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Does a developer's sale of mineral rights to an energy company foreshadow fracking?


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Some of the homes in the Brightleaf at the Park subdivision in Southeast Durham are so new the mailboxes have never been used. The concrete driveways are still pristine and free of dirt. The grass is unnaturally even and green.

For less than $300,000 you can own a 3,100-square-foot house and a quarter-acre of land in Brightleaf—but you will not own most of what lies beneath it. 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.

For the past two years, 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. Coincidentally, the transactions began occurring in the summer of 2010, around the time the push began to legalize fracking in North Carolina.

While common in other states, including Texas, where D.R. Horton is headquartered, the sale of mineral rights is new in North Carolina. Several title companies, real estate agents and other real estate professionals contacted by the Indy were unaware of D.R. Horton's activities or the assignment of mineral rights in general.

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 is due by May 1.

Calls to D.R. Horton's corporate headquarters in Fort Worth, Texas, and its local office in Morrisville were not returned.

Even if fracking remains illegal in the state, 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. Fannie Mae and Freddie Mac won't purchase mortgages on properties with "title impediments." They may make an exception for mineral rights—but only those that "do not materially alter the contour of the property or impair its value or usefulness for its intended purposes."

However, 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. In comments submitted to the N.C. Attorney General's office as part of the fracking report, SECU said it would 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)."

Several homeowners in Brightleaf, who declined to be named, talked to the Indy about their properties and mineral rights. One couple didn't recall any discussion of mineral rights when they bought their house on Pattersons Mill Road in 2011. Another, who had just closed on her home, said she was told of the mineral rights deed, but noted, "You had to be listening." The homeowner said she understands if natural gas or oil was found beneath her property, "I don't get any money."

D.R. Horton is required to disclose the status of the title, including any legal documents such as mineral rights, said Janet Thoren, legal counsel for the N.C. Real Estate Commission, which licenses and regulates real estate agents. The placement in the sales contract and the timing of the disclosure are also important. (Sales contracts aren't public record, so the Indy could not review one.) If homeowners know before closing about the mineral rights sale, then they may have little recourse. But, Thoren said, notification "at closing, that may not be sufficient. Closing may not be soon enough to make an informed decision."

That's when a third homeowner said she became aware of the mineral rights deed. "I wish I had known earlier," she said. "But it didn't stop me from going ahead and purchasing the house." She said she is aware of mineral rights because she owned them under a former home in Orange County. When she bought her home in Brightleaf, she said she was told that drilling "would most likely never happen."

This raises the question: If it would likely never happen, then why would D.R. Horton sell the mineral rights to its energy company?

"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,'" said Hope Taylor, executive director of Clean Water for North Carolina, which is on the forefront of the anti-fracking movement. "Folks just aren't aware of how much control of their lives they can lose if extraction happens, and it can have major impacts on their neighbors, too."

It is notable that owners of adjacent properties within the Horton developments have been stripped of their mineral rights. This could allow DRH Energy to engage in what is known as "forced pooling." Under forced pooling, which is legal in other states, 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, since DRH Energy owns the mineral rights under many contiguous properties, it's unclear if homeowners could legally object.

In fact, there is no explicit language in the mineral deed held by DRH Energy requiring the company to get permission from the homeowner in order to drill or mine beneath the property. The energy company can "whipstock, directionally drill, redrill, retunnel, maintain, deepen and operate any such wells or mines."

Jordan Treakle is the mineral rights coordinator with the Rural Advancement Foundation International-USA, based in Pittsboro. RAFI is working with the state's Consumer Protection Division on comments for the fracking report.

"Unless there are special statutory protections that protect the surface owners—which we don't have at this point in North Carolina," Treakle said, "you could have drilling take place on your property and not have recourse to stop it."

Clarification (April 5, 2012): The Legend Oaks home in the photograph above was built by Orleans, a previous builder at Legend Oaks. The "Affected subdivisions" sidebar states that not all homes in D.R. Horton subdivisions, such as Legend Oaks, may be affected, but the photo caption was written as such that readers could think that home was built by Horton.

This article appeared in print with the headline "Dirty deeds."


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