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Ohio Utica Shale

Mortgage language delaying some Ohio drilling leases

By Bob Downing Published: January 3, 2013

From the Youngstown Vindicator:

 

By BURTON SPEAKMAN

bspeakman@vindy.com

YOUNGSTOWN, Ohio — Some landowners who have signed lease agreements with oil and gas companies are running into a problem based on mortgage-contract language.

’A lot of these mortgages appear to contain clauses that would give the banks first dibs on any royalty income or even bonus payments,’ said Tom Carey, an attorney for Harrington, Hoppe & Mitchell, LTD, a Youngstown-based law firm.

BP has been directing lessees to have this language in their mortgage and have their bank sign a subordination agreement before completing the lease, he said. The landowner typically has 60 days to get the bank to sign the agreement.

’Some banks are willing to sign, others are requiring an application and a fee, others are just refusing to sign,’ Carey said.

The mortgages were made to people based on collateral and their ability to repay, he said. Oil and gas leases were not something that was being considered.

’I think if someone receives a big lease bonus payment they would be more likely to repay,’ Carey said. ’We’ve even agreed to pay the bank the next year’s payments from the lease bonus, whatever it takes to move things along.’

It would be understandable if the banks were stating that allowing drilling could make reselling a property difficult in the event of a foreclosure, especially if drilling is under way on the property, he said.

’The deal is that in some cases 1/8bank employees3/8 don’t want to take a chance,’ Carey said.

Banks with local branches have been easier to work with, but bigger problems have arisen when mortgages were sold to groups based outside the area, he said.

’One person’s mortgage was sold to Fannie Mae and trying to get a real person on the phone at Fannie Mae is impossible,’ Carey said. ’When we did get in touch with someone, they said he would have to fill out a form, pay $295 and it would take six weeks to get a decision.’

The lessee only has 60 days to get the issue taken care of for the lease to proceed with BP, Carey added.

The issue with the subordination agreements is due to mortgage language that was inserted into the contracts to protect the banks, said James Thurston, communications manager for the Ohio Bankers League.

The goal was to protect the bank from damage that could come to the house through it being demolished, used for drug trafficking, or a number of other issues that would diminish the value, he said.

’For example, if you have a $300,000 house and something is done on the property that creates a sinkhole next to it, the property is now worth zero,’ Thurston said. ’A lot of these mortgages were written by small community banks that couldn’t afford to inspect each and every one of these 500 to 600 properties they have on the books, so they had to protect themselves through contract language.’

The contract language has nothing to do with oil and gas development, but those lease agreements have gotten caught up in the general-protection language, he said.

Banks have to take precautions in contract language because ’if we don’t we’ll get spanked by our regulators,’ said Rod Alba, general counsel for the American Bankers Association.

Mortgages have to contain clauses to ensure there will be nothing done to the property that makes it impossible for the bank to recoup its investment during a sale, he said.

Banks have to be cautious because it’s not about what the perceived value of the property is, but what the market will pay for it, Alba said.

Carey said he is not sure how widespread of a problem the subordination agreements are, but has seen 15 to 20 people come to his firm with the issue.

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