Monday, July 9, 2012

Fracking, Mineral Rights and Homeowners

For the past two years, Fort Worth, Texas-based D.R. Horton has sold the mineral rights, and the right to drill, mine, store and explore for them, to its Colorado-based energy company on at least 425 of its lots in Raleigh, Cary, Durham, Chapel Hill and other Triangle cities, according to deed records.

Starting at 501 feet below the surface, the mineral rights, ownership of natural gas, oil, geothermal heat, hydrocarbons, even water, belong to DRH Energy, a subsidiary of D.R. Horton, one of the nation's largest homebuilders.

Coincidentally, the transactions began occurring in the summer of 2010, around the time the push began to legalize fracking in North Carolina.  The Consumer Protection Division of the N.C. Attorney General's office is expected to address the issue, and the Horton case specifically, in its upcoming report to the Legislature about fracking, a spokesperson for the attorney general said. The report was due by May 1.

Prospective and current homeowners could face serious financial or legal ramifications for losing their mineral rights: They may not be able to secure a loan or refinance a mortgage.  D.R. Horton operates DHI Mortgage, through which their prospective homebuyers can get loans, but lenders not affiliated with the company may not approve these transactions without the mineral rights.

The value of the manicured lawns at Brightleaf would likely be altered if DRH Energy chooses to exercise its "perpetual right" to drill or build tunnels, shafts or wells—a right, the mineral deed says, the company has "without limitation." Although the deed specifies that the drilling or mining would originate from land other than the homeowner's property, the activities and equipment, which could include tunnels and shafts, would occur beneath it.

The N.C. Housing Financing Agency, which provides first mortgages to low- and moderate-income homebuyers, will not back loans if mineral rights are excluded from the property, according to its online guide. The State Employees' Credit Union will not finance property if a homeowner sells or transfers the mineral rights during the term of the loan. 

Lenders might not grant mineral rights exceptions for loans "due to heightened risk concerns associated with extraction of these natural resources, including hydraulic fracturing technology (otherwise known as fracking or horizontal drilling)."

If natural gas or oil is found beneath the property of mortgage holders who have signed away the mineral rights, they will not get any money from natural gas extraction.

Developers and Mortgage companies are required to disclose the status of the title, including any legal documents such as mineral right. The placement in the sales contract and the timing of the disclosure are also important.  If homeowners know before closing about the mineral rights sale, then they may have little recourse. But, notification at closing, that may not be sufficient. Closing may not be soon enough to make an informed decision.

Anyone who learns that it was in a developer's interest to separate their mineral rights should be very skeptical of statements from them that drilling for gas or other use of the mineral rights is 'unlikely."

Under forced pooling, a company assembles enough properties so that it can drill under your land without your permission—even if you own the mineral rights. It is common in established gas and oil states. Generally, a certain percentage of landowners must agree to lease their property for drilling for forced pooling to be efficient. However, if a company owns the mineral rights under many contiguous properties, it's unclear if homeowners could legally object.

The energy company can "whipstock, directionally drill, redrill, retunnel, maintain, deepen and operate any such wells or mines."

Unless there are special statutory protections that protect the surface owners, which North Carolina does not have at this point, a property owner could have drilling take place on their property and not have recourse to stop it. (Indy Week, 4/4/2012)


  1. This comment has been removed by the author.

  2. You would have to be clear with the contract on what privileges and limitations each party has. The landowner has to be clear regarding the exact depth he wants to give to the buying company, and how the company is to behave on his property. The landowner has to evaluate if the buying company holds the deal as a partnership, since it would be very difficult for both parties to get along in the long run otherwise.

    Queenie Regner