To Lease or Not to Lease: Has Anyone NOT signed a lease? I'd like to hear why you didn't

My wife and I are part of a landowners group that is in the process of having their Range Resources contract reviewed by attorneys.  We only have 3.2 acres and have not decided whether we are actually going to sign a lease.  I am curious to hear from people who started to go through the process and then at some point decided against it.  I'd like to hear your reasons.  FYI - I'm not posting this so I can attack people's decisions.  I am genuinely interested in hearing from people who decided not to sign a lease.  

 

Thanks in advance!

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Permalink Reply by Jonathan A Jones on October 25, 2011 at 12:52pm
They were
Permalink Reply by Jonathan A Jones on October 26, 2011 at 1:13pm

Sorry for the truncated reply - not sure what happened.  I had typed a whole lot of text and then when I hit Add Reply that's what showed up!  Anyway...

That is correct - we DO NOT have a signed lease.  We are only entertaining the thought of signing the lease but would not do so until after the sale of the home.  The title search is done to ensure that there are no liens or other agreements related to the property that could be used as grounds for a potential lawsuit against the real estate agent or lender.  I am not clear whether the underwriters in our case are the same entity as the titling company.  Traditionally, the underwriter's function is to assess the eligibility of a buyer to receive a mortgage.  However, I think in our case they want to assess the potential gas lease to ensure that their security (i.e. my property) is being properly protected by the gas company and that we will not agree to something that could potentially devalue the property to the point where it is worth much less than the mortgage.  

As far as I can tell, in both cases - the title company and underwriters - it is legal.  They are trying to protect their investment.  The title company has to provide insurance that there is nothing in the history of the property that could create a legal problem for buyers, the lender, and the real estate company.  A gas lease is considered an encumbrance and thus falls within this scope.  Their main concern seems to be regarding what surface rights were given because anything on the surface could ultimately affect the value of the property.  It's one thing to have a tanker truck full of chemicals wreck and spill all over your property.  That could happen ANYWHERE to anyone.  In their eyes, it's a completely different story if you willingly agree to have an industrial activity occur on your property.

I have not retained the services of an attorney at this point.  right now, the underwriters just want to see what the lease contains.  If at some point they want to take a more proactive stance I would probably seek legal counsel.  

Now I know people are going to scream, "BUT THIS HAS BEEN GOING ON FOR YEARS AND THERE WERE'NT ANY PROBLEMS LIKE THIS!"  and I would agree with you.  But you and I both know that once the media latches on to some of these stories of water going bad and people getting sick they're going to run with it and the entire industry will be under more scrutiny then before.  I'm not saying it's right or that I agree with it but it is what it is.  

I will keep you all posted on the progress of this development.

Permalink Reply by Jim Litwinowicz on October 26, 2011 at 3:07pm

I have talked to a realtor that I have known for years about leasing issues. If I were a potential buyer, I would be very wary of buying a property that the prior owner is reserving the O&G rights to and isn't leased. Under that scenario, I wouldn't have any idea what the final lease will be and what protections are in it. However, if the rights were already leased then I would know exactly what I am getting into. I would know things like setbacks and restrictions on foreign pipelines, ponds, storage, compressor stations and more.  All of that makes a huge difference. Just make sure you get a countersigned copy of the lease.


Another possible alternative to consider is to sell some small percentage of the rights along with the surface rights, say 10%.  This does several things....it gives the surface owner some say in surface activities like setbacks and well locations. It gives them the surface compensation for surface disturbances like the spud fee, timber and crop damages, ROWs and more. And they will get 10% of the royalties.  All of this helps to compensate them for the risk of purchasing leased property and compensates them for the aggravation of the process.

It does reduce some of your eventual income but it makes the property a little more valuable and much easier to sell.

good luck!

Permalink Reply by Jonathan A Jones on October 26, 2011 at 3:34pm

Thank you for your thoughts, Jim!  We are not dead-set on reserving the O&G rights.  As a  matter of fact, we would be willing to give up the O&G rights if it meant being able to move.  The realtor said she would only disclose the fact that we are planning on withholding the O&G rights with a buyer she felt was serious about putting an offer down on the house.  

