Mortgage Lenders Are Becoming Increasingly Concerned With Gas and Oil Leases Associated With Hydraulic Fracturing


Fee Simple ownership of land in the United States generally consists of both the "surface" rights and the "mineral" rights associated with the property. As hydraulic fracturing becomes more prevalent, landowners are often attracted to the potential financial gain that could be realized by entering into a gas and oil lease that allows an extraction company the right to drill on their land. Gas and oil leases typically allow the extraction company the right to explore and extract "minerals" below the land. These leases also allow the extraction company to engage in other related activities, such as drilling and storage of waste materials on the surface of the landowner's property. In return, the extraction company will agree to pay the landowner royalties based on the amount of natural gas or other minerals extracted from the land. It is estimated that American landowners have signed more than one million of these gas and oil leases.

Recent reports indicate that mortgage lenders are becoming increasingly concerned with the growing number of gas and oil leases on mortgaged land. In most instances, a mortgage is secured by both the "surface" and "subsurface" rights to the land. As a result, the terms of the mortgage generally include the requirement that the landowner: (1) obtain prior permission from the lender before entering into a lease; (2) protect the property from damage, and (3) prohibit the storage of hazardous materials on the land. Some mortgages also include a rider specifically prohibiting the landowner from leasing mineral, oil or gas rights.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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