Money Problems for Landowners with Marcellus Shale Lease & Royalty Payments

The new wealth that leasing and drilling in the Marcellus Shale brings on, can also bring on a new set of challenges for landowners, many of whom are farmers who have struggled to pay the bills for years.

A case in point are the issues faced when there are multiple owners of a family farm, as told by Stuart “Buzz” Hutchison, an estate and trust attorney:

Complicating matters is that many of the farms in this area [Western Pennsylvania] are inherited over decades or even centuries, with several heirs owning fractional shares of the land. Lease agreements often involve getting several family members to sign off.

In one case he is familiar with, Mr. Hutchison said a family member who lives outside the state owns a 1/32nd (about 3 percent) share of a 300-acre farm south of Pittsburgh and is objecting to Marcellus Shale drilling on the property for environmental reasons, although everyone else in the family wants to move forward.

"What is this family going to do?" Mr. Hutchison asked. "While she has objections to the Marcellus Shale drilling, she has suggested she might be willing to sell her interest in the farm to the other owners. But the figure she has suggested for the sale price is considerably more than the other members feel her interest is worth.

"I find it somewhat amusing that while she is opposed to the drilling, she is not opposed to the money," Mr. Hutchison said.

"As long as she gets cashed out, she doesn’t care what happens to the farm."*

Mr. Huchison gives another example of a family partnership where the parents and grandparents, over time, gifted shares of the family business (with thousands of acres) to their children. Until the Marcellus Shale, it meant a yearly revenue of $80,000 divided five ways. But now there’s an offer on the table of $12 million. That’s a completely different ballgame for everyone involved.

Bottom line for landowners, you not only need a good attorney to review your lease agreement, you need a good attorney and a good financial adviser to help set up the legal and investment aspects of what you will do with the money. We’ll call them “good problems to have,” but they are problems nonetheless.

*Pittsburgh Post-Gazette (May 30, 2011) – Bonanzas that end badly: cautionary tales from Marcellus Shale windfalls

  • Anonymous

    The heirs (finally) need to form an LLC and come up with some sort of internal governance mechanism. If battle lines have already been drawn, the minority will NOT like this. I am not sure, but think the parties can demand a partition of the property, with each heir to get his/her physical piece of the property. Those who agree can then form an LLC with their pieces of the property. Of course if Pennsylvania adopts forced pooling, an anti-drilling minority will anyway be out of luck. All these steps require people who may not be familiar with LLC’s and governance issues to do some studying and bear some legal fees. Some smart lawyer should come up with a standard set of documents for this procedure. As owners of 400 acres that have passed through 4 generations, we are familiar with these problems. We are all lawyers and other professionals and even so this is NOT easy. I tried this BEFORE the Marcellus Shale boom and some of the family stopped talking to me.

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