RALEIGH — Some landowners in North Carolina are likely in technical default on their mortgages because they signed leases granting drilling rights to natural-gas exploration companies.
Assistant Attorney General Lynne Weaver told state lawmakers Thursday morning that mortgage terms typically forbid property owners from selling or leasing any part of their land until they have paid the loan off. The sale or leasing of drilling rights devalue a property, exposing banks and other mortgage lenders to greater financial risk if the property owner is unable to pay the loan, she said.
Weaver presented her concerns in Raleigh to the Environmental Review Commission as part of a statewide review of consumer protections and environmental safeguards needed before North Carolina legalizes fracking.
State officials will submit a final report of risks and recommended legal changes in May to the legislature. Some legislators have vowed quick action to legalize fracking extracting natural gas from shale rock while others plan to delay action and require further study of the risks associated with the mining practice.
These are immediate implications for landowners financial security, Jordan Treakle, a landowners rights advocate with the Rural Advancement Foundation International, said after Weavers presentation. RAFI, based in Pittsboro, has assisted Weavers research into consumer issues related to fracking.
The mortgage clauses, called due on sale, are intended to protect lenders by requiring their approval before the owner can sublease exploration rights to drilling companies. If the rights are leased without prior approval, the mortgage lender could immediately demand repayment of the home loan on grounds that the value of the property has been diminished and the contract violated.
In North Carolina, about 80 leases have been made with natural-gas explorers, mostly in Lee County, giving the explorers drilling rights under those properties.
Weaver said she is not aware of lenders citing the due on sale clauses and demanding payment, but they would be authorized to take such action under state law. All affected property owners who have outstanding mortgages are now at risk, she said.
Some lenders are not comfortable with these risks at all, Weaver told lawmakers.
Weaver also noted a host of other concerns that need to be addressed before fracking is legalized.
Among them, mortgage terms typically bar homeowners from taking steps that would devalue a property before the mortgage is paid off. One such action would be the presence of hazardous materials, such as the chemicals used in fracking, on the property.
Lease terms, however, would allow drillers to bring chemicals on the property, putting the owners at risk of violating their mortgage terms.
Fracking refers to hydraulic fracturing, a process of pumping millions of gallons of water and chemicals under high pressure to break up underground shale rock to release trapped natural gas.
Once a property owner signs away mineral rights, as drilling rights are called, the gas exploration company has the legal right to enter the property and set up derricks, pipelines and impoundments.
This is a harsh doctrine, Weaver said, noting that it leaves homeowners with little say in what happens to their land.
Weaver cited a 1945 case in which a property owner sued a mining company that owned the mineral rights to the property and mined kaolin, a type of fine white clay used to make porcelain. To access the kaolin, the company dismantled two houses piece by piece and stacked the materials on the premises. The houses were not occupied at the time. The N.C. Supreme Court ruled that the company, Harris Clay Co., was within its legal rights and denied damages payments to the property owner.
It only remains to say that it was the duty of the defendant to use due care in recovering the mineral so as not to injure the surface any more than necessary, the court ruled.
Weaver suggested changing state laws to protect landowners, including a requirement that drillers pay landowners for any damage to their properties.
In some states, companies that have signed leases have refused to pay homeowners bonuses for the drilling rights, Weaver said. Such cases have resulted in lawsuits in multiple states.
She also said that representatives who sign leases, called land men, should be registered with the state. Furthermore, the state should pass a law that would give land owners time say, 15 to 30 days to get out of a lease after signing it.
Their job is to sign up as many people as possible, in as short a time as possible, for as low a price as possible, Weaver said.