This week’s column is on gas
leasing and the many implications for the homeowner. Recently, I attended a
presentation given by three experts, two lawyers whose area of specialization
is gas leasing and a bank official. In today’s column I will summarize the
points made by Greg May, Vice President for residential mortgage lending at Tompkins
Trust Co., a man with 40 years of experience in the mortgage field. Mr. May
prefaced his comments by saying that when it comes to hydrofracking he is
neither pro nor con and that he was not there to debate the issues; rather he
was there to discuss the conflicts between mortgages, insurance, and leases, so
that people with existing leases or contemplating signing one can be informed. He
also made it clear that his expertise is residential lending and that his
comments would address residential mortgage issues. The following comments are
paraphrased from his presentation.
Fannie Mae/Freddie Mac (The Federal
National Mortgage Association, nicknamed Fannie Mae, and the Federal Home
Mortgage Corporation, nickname Freddie Mac) set standards for all residential
mortgage lending in the US. These mortgages come with these restrictions and it
is the same in every state: There cannot be any surface or subsurface entry or
infringement into that wedge of property (fee simple) and there cannot be any encroachment
within 200 ft. of residential structures and its outbuildings. Every lender in the country uses these
guidelines as a basis for their mortgage lending. Nothing can infringe upon
your wedge of property, either on the surface, or underground. The current NYS
regulations governing gas drilling allow a 100 ft. set back from wellhead to
residential structure. This is a conflict, one that many homeowners were not
aware of when they signed gas leases. This also becomes a conflict if someone
is compulsory integrated
The FHA (Federal Housing Administration) and VA (veterans administration)
have their own set of lending rules for mortgages and they are different from
Fannie Mae/Freddie Mac in that their guidelines state that there can be no
surface or subsurface entry within 300 ft. of a residential structure or out
buildings or 300 ft. from the boundary of the property.
Section 18 of the standard Fannie Mae/Freddie Mac mortgage document
prohibits the transfer or sale of any portion or rights in a mortgage property without the written consent of the
lender. “ I have worked for Tompkins Trust for 4 ½ years, and not once has
there been a request asking for permission, yet I am confident that there have
been hundreds, maybe thousands of leases signed in that period of time. This is
a technical default under the terms of the mortgage: you’ve broken the promise
that was made to the lender. This is not particular to my bank – but any bank-
this mortgage document is standard in the industry. It says you cannot pledge
those rights without prior consent and if you talk to your lender they are
going to say, no, we don’t give you permission to assign the rights.”
Section 21 of the same document prohibits environmental hazards, hazardous
substances, and particularly gas to be stored, disposed of discharged, or
released on a mortgaged property. When you sign a mortgage agreement this
section states that you (as the owner) will not do this, or you will not allow
anyone else to do this on your property. Typical residential usage is allowed, like
gas for the mower or propane for heating, but this is talking about major industrial
purposes. Some leases that landowners have signed with the gas company give the
company the right to store gas on the property, or underground, and that is
specifically prohibited in the mortgage document.
“If you have signed a lease after your mortgage was in place it is a
technical default. Do you think any lender in their right mind will try to
foreclose? No, – but what is important is that the gas companies are not
letting you know that there are specific prohibitions to signing a lease. Landmen,
when they come to the house, are not saying you better check with your bank
first if you have a mortgage”.
“We are seeing a lot of refinance activity to take advantage of lower
rates. I am finding that people have signed a gas lease that gives away rights to
the gas company and creates an opportunity for environmental impact. People are
being told it is not a problem, but it is a problem folks”.
“A unique problem with horizontal slickwater hydrofracking is that it is no
longer like the old vertical wells, so even if you have increased setbacks you
are drilling horizontally and entering into the wedge of earth that is “fee simple”
in NYS. So even though you might have a proper setback on the surface, the
drilling goes down and then enters the wedge of property underground. That’s
the problem and it’s a challenge for NY State”.
Another problem has to do with a residential homeowner’s insurance.
Traditional homeowners insurance does not cover any damages as a result of industrial
operations.
A local agent might say, “it is not a problem,” but you need to call the
company, not the agent. And they will say, “absolutely not – it is not covered”.
“I have gotten written confirmation from a number of large companies. For
example Kemper Insurance said, ‘Basically our position is that we do not want
to entertain risks where there is any type of gas drilling on the property. Our
rates do not contemplate that exposure.’ Safe Company stated, ‘we do not look to do these – too much
exposure to explosion for our property as well as a liability possibility for damages
done to other properties’. If you have signed a lease you might not have the
coverage you thought you had and that is a problem.”
The problem is that a company insures your property and then at some point
later a gas lease is signed and sometime in the future there is a claim because
something happens due to drilling activities. Suddenly there are pipelines,
roadways, compressor stations, drilling platforms. These are industrial, not
residential endeavors and they will void your insurance. If your insurance is
terminated, then your mortgage is in default.
Elizabeth Radow, one of the lawyers speaking the same evening put it this
way, “If you are unable to maintain homeowners insurance on your property it is
no longer a technical default, but an absolute default.”
Gas leases, mortgages and insurance are
a complex issue that not many homeowners have thought about or have even known
what questions to ask. Below are links to videos and written material by Greg May:
Gas and Oil Leases as They Relate to Residential Lending - Tompkins Co. Council of Governments by Greg May and Carol Chock
Video -Legal Issues for Landowners With or Without a Lease - a presentation sponsored by Cornell Cooperative Extension. Presentation by Randy Marcus, attorney is particularly excellent
Video- Landowners Rights Regarding Oil and Gas Leases - Mike Danaher- Assistant NYS Attorney General - Cornell Cooperative Extension.
Carol Chock - Tompkins Co. Legislator "Comments on sGeis on Real Estate and Hydrofracking Conflicts"
Couple Denied Mortgage Because of Gas Drilling - WTAE - Pittsburgh
Ban and Moratoria update:
Moratoriums: Butternuts, Bristol, Caroline, Lincoln, Little Falls,
Manchester, Olive, Oneonta (town), Oppenheim, Rush, Schoharie, Scipio,
Waterloo.
Bans: Albany, Bethel, Oneonta (city), Skaneateles (town)
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