TopS&S Horizontal Logo

In This Issue:
  
Quick Links:  
SpotlightAttorney Spotlight 

 

Jessica Conn
Jessica Conn, Esq.

  

Jessica practices business law with a focus on commercial lending and government guaranteed lending. In that capacity, she prepares and reviews loan files; and drafts and negotiates loan documents for conventional, SBA 7(a) and 504 loans. Jessica also counsels business entities with regard to entity formation, maintenance and dissolution; capitalization; employment contracts; intellectual property protection; and other general business matters.

Jessica graduated from Barnard College with a Bachelor of Arts in economics. She received a Juris Doctor from Fordham University School of Law. Jessica also holds a Masters of Law in Taxation from Villanova University School of Law.

Jessica is admitted to practice in Pennsylvania, New Jersey and New York. She is a member of the Pennsylvania Bar Association. 
    

Featured 

 

Starfield & Smith, P.C. is on Facebook!  

 

Find us on Facebook

 

Become a fan of Starfield & Smith, P.C.  on facebook to receive updates, articles, and news pertaining to SBA and lending related topics. Just click on the badge above to get started!
  
Not on facebook? Sign up for free here.

twitter
  
  
Starfield & Smith, P.C. is on twitter! Follow us for links to our most recent news and articles. Click here to follow us:  

Follow me on Twitter

  
  

 

 

Best Practices: EPC's and Oil & Gas Leases.

By Joseph A. Ernst, Esq.

 

 

Joe Ernst
Joseph A. Ernst, Esq.
    

 

 

 

 

Under the Eligible Passive Company Rule in the SOP 50 10 5(C), in the event that an Eligible Passive Company ("EPC") becomes the beneficiary or owner of the rights to an existing mineral lease on the property that the EPC acquires, the EPC must assign its interest in the mineral lease to the Operating Company ("OC"). One would think that it would be easy to determine if there is such an existing mineral lease through a search of the chain of title. However, this is often not the case due to the unique nature of oil & gas leases, which are unlike other leases that lenders typically have to deal with.  Because the SOP expressly states that the EPC Rule is an exception to SBA regulations that prohibit financing assets that are held for passive income, the EPC Rule is interpreted strictly. Consequently, the failure to identify an existing oil & gas lease on the EPC acquired property and to assign the EPC's interests in the lease to the OC could jeopardize the SBA guaranty.

 

Over the last decade there has been much activity in many areas of the United States that have rich natural gas shale reserves. These reserves are referred to as "shale plays", and there are at least seventeen named shale plays in the United States, the most important of which are the Barnett shale play in northern Texas, the Haynesville shale play in northwestern Louisiana and eastern Texas and the huge Marcellus shale play predominately in Pennsylvania and West Virginia, but also extending into Ohio and New York. In addition to the current natural gas activity in these shale plays, lenders should also keep in mind that during the last quarter of the 19th century through the first quarter of the 20th century certain regions of the country produced natural gas in significant quantities, in large part for use in gas lighting. The oil & gas leases from the 19th and 20th centuries, although decades old, may nevertheless still be in full force and effect for the reasons outlined below.

 

Oil & gas leases are drafted and are intended to remain effective for an indefinite period of time. The means by which oil & gas leases are preserved or held for decades by oil & gas companies are through:

                (i)           the production of oil or gas; or

(ii)          the payment to the landowners of relatively small sums of money; or

(iii)         by merely investigating the property for the development of oil or gas.

The latter means of holding the lease by investigating the property for development is a catch-all means that includes off-site development and marketing efforts, and allows oil & gas companies to claim that a lease is still in force, even if the oil & gas company has not been on the property for years. Therefore, if a lender comes across an oil & gas lease in the chain of title of the EPC acquired property, the lender should not assume that, if the primary term of the lease has expired, that the oil & gas lease is no longer in effect. In fact, the lender should assume that any oil & gas lease (even those from the later part of 19th century and the early part of the 20th century) are still in full force an effect, unless there is a memorandum of lease termination or release of lease in the chain of title.

