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October 10, 2015

Liens could be obstacles for gas leaseholders

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Posted: Sunday, February 9, 2014 2:15 am

OHIOVILLE -- In October, Garry Miller tried to refinance his home. The only problem? There was a $500 million lien, or line of credit, showing up on his property deed.

“I went to remortgage my house to get a lower rate and I wanted to buy a truck,” Miller said. “And when they did the title search, the lady from the credit union called me up and said, ‘You need to come in and look at this.’ And I looked at it and said, ‘$500,000?’ And she said, ‘No, you better read it again.’ And it was a $500 million line of credit.”

Miller, a former truck driver, had signed a natural gas lease with Chesapeake Energy in December 2010 on about 12 acres of his land. He was given a nearly $30,000 bonus, plus 15 percent royalties, the latter of which he hasn’t received since his acreage isn’t in a unit yet. A drilling unit, experts say, is an area of 650 acres that are combined then brought into production, after which leaseholders begin to receive royalties.

“Did I need the money? No. Did it sound good? Absolutely,” said Miller, sitting in the kitchen of his cozy Ohioville home. Inside, there are two friendly dogs, one big, one small. Outside, four horses reside in a relatively new horse barn, flanked by a rolling pasture for riding.

Miller has mixed feelings on how he was treated by Chesapeake. The money was good, Miller said, but added he wished they would have told him a lien was a possibility.

“Moneywise, they treated me fairly,” he said. “But I think they should have educated me more. But as far as the lease goes, and them putting a lien against my lease, they should have told us that was going to happen. That’s unfair … It’s very deceiving, especially when you go to the bank to get a loan and you find out, oh wait a minute, there’s a lien against your property.”

Chesapeake Energy officials declined to comment for this story. But a spokesman from the Marcellus Shale Coalition, an industry group, weighed in.

“In some cases, companies leverage their leased mineral estate in an effort to secure additional capital,” said MSC spokesman Patrick Creighton. “In these instances, a lien is placed against the leasehold estate of the operator, not the royalty interest of the landowner or property itself.”

In other words, the lien, Creighton said, is actually against the oil and gas rights, not the property itself.

But Miller’s deed doesn’t specify that.

“If you look at the lien, the way it’s stated … it says it’s on my property,” he said.

Creighton also said that in a case like Miller’s, the drilling companies should be able to communicate with the bank and resolve the issue.

“In the rare case when a homeowner is attempting to refinance their home and the bank has a question about this type of lien, the homeowner and bank (they are) working with should contact the operator so that clarification can be provided,” he said.

Miller said he talked to several people from Chesapeake, but no one helped. And regarding his efforts to refinance, he also said he went to three different banks, all of which had the same answer to his refinancing request.

“They all told me no,” he said. “So I’m dead in the water because the banks are all scared of this, which I understand it’s all new. But why should I take the beating because they’re not educated?”

Robert J. Burnett, director of the Oil and Gas Practice Group at Houston Harbaugh in Pittsburgh, said he hasn't seen anything like this before.

“I’ve not see anything of this scope or magnitude regarding a lien taken out against an oil and gas property,” he said. “The only liens that I’ve seen in connection with oil and gas leases are mechanic liens.”

Mechanic liens, he said, are liens a contractor can use during the building process to ensure payment.

There is a clause in Miller’s lease that talks about liens. But this clause, Burnett said after reading it, simply allows the drilling company to pay something like a mortgage payment, if the homeowner should miss one.

And why would a drilling company want to do that?

“If there’s a default on the mortgage, that could wipe out the oil and gas lease,” Burnett said. He said he’s seen this clause before – the oil and gas company is trying to protect its interests.

“It does not mean the oil and gas company can take out a lien on the property,” Burnett said.

He also has a bit of legal advice for anyone considering a lease.

“If there’s a mortgage on the property, you definitely want to take a look at your mortgage on the oil and gas lease, because there would be provisions in the mortgage that are impacted because of this issue,” Burnett said. “There sometimes can be a clause in the mortgage that limits or restricts the ability of the debtor to convey the property -- and an oil and gas lease could sometimes be considered a conveyance or collateral.”

As for Miller, he simply wishes he would have been more careful.

“My point to people out there is to educate yourself before doing anything,” he said. “Shame on me for not getting a lawyer, but there’s a lot of people who didn’t.”

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