Note the proximity of drilling operations to residence. Photo by Robert Donnan
Recently, I attended a
presentation about gas leasing and the many implications for the
homeowner. There were three speakers, two
lawyers whose area of specialization is gas leasing and a bank official
specializing in mortgages. In today’s column I will quote points made by attorney,
Elizabeth Radow. Ms. Radow has 25 years experience handling real estate
development and is a special council to the law firm of Cuddy and Feder. She
chairs the Hydraulic Fracturing Committee for the League of Women Voters of New
York State. She is the author of an article called “Homeowners and Gas Drilling Leases: Boon or Bust?” in the Nov/Dec 2011 issue of the New York State Bar
Association Journal. I urge anyone interested in these concerns to read it.
This is an excerpt from her
article, and serves as a good introduction to her remarks that evening:
“ Residential fracking
carries heavy industrial risks, and the ripple effects could be tremendous.
Homeowners can be confronted with uninsurable property damage for activities
that they cannot control. And now a growing number of banks won’t give new
mortgage loans on homes with gas leases because they don’t meet secondary
mortgage market guidelines….Also, New York’s compulsory integration law can
force neighbors who do not want to lease their land into a drilling pool, which
can affect their liability and mortgages as well.”
Like Greg May of Tompkins
Trust, (see leasing part #1) who spoke before her, Ms. Radow emphasized that
her remarks were relevant to all property owners, whether pro or con drilling:
“Think of homeownership as a
bundle of rights that encompass the air above, the ground below, and the
surface itself. This bundle of rights comes with expectations. When you buy
your house you have the expectation that for the period of ownership you have
the opportunity to build on the land, perhaps an outbuilding, perhaps a
mother-in-law-apartment. You also want the opportunity to pledge that house as
collateral on a mortgage loan. You might want to lease all or a portion of the
property, or sell the property. You also have expectations of the basics – a
roof over your head, and clean running water. Less tangible expectations are
the things that make a house a home, peace and quiet, fresh air, a safe and
secure place to raise your children.”
When a homeowner leases their
land for unconventional drilling, they are, “giving away a very large percentage
of these bundle of rights. The pre-printed leases that thousands, maybe tens of
thousands of New Yorkers signed, without negotiations, or being told the true
nature of the process, such as the surface operations, the on-site presence of
hazardous substances, the drilling activity, the compressor stations, the surface
right-of-ways, underground pipelines, and perhaps the underground storage of gas.
“In these pre-printed leases
the gas companies are given the right to establish easements for roads and
utilities and surface operations which are not specifically designated when one
signs a lease. This is an important thing to think about. If you have not
attached to that lease anything designating where they might put that easement,
in effect you are giving the gas company an extensive right to put those
easements wherever they want. And because they have reserved this unqualified
right it may leave the homeowner vulnerable and limit where the homeowner can
build on the property in the future, and jeopardize a home mortgage. Think
about the fact that there are no provisions in these leases for maintaining
these easements or for funding them. This means by default the homeowner will
be responsible for upkeep or remediation for anything that might happen with
respect to the easement that was granted.
“Greg May mentioned that if a
person signs a gas lease after a mortgage has been entered into – you will be
in technical default of your mortgage because mortgages prohibit the activities
gas leases permit. But as long as you are paying your mortgage it is unlikely
that the bank will call a default – because they will be unaware that you have
signed a lease – because you didn’t tell them. There is one circumstance in
which it is not a technical default – it’s an absolute default and that is if
you are unable to maintain homeowners insurance on your property. When banks
sell their mortgages on the secondary mortgage market it is the expectation
that the homes are going to be insured for the full life of the loan. All
residential mortgage lenders require homeowner’s insurance from their
borrowers. But even the most comprehensive homeowner’s coverage excludes the
types of property damage associated with the drilling lifecycle, such as air
pollution, well-water contamination, earth movement and other risky commercial
activity performed on residential property.
“There are thousands of
people who have signed leases that do not have insurance in them – meaning in
effect you as an owner have not delegated that right to the Gas Co. – which
means that you have retained the obligation for an activity that you do not
control and this is obviously something that is of concern. People who thought
that signing a lease document would bring in royalties with no other worries
have given away to the gas companies, for the price of an upfront signing bonus,
an extraordinary percentage of the bundle of rights that I spoke of earlier,
while potentially remaining legally responsible for the uninsured actions of
their gas company tenant.
“Also the gas leases are and
can be pledged as collateral for a loan, if they are not sold outright,
increasingly to foreign investors. So in effect homes with mortgages and a gas
lease have two sets of investors riding on the property – those in the
secondary mortgage market and the gas investors. Secondary market investors –
like pensions- want the value of the property in which their pensions are
invested to maintain its value for the thirty year life of the loan. They don’t
want hazardous activity, no explosive materials, they don’t want the risk that
is introduced by industrial activity on residential property. On the other hand,
gas investors would like to see a profitable bottom line. Avoiding risks
directly undercuts the bottom line – so, for example, the more a gas company
has to do to comply with environmental law the lower the profits. These two
investors’ interests are potentially at odds with each other.
“So we have a mortgage and a
gas lease on a single piece of property. This is nothing short of extraordinary
when you consider that our home is our most valuable asset and we have to ask
ourselves when we purchase our homes – did we intend to give away so much
control to third parties? We are in the uncharted waters of heavy industrial
activity on residential property, all on the backs of homeowners. As property
owners it is our right to protect our private property from run- away financing
schemes and from inherently risky, underinsured drilling activity. It is
imperative that we keep our property safe. I feel we need to be risk averse, preserve
our agricultural economy and our private property values for future
generations. The loss of property value is a no-win situation for any New
Yorker, whether you are in favor of drilling or oppose it.”
Additional Resources:
Elizabeth Radow - editorial in Buffalo News
___________________________________________________________________________________
Second Thoughts About a Gas Lease? What You Can Do. – a presentation on Wed. May 23 at 7pm – Candor Fire
Hall – 74 Owego Rd. Rt. 96B (North of Owego) presentation by Ellen Harrison –
founder of Fleased.org and Joe Heath, attorney, discussing lease termination
and how to clear your title.
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