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Mortgages may make signing drilling leases more difficult, attorney says

February 23, 2014
By KATIE SCHWENDEMAN - Staff Writer (kschwendeman@mojonews.com) , Morning Journal News

LISBON - It is possible that leasing property for oil and gas will make it more difficult to get a loan on a home, attorney Alan Wenger of the Harrington Hoppe and Mitchell law firm said.

Wenger, who has negotiated leases for landowners in Columbiana County and surrounding counties, was contacted to weigh in on the recent East Palestine oil and gas leasing discussion, specifically, those regarding leasing and its effect on mortgage lending.

He confirmed that some mortgage lenders require borrowers to have their consent before leasing property for oil and gas.

"Generally, the smaller local banks don't seem to have much of a problem with lending of properties that are subject to lease, but the larger banks, like Huntington and PNC that aggregate mortgages and sell them as packages to underwriters out of state are looking at anything that might jeopardize security," he said.

In some cases it was the oil and gas leasing companies that balked at leasing property until consent was given by the lending institution.

"In running the title the leasing companies, whether it is BP or whoever it is, will usually want a very clear written consent from a lender if they see the property is subject to a lease. In some occasions we had trouble getting those consents from lenders, or we had to pay dearly for them," he said.

Money spent was in the form of application fees that were "many hundreds of dollars" and the lenders also required the borrower to assign some of their oil and gas leasing bonus money to pay down the mortgage, he explained.

"There was some of that in Trumbull County. I think there has been some of that in all of the counties that I am usually involved in," he added.

East Palestine Councilman Alan Cohen, who brought up the lending concerns, said his own "standard Ohio" mortgage includes a clause that he must obtain written consent from his bank before leasing mineral rights on his property.

"This could affect every single piece of property in East Palestine, now and for prospective buyers in the future," he said.

Wenger said anyone leasing property for oil and gas should be aware of what their mortgage says.

"Many mortgages do not allow the owner of the property to lease it for oil and gas without the mortgage owners' consent. Technically, if you did that they could call the mortgage and make you pay it off, or they could deem themselves not secured," he said.

In his experience he has seen mortgages refer specifically to oil and gas leasing, while others refer to anything in which security may be jeopardized.

Security is jeopardized in cases where the value of the property it diminished.

"Drilling activity can, in some folks' eyes, affect the value of the property ... it might not automatically be a problem, but could under some circumstances," Wenger said.

Charley Althof, president of the Youngstown Columbiana Realtor's Association, said the association has not had any negative responses from lending institutions regarding oil and gas leasing.

"Our sales are up and the gas and oil industry has been positive. I have not come across any cases where people have been denied leases due to oil and gas leases," he said.

The leasing does not appear to have a negative impact on home sales, since sales in the state have increased by 14.7 percent in 2013 over 2012, and the average sales price of a house in Ohio increased by 5.2 percent last year, he said.

The average sales price of a home in the 17 counties that make up northeast Ohio is $135,000, he added.

He said that, typically, the issue comes down to the sale, considering most buyers want all the mineral rights on a property.

Sometimes that isn't always possible, since a previous property owner could still have claim to the minerals despite moving elsewhere.

According to Wenger, marketability of a property can be affected when mineral rights are severed from surface rights, in which case the mineral rights owner could have the ability to approve drilling on the property even though it is now owned by someone else.

The rights are severed through sale or transfer, and in some cases could have been severed several years before a landowner purchases a property.

"It's not uncommon for the mineral rights to be severed from the surface rights ... the worry might be that a drilling rig can come in and plant itself on the back 40 of your property," Wenger said.

Some lenders also take into consideration if rigs are located within a certain distance of a property, he added.

East Palestine is petitioning landowners to combine their property with municipal property to offer to oil and gas companies for leasing and Cohen and Councilwoman Ellen Beagle are concerned that doing so will result in unitization, a legal process that allows companies drilling for oil and gas in Ohio to force unwilling or reluctant property owners to become part of a drilling unit.

Unitization specifically applies to horizontal drilling while mandatory pooling applies to vertical drilling. Under the law, at least 65 percent of a proposed horizontal well unit's mineral rights must be owned or leased by the applicant.

Drilling companies must file a unitization petition with the Ohio Department of Natural Resources (ODNR), which has the final say.

Wenger said he is "up to his neck" with cases involving unitization, and petitions being filed in Columbiana and Trumbull counties by oil and gas companies mostly involve 500 acres of land, although some have been more than 600 acres.

According to a recent report, only one approved unitization application involving property in Columbiana County has been approved by the state but several others are pending. Meanwhile, forced pools have occurred in Columbiana, Trumbull and Carroll County, Wenger said.

He doesn't foresee unitization resulting in a drilling rig moving into East Palestine.

"Well over 65 percent is what is being required so far, so they would have to have almost everyone in place and I think that would be pretty difficult to do in that setting. The current rules for this kind of drilling would require a 500-foot setback from any property not in a unit, which could be problematic in an urban situation too. It might be a really difficult thing to develop a practical drillable unit," he said.

 
 

 

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