Gas Company Mortgages Won’t Prevent Landowners Borrowing
By Rick Hiduk
Imagine going to your local bank with the intention of taking out a loan on the equity you have in your home only to find out that someone got there before you and filed a mortgage on your deed. According to Diane Ward of Standing Stone Township, that’s how some local residents found out that the gas companies with whom they had signed lease agreements had mortgaged their mineral rights.
Ward caught the ears of those in attendance at the July 28 Bradford County Commissioners’ meeting when she disclosed that gas companies such as Chesapeake Energy are garnering cash for operating costs by mortgaging mineral rights and pipeline right-of-ways that they have leased from local landowners. The procedure is apparently legal and poses little if any financial risk to the landowner. It is not new to the gas companies, but it’s new to local lending institutions and startling news to Bradford County residents. The practice represents one more facet of the industry that is not disclosed to the public but comes to the surface serendipitously.
“This may be standard practice to the industry, but it isn’t standard to the people in the area,” said Ward. “Some more communication is needed between the gas companies, the banks, and the landowners.”
To be clear, Chesapeake is not mortgaging properties or structures on the properties, the equities in which are not affected by the practice.
“There’s no separation. It’s all part of the deed,” Ward said of the root of the confusion landowners initially face when they are confronted with the situation. “The bank surprises them by telling them that they are already mortgaged to the hilt.”
“As part of the mineral-leasing agreement, Chesapeake takes ownership of a percentage of the mineral rights,” Chesapeake corporate development senior manager Brian Grove explained in a prepared statement. “Chesapeake has the legal right to mortgage its leased interest in the minerals. Because Chesapeake cannot mortgage any property interest other than what it already owns, this action should have no effect on any property owner’s ability to act on their own property interests.”
A Wyalusing-area bank loan officer, who has been dealing with the issue on a daily basis but preferred to speak on anonymity, agrees. He is not a fan of the practice of mortgaging mineral rights and feels that the gas companies could secure the same revolving credit by mortgaging property and structures owned by the company in Oklahoma and other states, but the impulsive fears of landowners stoked by this breaking news are unfounded.
“At the end of the day, if things were to go bust, this would be an issue between the bank and Chesapeake,” he stated. A lien is placed against the percentage of oil and gas assets assigned to Chesapeake as per the leasing agreement. The parcel number is used for the loans because it makes the deeded mineral rights easier for the banks to identify.
“Leasing and mortgaging rights of way occurs in a process similar to residential utility-line easements, in that such rights of way are potentially restricted surface use but have no impact on the landowner’s ability to make financial decisions regarding the property,” Grove continued. “However, unlike utility easements, property owners are compensated when the rights of way are obtained from the owners, presumably for the inconvenience that any future surface use restriction may create.”
As per Commissioner Doug McLinko’s questioning, Ward indicated to the commissioners that companies in addition to Chesapeake were engaged in similar financing strategies. In recent years, she added, the federal government has attempted to restrict the activity via the cumbersome Dodd-Frank Statuary.
“If the feds are looking into closing these loopholes, maybe we need to take a personal interest in this in Bradford County,” asserted Ward, who conceded that she is not an expert on the subject. “We don’t know what the full impact of this will be, but we need to become more educated in the county.”
The aforementioned loan officer concurred that education on the matter is the key to being able to continue to provide loan services to residents who feel caught up in the unexpected snafu. He suggested that people dealing with local banks are in the best position to cut through the red tape and get the money that they need to borrow, as the procedure in Bradford County has become quite widespread.
“It hasn’t changed our position with the landowner,” he related. “We still lend on land and buildings.” Those whose mortgages are held by interstate lending institutions might have to work a little harder to educate their loan officers about the practice, however.
“Chesapeake takes very seriously its responsibility to lessors, stockholders, and the communities in which it operates,” Grove stated. “Through sound financial practices such as this, Chesapeake continues to fulfill its obligations for natural gas production under lease agreements with landowners to provide a stable supply of natural gas that Bradford County and the nation require to meet our energy demands.”