the landowner’s mortgage and make it difficult to refinance. Some lenders will not issue loans on properties where the mineral rights have been leased or sold. 
 
Oil and gas exploration can also damage land, homes, crops and water supply, damages for which the landowner may not be fully compensated.
 
In addition, the report describes the practices of “landmen” who often use high-pressure tactics to try to get landowners to enter into leases to allow oil and gas exploration on their property. Landowners may not get all the information they need before entering into a lease and may be rushed to make a decision.
 
Consumers who are buying real estate need protections, too, the report found.  Most property owners in North Carolina own both the surface land and the minerals underneath, but in split estates, the mineral rights can belong to someone other than the landowner. The report finds that current law does not specifically require a seller to disclose, at the time of a purchase offer, that the mineral rights are not included.  If another party owns the mineral rights, that gives them access to the property and could also decrease its value. Cooper recently issued a consumer alert on this topic.
 
Recommendations
In the report, Cooper’s office recommends that legislators enact a number of additional protections for consumers, including:
  • Written disclosures for consumers and approval by mortgage lender
Notice should include that the lease may adversely impact their mortgage and their ability to refinance, that they should take sufficient time to review and understand the lease, and that oil and gas extraction will likely disrupt and possibly damage their land, among other disclosures. The oil and gas company should also be required to notify the mortgage lender and obtain their approval.
 
  • Mandatory cooling off period for landowners who sign a lease.
To combat high-pressure sales tactics, landowners should get 30 days to cancel their lease without penalty if they decide to cancel after further examination. Notice of the cancellation period should be prominently disclosed in the lease.
 
  • Registration of landmen or lease brokers. 
Landmen or others who solicit leases should be required to provide basic information about their employment or agency status to the landowner, and should be required to register with the NC Department of Environment and Natural Resources or the NC Secretary of State’s Office. 
 
  • Encourage prompt payment to landowners
Require initial payments to landowners for oil and gas leases to be made within 30 days, or landowners can cancel.
 
  • Better legal protection for landowners.
Oil and gas well operators should be required to reasonably accommodate landowners’ use of the land, give them as least 30 days notice if the surface will be disturbed, and offer landowners reasonable compensation.
 
  • Expanded compensation for damages to land, water.
Require oil and gas well operators to compensate landowners for all damages, including taking out a bond to cover potential damages. Provide greater protection for landowners against water contamination or decreased water supply, restore the surface, and protect landowners against claims related to the operator’s activities.
 
  • Notification for property buyers if mineral rights aren’t included.
If the mineral rights aren’t included in the property for sale, the seller should be required to provide prominent written disclosure no later than the time the buyer makes an offer to purchase.
 
  • Better records and notification of lease transfers
Require all oil and gas leases to be recorded with the register of deeds in the county where the property is located, within 30 days of the date of the lease’s execution, and require landowners to be given written notice when a lease is transferred or assigned to another party.
 
In preparing the report, Consumer Protection attorneys attended public hearings and met with stakeholders and experts, including from NC DENR and the Rural Advancement Foundation International. 
 
The complete report is available at www.ncdoj.gov.



Media contact:  Noelle Talley (919) 716-6413