 

In addition to requiring that the EPC assign its interest in the oil & gas lease (together with its rights to all rental, mineral, royalty, bonus or similar lease payments) to the OC, the SOP also requires that (i) any such assignment be subordinated to all Mortgages or Deeds of Trust; (ii) if such subordination is not possible, the lender must provided documentation to that effect; (iii) if the mineral lease has been terminated, the lender should attempt have it removed from the Title Policy; and (iv) if the lender is unable to have the terminated lease removed from the Title Policy, the lender must provide supporting documentation evidencing the proper assignment of the lease to the OC and obtain a title endorsement to protect the SBA's interest in the real property (i.e., California Land Title Association ("CLTA") 100.23 or 100.24) (see page 123 of the SOP). CLTA 100.23 protects lenders against loss sustained by reason of damage to existing improvements resulting from the exercise of any right to use the surface of the land for the extraction or development of the minerals leased under the oil & gas lease noted in the Title Policy, and CLTA 100.24 protects lenders against loss or damage sustained by reason of the oil & gas company having the right to enter upon or use the surface of the land under the terms of the oil & gas lease noted in the Title Policy. Similar protection is also afforded by the ALTA 9 endorsement.

 

In summary, Lenders should be cognizant of shale plays currently in production, being actively developed or being leased-up for future development. Lenders should also be cognizant that decades old oil & gas leases, with a primary term that long ago expired, may nevertheless still be in full force and effect. To ensure compliance with the SOP, any existing mineral lease on the EPC property must be assigned to the OC, subordinated to all Mortgages or Deeds of Trust (if possible) and removed from the Title Policy or endorsed as described above. For more information on SBA-related mineral lease issues, contact Joseph at: [email protected] or (215) 542-7070.

 

 

 

 

 Back toTop 

 

 

 knowDid you know...

  

 Compass 

...that Starfield & Smith, P.C. can provide title insurance in Pennsylvania and New Jersey and can place title insurance nationally through its underwriting networks?  

For more information about this and other services Starfield & Smith, P.C. provides its clients, please call Ethan at 215-542-7070 or by email at

[email protected]

 

SeminarSeminars and Events
    
SBA Loan Guarantees: Current Purchase Issues and Complexities

 

Presented by Ethan Smith and Christopher Evans
Date: August 3, 2011
Time: 1:00 - 2:30 PM EDT
Location: Live Audio Conference

 

If you are interested in this course please contact us at: [email protected]

  

SBA Eligibility Hot Topics
 

Presented by Ethan Smith

Date: August 8, 2011

Time: 8:00 a.m. - 2:00 p.m.

Location: Fort Worth, Texas

 

Mid America Lender's Conference
The Worthington Renaissance Fort Worth Hotel
Extended Training Course - "SBA Eligibility Hot Topics"
 

If you are interested in this course please contact us at: [email protected]
  

 

Lender Oversight and Liquidation/Guaranty Purchase Process

Presented by Ethan Smith
Date: August 10, 2011
Time: 12:15 p.m. - 3:15 p.m.
Location: Fort Worth, Texas

 

Mid America Lender's Conference
The Worthington Renaissance Fort Worth Hotel
Extended Training Course - "Lender Oversight and Liquidation/Guaranty Purchase Process"

If you are interested in this course please contact us at: [email protected]
  
 
Shark

 

ContactInfo Starfield & Smith, P.C.
Pennsylvania Office
1300 Virginia Drive | Suite 325
Ft. Washington, PA 19034
phone: (215) 542-7070 | fax: (215) 542-0723

 

 
 Loan Documentation | Closing | SBA Guaranty Purchase
Franchise Consultation | Regulatory Compliance 
Business Consulting

 


This email is an advertisement from Starfield & Smith, P.C. and is subject to this disclaimer.
 � 2009-2011 Starfield & Smith, P.C. All Rights Reserved