Leasing Part #3 - Joe Heath

This column concludes the three part series on leasing with comments made by attorney Joe Heath who spoke on “ Problems With Gas Lease Termination”. What he has to say will be of interest to all – not just leaseholders. Mr. Heath has practiced law since 1975 and specializes in Constitutional and Civil Rights law. He is the general council for the Onandaga Nation. He helps landowners with their leases and has reviewed over 500 different leases in the last year.  

Mr. Heath began his presentation by talking about the Landmen, the fleet of salesmen that convince landowners to sign drilling leases. He felt that a number of them attempt to get landowners to sign through dishonest means, creating false impressions, telling half-truths and obscuring the full and serious implications of fracking and the lease itself. “The landmen don’t reveal the nature of what you are signing, so I want to explain what is given away in a standard lease.” He emphasized that “ we are not talking about your grandfather’s gas well, we are talking about heavy industrial operations. The terms are very pro-company and unfavorable to a landowner. Most people do not read the document carefully or understand them. They are very complex business transactions with enormous environmental implications. They will impact your title, mortgage, and possibly your ability to get a mortgage and insurance. Many people have said to me ‘before I signed I asked my family lawyer about it and he said, ‘oh, go ahead and sign, it’s just a gas lease’. You have to find someone who knows the intricacies of these leases because the landmen are trained to defraud you”.

“Many people think that a lease just lets a gas company put a well on their property, but it’s a lot more than that: roads, power lines, compression stations, wastewater ponds, not things you want near your home. You give them the right to store gas underground, if the geological conditions are right, no matter where the gas came from. A lease also gives the company the right to take non-domestic water sources, meaning, they can’t take water from your existing well, but could drill their own well and take as much water as they want.”

“Another problem is how they calculate royalties. All the  company’s expenses, the cost of transport, marketing, treatment, compressing, are taken out before you would begin to see royalties. If gas is selling like it is now around $2 there won’t be any royalty payments because there won’t be any profit. The lure of the royalty payment is often an illusion.”

“The pattern I see is that the lease is structured to benefit the corporation as the lease progresses over time with clauses favorable to the company and harmful to the landowner. Ending the lease is not straightforward in New York and leases do not automatically terminate at their agreed end; you have to take very active and sometimes complex steps to terminate. There are automatic extension clauses – all the Chesapeake standard leases I have seen have them- and if you don’t cross them out when you sign, your lease will be automatically extended for another five years. Companies are invoking ‘Force Majeure’. This means if I am building you a house and there was a flood that prevented me from getting to the site – that is an act of God that has interfered with my obligations under the contract. Chesapeake sent a letter to all of their leaseholders claiming that New York’s regulatory situation – where they are not issuing permits during the time that the DEC is reviewing regulations – gives them the right to extend all leases under Force Majeure. I don’t think these claims will hold up in court but the problem is if a landowner has to take these large corporations to court it’s almost impossible. Additionally leases can be extended, by what in PA. are called ‘operations’. It should mean if there is a working well on your property and it’s producing, then your lease will extend, but the definition of ‘operations’ has been taken to a very different level of complication for the landowner. The language in the lease includes what companies call ‘clearing operations,’ construction of access roads, or the delivery of heavy equipment. Or anything similar – it’s very broad language to include just about anything. At the end of a five-year lease, a family in Pa. had had no activity on their land and thirty-one hours before the end of the term, the gas company staked out an access road and put a bulldozer on it. The bulldozer wasn’t even on their particular parcel of leased land – the company had created a large ‘pooling unit’ consisting of a group of properties and claimed 20 leases were extended by parking one bulldozer. Now they are in court.”

