Nearly 30 percent of homes in Massachusetts are heated with oil, and homebuyers are often responsible to pay for any oil remaining in the oil tank at the time of closing.
Generally speaking, oil remaining in an oil tank is considered personal property, and the homebuyer is expected to reimburse the seller for the fair market value of the oil in the tank at the time of closing. This reimbursement is often referred to as proration. The general rule relative to proration is reflected in both of the most popular real estate Purchase and Sale Agreement forms in Massachusetts:
• Massachusetts Association of Realtors Purchase and Sale Agreement: “At the time for performance of this Agreement [i.e. closing] adjustments shall be made as of the date of performance for current real estate taxes, fuel value…”
• Greater Boston Real Estate Board Purchase & Sale Agreement: “Collected … taxes … shall be apportioned and fuel value shall be adjusted, as of the day of performance of this agreement and the net amount thereof shall be added to or deducted from, as the case may be, the purchase price payable by the BUYER at the time of delivery of the deed.”
About one-half (50.1 percent) of Massachusetts homes are fueled by natural gas, according to a December 2016 U.S. Census Bureau report. The other most popular heating options in the Bay State are oil (29.3 percent), electricity (14.7 percent), and propane (2.9 percent).
How is a Fuel Adjustment Handled at Closing?
1. Most oil tanks are 275 gallons; however, in rare cases, tanks are slightly larger or smaller, or the seller has more than one oil tank.
2. All oil tanks should have a gauge, which shows the amount of oil in the tank. For example, if the gauge shows that a 275-gallon oil tank is half full, there are approximately 137.5 gallons in the tank.
3. Before the closing, typically at the final walk through or a few days before, the oil gauge is observed and the amount of remaining oil is calculated. There might be some amount of “sludge” at the bottom of the tank. Sludge is a watery, microbial mix that causes some of the oil to break down, mix with dirt and rust, and sink to the bottom of the tank. Sometimes the parties take into account a certain amount of sludge (typically around 10 percent of the size of the tank). There is not an industry standard, and often sludge is not considered. Obviously, it is difficult to calculate a percentage of sludge in a tank or even know if such sludge exists in a particular tank.
4. The current market price per gallon of oil must be determined to calculate the amount the homebuyer will owe the seller at closing. Again, there is not an industry-standard in Massachusetts for how the market price of oil at closing is assessed. The following are common methods: (a) the seller’s oil delivery company sometimes will produce an oil proration form which performs the calculation; (b) the seller contacts the oil company and is verbally informed of the current market price for oil per gallon; (c) the buyer researches local oil prices and reports back the average market price for oil per gallon; (d) the closing attorney makes the determination and calculates the fuel proration on the Closing Disclosure, and; (e) sometimes the seller uses the price per gallon paid for the last oil delivery to calculate the amount owed at closing. Although arguably fair, simply using the price the seller last paid is the least accurate method, since the price per gallon may have increased or decreased since the last delivery. The Massachusetts Department of Energy Resources (DOER) maintains a webpage that aggregates data from full-service oil dealers and provides weekly updates on average oil pricing, as well as historical data.
So for example, let’s say a buyer is purchasing a home with a 275-gallon oil tank which is three-quarters full at the time of the closing, and the market price for oil is $3.00 per gallon.
Not factoring into account any amount of sludge, the oil proration at closing would be $618.75 (275 gallons x 0.75 = 206.25 gallons x $3.00/gallon = $618.75).
Factoring in 10 percent of sludge, the oil proration at closing would be $556.69 (275 gallons ÷ 10% = 247 gallons x 0.75 = 185.63 gallons x $3.00/gallon = $556.69).
How Does Fuel Proration work with Propane?
If you are buying a home that is fueled by propane instead of oil, the fuel proration works the same. There is a gauge on the propane tank and the homebuyer reimburses the seller for the market value of the propane in the tank at the time of closing.
Homebuyers should be aware of the following: (A) The above paragraph assumes the seller owns the propane tank. With propane fuel, it’s not uncommon for the propane supplier to provide the propane tank along with the propane. When that’s the case, what the propane supplier usually does is credit the seller for the full amount of the propane left in the tank, and then, if the homebuyer wants to continue the service, the buyer sets up a new account and pays the propane supplier for the remaining propane at current market price. If the new owner does not wish to continue service with the propane supplier, the company comes and removes its tank. (B) While oil tanks are typically inside the home, propane tanks are most often outside. Also, unlike oil tanks, it is perfectly acceptable for a propane tank to be buried underground. Many newer homes that are heated by propane will have a buried propane tank. The fuel gauge is above ground under a capped access point.
How Does Oil Proration Work in New Hampshire?
Oil (and propane) proration works essentially the same in New Hampshire as in Massachusetts, except that the method of determining the market price of oil or propane is more specific. The parties use the pricing of the company that last delivered the oil or propane. Unlike Massachusetts, there is a universally-used statewide Standard Form Purchase and Sales Agreement, produced by the New Hampshire Association of Realtors. Section10, PRORATIONS, of that Agreement states: “Buyer shall pay for all fuel remaining in tank(s) calculated as of the closing date or such earlier date as required to comply with lending requirements, if any. The amount owed shall be determined using the most recently available cash price of the company that last delivered the fuel.”
Oil and propane heat are much more common in New Hampshire than Massachusetts. Fifty-one percent of New Hampshire homes use oil, followed by natural gas (19.8 percent), propane (13.2 percent), wood (6.5 percent), and electricity (5 percent), according to a 2013 New Hampshire Office of Energy and Planning report.
Additional resources: Massachusetts Consumer Tip Sheet for Oil Heat Contracts and Massachusetts Consumer Tip Sheet for Oil Heat Maintenance.