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Gas Drilling Moratorium is not Force Majeure

Gas drilling in Sullivan CountyIt has been almost eight years now since the gas lease rush really started here in upstate New York, and land owners fell over themselves to sign lucrative leases with various gas drilling companies for the mineral rights deep below their properties. (Some of these leases were ten years, but the majority that I have seen and heard about were five, with an “option” for more.)

But then New York State stepped in and declared a moratorium which stopped all gas drilling dead in its tracks. Many landowners thought that they had basically been paid for doing nothing, and the clock on the wall was counting down the length of the lease.

However people do not like to lose money, especially people who own big companies with lots of attorneys on retainer.

They had thought of a scenario such as this.

Most of the lease contracts have a Force Majeure” clause. Force Majeure means “unavoidable occurrence outside the control of both parties”. The gas companies argued that the moratorium should trigger the Force Majeure clause and essentially freeze the contracts at that point in time until the suspension has been lifted.

I ran across a gas lease issue during a deal where the buyer was attempting to purchase a house via an FHA loan with a gas lease attached. FHA’s setbacks and guidelines are stricter than the lease stipulated. The lease’s minimum setbacks were 150 feet from the dwelling, while FHA requires at least 200 feet.

It may seem like a bizarre stumbling block. A 50 foot differential on an obscure FHA rule about a potential gas well despite a statewide indefinite ban on drilling? Real estate deals fall through every day for just such ridiculousness. Ask any real estate agent. They would love to regal you with tales of lost deals over asinine and incompressible reasons. All of us have these battle scars. Common sense takes a back seat to procedure way to often in the mortgage/bank business.

Well what saved this deal? Actually it was an FHA underwriter with a bit of commons sense, but what persuaded him was a recent  ruling from the Northern District Court. On two separate cases they have ruled that the NYS halt on fracking does not fall under Force Majeure. The clock really is still ticking, and on many of these leases, time is already up.

The lease on the property I was selling is up in Aug. 2015. After seeing the big picture, the underwriter determined that the chance of a gas well drilled within that 50 foot radius in the next four months was remote enough not to kill the deal. We closed last week.

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