An Ounce of Prevention is Worth a Pound of Cure: An Oil & Gas A&D Tip in the Age of Virtual Closings & Electronic Recording of Deeds

For centuries the recording of deeds which pass title in real property from one to another has been carried out through some local designated official or recorder’s receipt and accounting of the physical deed itself. Now, at least in the Permian Basin (eastern New Mexico and West Texas), more counties of late have been accepting scans of such deeds or other documents conveying or affecting real property in lieu of receiving the physical form itself. This is a convenient situation for all involved, and in many cases it facilitates same-day recording as opposed to slowdowns caused by mailing each way and the document sitting on a pile in the county clerk or recorder’s office – no names mentioned (but the name of the county rhymes with Jeeves).

This convenience could potentially and unwittingly lead to unintended exposure when transacting to sell an asset during a remote or “virtual” closing where the parties are not physically meeting in the same location to close the deal. Under these circumstances in the mineral/royalty and leasehold A&D space, it is many times custom where escrow is not being utilized during the closing process for things to play out like this once both sides are in alignment following a buyer’s due diligence:

• Parties execute pre-closing documents in the lead-up to the actual closing (settlement statement, tax docs, non-foreign status form, etc.);
• Seller scans and emails the executed document conveying/affecting real property at the heart of the transaction; 
• Buyer remits payment, typically by wire transfer, following its visual inspection and approval of the scanned executed document; and
• Upon Seller confirmation of the arrival of the wire transfer(s), Seller overnights document(s) to Buyer and provides tracking info.

If you have read this article’s introductory paragraph then I imagine that you have already inferred where this is heading. Depending on the quality of the scanned image utilized in the step italicized in the list above, it is at least conceivable that a malfeasant buyer (especially a less well known one and/or one without an established reputation) could attempt to record the scan of the executed conveyance prior to remitting payment. The best outcome in such a scenario would be that it all gets sorted in the long run, but surely would be a nuisance. The worst outcome in such a scenario is that a buyer records the not-yet-paid-for conveyance document and then files a bankruptcy petition right afterwards, meaning the seller would likely be subjected to treatment by the debtor/trustee in possession as an unsecured creditor, and could potentially not end up recovering the ill-gotten property. The latter outcome is admittedly very specific and requires a very less than ideal set of circumstances, but the price of protection is very, very inexpensive.

Any seller of real property in our space would be wise to consider marking the scan of the conveyance document during a remote closing in some fashion that denotes that it is not intended—and not suitable—for recording. This can be achieved by watermark, some sort of inserted typeface indicating such, or even with a conspicuous “COPY” stamp. While the odds are low that a buyer would actually be brazen enough to attempt this, why not take a few seconds and totally negate that option?

Article also available at my LinkedIn page. Please note that this article is provided for informational purposes only, does not constitute legal advice, and represents the thoughts of the author individually and not necessarily those of his employer. All readers should contact their attorney to seek advice relating to the contents of this article, and should not act—or refrain from acting—based on the contents of this article without seeking such advice.