3:49pm

Wed June 15, 2011
Marcellus Shale

Gas lease fine print impacts home loans

The state is still writing rules for natural gas drilling. But local banks say they’re already restricted from issuing some mortgage or home equity loans by gas leases.

That’s because contracts may not always include enough protections for homeowners.

If you own a piece of land free and clear in New York, you own rights to use the surface. You also own what are called the mineral rights – the coal, the gas, the gravel that might be in the ground.
 

“In theory, [ownership] goes up to the heavens and down to the center of the earth,” explains Chris Denton, an Elmira attorney who has come to specialize in work with landowners on gas leases.

These are contracts with the oil and gas industry that work a little like a time share. Companies say: ‘We’d like in on the unused parts of your land. We don’t want your house, but we want to access what’s underneath it.’ In the Marcellus Shale, they’re eyeing your natural gas.

But a key difference (among many) between a gas lease and a time share: you and the gas company are going to share the land at the same time.

Unless you set some limits in your contract – like the company has to drill under your property from a neighbor’s land – you’ll also give them permission to access the gas from the surface, where you live.

“If you just grant without discussing surface rights,” says Denton, “by law in both Pennsylvania and New York, the surface is subject to the ability of the people to take the gas out.”

A harder sell to lenders

This has come to a head in the upstate New York mortgage market, according to Greg May, vice president for mortgage lending with the Tompkins County Trust Company.

“There’s a constant flow of mortgage money at competitive rates, but we do have to follow their guidelines.”

May says if a property is leased for drilling, banks have trouble figuring out what it’s worth.

Contract details that banks hadn’t previously considered, like the buffer zone around the house, are now a regular concern for lenders. May says in the last six months, gas companies have become less cooperative about making changes to their leases.

Lawyers say more deals are falling apart before they even reach the bank because sellers want to hold onto mineral rights.

In Pa.: same land, different owners

Western Pennsylvania has a long history of oil and gas drilling. So mineral rights and surface rights may have been sold separately generations ago, which means they’re now owned by different people. 

Tim Kelsey with Penn State Extension says that’s led to unpleasant surprises for some of Pennsylvania’s homeowners.

“People saying they retired here, they own 10 acres and suddenly they find out in a week that a rig is going to come in and the grove of trees that they really like back away from the house is going to be bulldozed and they have no right to be able to say no to it. [There is] a lot of anger, a lot of pain about that process.”

Kelsey says these circumstances make gas drilling’s ‘haves’ and ‘have nots’ very visible in Western Pennsylvania.

Some sellers in the northeastern part of the state are also trying to unload their properties while keeping the mineral rights.

“[In the] long run, generations from now, we’ll have the same challenges there that we have in parts where historically there’s been mineral extraction here,” Kelsey says.

In New York, State Assemblywoman Barbara Lifton from Ithaca, has taken on the mortgage issue for now.  She’s just submitted rules that would answer some of lenders’ worries. However, there are just a few days left to pass that legislation this session – and some bigger fish to fry.

Lifton says she “has extremely low expectations [for passage this week] unless there’s more pressure on both houses.”

May says he expects to have more conversations with county and state officials in the coming months. Lifton’s legislation will come back up for consideration in January.

 

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