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Comment: Fracked by Liens

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Fracked by Liens

by Chip Northrup on December 28, 2012
Gas drillers pledge their leases at banks to borrow the money to drill wells and pay contractors. When they can’t pay, the bank forecloses on the loan and the contractor’s file mechanics liens against the encumbered asset. “The encumbered asset” is legal talk for “your farm,” as many hapless folks are finding out. A mechanics liens from a contractor would certainly go against the leased mineral rights, and if the lease contained surface access (which it would have to) then, conceivably they could get a judgment against the land owner. Regardless, if the lien is legitimate it will cloud the title – so if the landowner goes to sell or refinance, they may have to pay off the contractor just to get rid of the mechanic’s lien. Anyone that is Compulsively Integrated into a well could face such an encumbrance. Plus the encumbrance of the banks that these leases have been pledged to en masse to drill the wells. Those can find their way back to the individual leases, since that was the collateral in the driller’s loan: Somebody’s farm. A lot of farms.

Then there’s the little problem of trying to refinance when you’ve leased your mineral rights – and the mortgage company says take a hike.