Mr. Heath ended his presentation by sharing the complex steps a leaseholder must take if they are near the end of a lease term and want to terminate. “Once people understand what these leases are doing to their real estate I recommend that you use this process because it is an encumbrance on your title. The New York State law starts off looking great, it states that once the lease ends in five years the Company shall send you a document that can be recorded and you go to your county clerk and that will be the end of it. Shall is the problem because there is no penalty or remedy if they don’t send it. If they don’t send you the recordable termination notice, you have to send them a notice letter. Not only to the original company but you have to notify any company that they have sold any portion of your lease to.” This is where it gets complicated because as Mr. Heath described, “companies like Chesapeake sell off collections of leases for profit, often to foreign companies. They can’t make a profit selling gas at low prices – but they can make a profit by bundling and selling leases to other companies in places like Norway, Australia, and China. They also sell the gas overseas at higher prices than they can sell it domestically. [For an in depth article about this practice read “The Big Fracking Bubble: The Scam Behind the Gas Boom”. You won’t know if they have sold your lease, or a portion of it. What Chesapeake did when they sold a third of all their leases is they went to the county clerks, filed one document that implicated 800 or more property owners per county. The property owners got no notice that a portion of their lease had been sold. Not only do you have to send a specific letter to the original company, you have to send a notice to all of them. None of this will be under your name – it will be under the company’s name like Chesapeake, Cabot etc. I’ve worked with leaseholders in Cortland Co. who had to send letters to 8 different companies. They have to be sent by certified mail, and they have to be very detailed with very specific information and particular affidavits. All the forms can be found on the GDACC website [Gas Drilling Awareness of Cortland County]. You send the required forms and wait thirty days. You then take the letters and forms to the county clerk and the lease is terminated. But this is where the landowner is in a catch-22 type situation. During that thirty-day period all the gas company has to do is file a simple letter with the county clerk saying  ‘we are extending the lease’. The dilemma is that by notifying the company of your intentions you have opened up a thirty-day window for them to take some action that they might have otherwise not taken. If this happens and your lease is extended you have to go to court and that is very difficult for an individual.”

The program concluded with Mr. Heath’s offer to look at leases and give advice. There was a long line of people with leases in hand waiting to speak to him.

Another in-depth resource for the landowner who signed a lease before understanding the full implications and the threats that hydrofracking poses is Fleased.org. Click on resources and there are videos of Joe Heath, forms for the leaseholder, and many articles on leasing issues.

Some other resources and videos:

Video of Joe Heath presentation on Leases 

Video - Gas Lease Workshop , Sidney, NY 3/18/12

Drilling Doublespeak- Gas Drillers Disclose Risks to Shareholders - But Not to Landowners

Signing Drilling Leases and Now Having Regrets - New York Times 9/22/11

Does Natural Gas Leasing Hurt property Values?

Brief Summary of Challenges for New York State Leased Landowners

Cortland Clerk Fights Abusive gas Leasing Practices

Residents with expired leases fight extensions

Leasing Part #2 - Elizabeth Radow

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 - video of testimony in Albany and the text of her testimony

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.

Leasing: Part #1 - Greg May

There are many ways in which unconventional drilling i.e. horizontal hydrofracking, is different from the gas wells of the twentieth century: compulsory integration, enormous water usage, the toxic chemicals mixed with the water, pollution of the air, and the surface and underground water sources, constant truck traffic, the radioactivity brought up from the depths, and the wholesale transformation of the countryside into an industrial zone operating 24/7. All of these topics have been covered in past columns and are archived on this site. Each column has links to the primary source material used in my research.

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.

 He started by stating that in New York State one’s title to real estate is called “fee simple”. What this means is that when you buy land, you purchase a wedge of property from the center of the earth to the heavens above. Some states separate surface from subsurface, but in New York State it is traditionally  “fee simple”.

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:

Here is an excellent video of a presentation by Greg May. 

Gas and Oil Leases as They Relate to Residential Lending - Tompkins Co. Council of Governments by Greg May and Carol Chock

Summary Points - Gas and Oil Leases as They Relate to Residential Lending by Greg May

County Work Group Urges State To Address Gas Drilling's Effects on Real Estate

Additional resources about Leases, Mortgages and Hydrofracking:

Learning Too Late of the Perils in Gas Well Leases by Ian Urbina , New York Times 12/1/11

Rush To Drill Creates Mortgage Conflicts by Ian Urbina, New York Times  10/19/11

US Officials Push For Clarity On Oil and Gas Leases - by Ian Urbina , New York Times 11/24/11

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"

Carol Chock - Letter to Gov. Cuomo on Real Estate and Hydrofracking Conflicts

The Truth Behind The Promises

Farmers Caught in Oil Giants Shell Game - MSNBC

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)