In the scenario where we would plan on retaining the rights, I couldn't imagine NOT showing the lease to the potential owners of the property.  I don't have anything to hide.  If they would want a piece of it, fine.  Range Resources has also said they would work with us and any potential owners to add additional items to the contract addendum.  

I guess bottom line for us - Even if we convey the O&G rights with the property it is a win for us still.  Yeah - we'll miss out on some royalties and the initial bonus payment but moving closer to my job into a residential neighborhood is or priority here - not making money.

Permalink Reply by Jim Litwinowicz on October 26, 2011 at 3:46pm

If I were the potential buyer and you reserve the rights, I would ask that the lease be signed either before or the same time as the purchase was made.  That is the only way to be sure of what the lease states. I wouldn't buy if you reserve the rights but weren't signed.  Thats just my opinion.

If you convey the rights, you can keep any fraction for your self or family. Try for half or at least a quarter. That could still be substantial income in the future.

Permalink Reply by Lilace Guignard on October 27, 2011 at 2:49am

Your realtor's response is interesting to me. I know when I was looking at properties I rarely looked further if it didn't say that it was unleased and came with OGM's, OGM's transferred (when leased), or OGM's negotiable. I assumed if it said nothing that the seller was retaining them, and didn't ask unless super interested. I have no idea if I'm typical of buyers, but that was my take. I'd list them as negotiable and have a price range for with and without in mind. Also, my understanding is that as long as you have 49% of the rights you have a say in what happens.

 

Lilace

Permalink Reply by Jonathan A Jones on October 27, 2011 at 2:53am

We've discussed all of the above with the realtor.  We do have a price in mind if they are interested in having the O&G rights transferred.  I asked a lot of realtors about the O&G issue and they said it was split about 50 - 50 in our area:  half didn't care one way or the other and the other half did (either really wanted the rights or didn't want the perceived headache of having them).

She's approaching the issue cautiously because she doesn't want to alienate any potential buyers on that issue.  The house and the property are great and she would like to make an impression on the buyer without the O&G rights issue coloring the situation.

Permalink Reply by craig on October 26, 2011 at 4:28pm

Jonathan, I think the caveat is the fact that you MIGHT sign a lease after the sale. To me this means you will sell the property and reserve the mineral rights. In this case I would understand the increased scrutiny. What would stop you from signing any other lease that is different than the one you are considering now? Banks don't like the unknown. 

Permalink Reply by Jonathan A Jones on October 27, 2011 at 3:03am

We were told that there is increased scrutiny across the board regardless of whether you are signed or are considering signing.  They would have asked even if our realtor had not asked the question first.  

I see your point of view, but if I were them, I would prefer that a customer come to me WITHOUT a signed lease.  Then, I (as the bank or underwriter or whomever) may be able to have a say in how the lease is written to protect my interests.  

Permalink Reply by Barbara on October 26, 2011 at 4:52pm

ok, thanks and good luck with ALL of it.  i know about title searches and this is a major deal here now with the leases...have a friend who does the searches and some are very complicated with non-documented this or that from over a hundred yrs ago...............but it all has to be in place.

it's the underwriters that confused me.  so, i guess you will find out their accurate function.  i do not think they are the same as the title search people.

and in response to any 'going on for years' questions, yes, selling properties has, but NOT gas development as we are now seeing it and with the values on it that it has now.  a different world here.

piece in today's towanda daily review about water again...stating the physical act of drilling can displace naturally occuring mineral from where they have been forever and these can then enter the water table; fracking doesn't have to do this, just drilling can; and frack chemicals are not being found.  check it out ....on the front page...it's boron that is being found.  this was a big study of many wells.

Permalink Reply by Jonathan A Jones on October 27, 2011 at 3:07am

Here is an interesting article published yesterday (Thanks, wifey!)

http://www.strausnews.com/articles/2010/06/05/pike_county_courier/n...

Permalink Reply by Barbara on October 27, 2011 at 5:12am
whoa.......................THIS is a very interesting development, for sure.......i had heard that property values can drop................hadn't heard the mortgage side of it . oh boy.......yet more FUN FUN FUN.  pls continue to send your real estate adventures................we need to know this 'stuff'.

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