Guest Opinion: Full disclosure needed on real estate deals
January 31, 2014
South Dakota's property disclosure statute should be revised. I suggest the 2014 Legislature Session amend the current "property condition disclosure law" to require sellers of real property to disclose the status of both mineral rights and water rights to prospective buyers. In 1993, the legislature passed a real estate "property condition disclosure law" which requires written disclosure of the presence of easements, zoning restrictions, water damage, and the like as a part of a sale of residential property. Sellers make these written disclosures to a purchaser concerning the condition of a property at the time a purchaser makes an offer to purchase. The current law does not require that the seller disclose information regarding mineral rights ownership or water rights.
Water rights as well as mineral rights are issues that affect the sale of real estate and affect its value. Both often go unaddressed in South Dakota when selling property. The consequences of a failure to address these rights are not pretty. Surprises when doing a real estate deal should not occur. The era of "let the buyer beware" is long gone. The South Dakota Supreme Court has stated, "The doctrine of caveat emptor (let the buyer beware) has been abandoned in favor of full and complete disclosure of defects of which the seller is aware." I suggest that putting everything material on the table when doing a real estate sale is the best policy.
This fall the South Dakota Real Estate Commission provided me with the opportunity to present workshops throughout the state to licensed real estate brokers. The subject of the workshops was, among other matters, water rights and mineral rights as they affect real estate. During these workshops brokers discussed with me problems that occur in a real estate transaction because of the absence of such undisclosed interests. The need to protect purchasers through honest and full disclosure of mineral and water rights has also been borne out in the experiences of other states. Four years ago, Wyoming adopted a statute which requires sellers of property to disclose whether any mineral rights have been severed prior to a sale. The reason for the new law, according to the President of the Wyoming Realtor's Association, was to avoid the unpleasant surprise encountered by people who bought property thinking that they owned the rights to minerals only to find that a third party would appear on their land, and start digging on the property. By making the buyer aware of the severance of mineral rights, Wyoming's new disclosure law allows a prospective purchaser to make a more informed decision when purchasing. Recently in Florida a large home builder announced that it will stop severing mineral rights when selling property – after a local newspaper wrote a series of articles investigating the practice of selling property to people who learned of the practice only at the closing table where they felt pressured to consent.
Mineral rights can be severed from surface property rights on the same piece of property in South Dakota and do not automatically pass with title to the land in a sale. A third party can own the mineral rights to land. Title insurance is not the answer to this issue. Title insurance does not insure mineral rights on a property, nor does title insurance cover such things as water permit rights. When doing a real estate deal a purchaser should not assume that the title insurance policy will offer coverage. Water rights present a similar issue. A water right, with some exceptions, is an 'appropriated right' given by the state. Neither water nor water rights are insurable through title insurance.
"Full disclosure," makes for a complete sale in a real estate deal. Full disclosure is the act of a seller of providing all the facts which the other party should know before the other party decides to buy. Full disclosure is not something I would always do on a first date when I was a young man – but that is another matter. Full disclosure is akin to the term used by contemporary politicians and pundits known as "transparency." South Dakota's property condition disclosure law aims to achieve full disclosure, but the current language falls short of this goal. While the disclosure statement requires a seller to disclose such things as unrecorded liens and easements, it does not require disclosure of mineral interests or water rights. South Dakota's property disclosure law should be amended to disclose mineral and water rights associated with a piece of property.