A Gas Lease Can Prevent You From Selling Your Property
Most homeowners did not know about the dangers of hydrofracking when they signed a gas lease and are only now finding out that most home mortgage loans prohibit the types of heavy industrial activity and hazardous materials that come with fracking.
Take the case of Brian Smith of Daisytown, PA who in May 2012 was unable to refinance his home and was told by his lender, “While Quicken Loans makes every effort to help its clients reach their homeownership goals, like every lender, we are ultimately bound by very specific underwriting guidelines. In some cases conditions exist, such as gas wells and other structures in nearby lots that can significantly degrade a property’s value. In these cases, we are unable to extend financing due to the unknown future marketability of the property.” New research indicates that the vast majority of prospective buyers say they would decline to buy a home near oil and gas drilling.
In a March 18, 2012 New York Times article, “Mortgages for Drilling Properties May Face Hurdles”, Ian Urbina reported that the Department of Agriculture is considering requiring an extensive environmental review before issuing mortgages to people who have leased their land for oil and gas drilling. This proposal by the Agriculture Department reflects a growing concern that lending to owners of properties with drilling leases might violate the National Environmental Policy Act, known as NEPA, which requires environmental reviews before federal money is spent.
These are only the latest examples of the trouble that owners and buyers may have in getting a mortgage on land that is leased or near land that is leased.
A growing number of banks won’t give new mortgage loans to buyers for properties with leases, because gas leases stay with the property once it is sold. They won’t lend to homeowners who want to take out second mortgages and in some cases they won’t even lend to neighbors who don’t have a gas lease if their property is close to a property that does have a lease. For example, lenders, such as the FHA (Federal Housing Administration) and Department of HUD (Housing and Urban Development) will not provide financing if surface or sub surface gas rights have been leased within 300 feet of a residential structure OR within 300 feet of property boundary lines.
This also affects people who are subject to New York Sate’s compulsory integration laws, which stipulate that wells can be drilled under your property if 60% of the property adjacent to you does have gas leases. Each applicant for a permit to drill an oil or gas well in New York State must include a map in the application that shows the area that will be assigned to what’s called a spacing unit. If your property is within this unit the gas company has the right to drill under it even if you haven’t signed an oil or gas lease. For more information about compulsory integration laws, please click here to go the “Landowner Option Guide” on the DEC website.
Gas companies can sell a gas lease to anyone they choose without telling the homeowner which means that the homeowner loses control over who comes onto their property to drill and the quality of work they perform. Neither homeowner’s insurance nor the gas lease covers risks from accidents, such as methane leaks, chemical spills, blowouts and more that come with gas drilling, and homeowners could be liable for things that happen that are out of their control. This leaves suing the gas company as the owner’s only option, which can be a daunting and costly prospect.
Gas leases may void title insurance, as the majority of policies do not cover any commercial ventures. The fine print in most title insurance policies in New York State contains specific exclusions that have the potential to void title insurance coverage for any commercial venture, including any of the common activities of commercial drilling, storage, or transmission of gas that occur on a residential property. This means that title insurance may become invalid for homeowners who lease their drilling rights, and it’s likely that even if someone were able to buy a property with a gas lease, they would be unable to get title insurance.
Some communities are already seeing a softening of home sales with buyers holding off making any investment until the issue of fracking is resolved. Mireya Navarro’s New York Times article on September 27, 2012, Gas Drilling Jitters Unsettle Catskill Sales reported that many listings are languishing because potential buyers are spooked by the prospect that New York State will open the region to hydraulic fracturing.
Property values traditionally go down in areas where there is fracking. In many parts of Texas, real estate appraisers have severely discounted valuations (driving prices down by as much as 75%) if a property has a gas well. New construction, one of the bases of economic recovery, won’t start where there is residential fracking because construction loans require a property to be free of the risks that gas drilling brings.
Towns are just starting to understand how these issues will impact assessment rolls, the value of property in their communities and ultimately the tax base. Tompkins County Legislator Carol Chock, who chairs a working group in Tomkins County, said, “We are finding a current negative impact on land values, real estate transactions, and our ability to perform appraisals.”
The heavy industrial risks from hydrofracking could have tsunami-like implications to homeowners and towns, as well as to banking, housing, insurance and secondary mortgage market interests and their investors and could ultimately negatively affect all American taxpayers.
Elisabeth Radow’s excellent article titled “Homeowners and Gas Drilling Leases Boon or Bust” explores this issue in detail.
Based on extensive study and scientific evidence, Catskill Mountainkeeper has called for a ban on fracking. We are also working within the existing regulatory process in New York to raise critical issues, widen the discussion of the impacts of drilling, and expand the options available to protect the public.
Gas and Oil Leases Impact on Residential Lending, by Greg May, VP – Residential Mortgage Lending Tompkins Trust Company, March 24, 2011
Tompkins County Council of Governments – Task Force on Gas Drilling – for Assessment and Land Valuation Subcommittee
Elisabeth Radow, Esq. attorney at Cuddy & Feder LLP, from an article in the November/December 2010 issue of the New York State Bar Association-NYSBA Journal Magazine