Natural Gas Boom Fuels Requests for Partial Releases from Mortgage Liens

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Residential lenders and servicers are continuing to see a larger impact from the natural gas boom, and it is not just from properties hosting drilling operations. More lenders are seeing increasing numbers of borrowers adjacent to or near drilling operations who are attempting to sell oil gas and mineral estates in fee and seeking partial mortgage releases from their lenders as a result.

Lenders receiving such requests can generally protect themselves by releasing any lien interest in oil gas and mineral estates (subject to investor guidelines) on the condition that the buyer of the subsurface estate will not be permitted to use the surface of the property for anything associated with extraction of minerals, oil or gas. However, lenders should also be conscious of the risk to the collateral value of the surface estate presented by the mere presence of an oil and gas operation on neighboring properties. In addition to aesthetic issues, noise, air, and water pollution could pose problems for neighbors.

In exchange for the release of the lien, lenders could consider bargaining for setbacks of the neighboring drilling operation from the still-encumbered property line. Particularly in areas with no public water service, lenders may also want to have the benefit of a pre-drilling water test to establish a present baseline should the water supply later become tainted and diminish the surface estate’s collateral value.

This situation should not be confused with one where a driller seeks to lease the oil and gas from a property owner's subsurface estate—by far the most typical situation lenders may confront. In that case, the language of the mortgage should serve as the guide, and lenders should be certain that mortgagors be required to obtain consent from the bank to lease the subsurface estate, particularly where the lessee/driller seeks to locate a well-drilling operation on the property. In practice, however, it has been rare for the mortgagor to seek such pre-approval even if required by the mortgage documents.

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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