Finding and developing oil and gas is technically complex, costly and risky. Most owners of subsurface oil and gas, including governments, are not prepared to take the risk associated with trying to develop their own resources. In the case of individual owners of freehold mineral rights, most are equally risk-averse and very few have the technical training, experience or the necessary financial resources.
If the owner of the resource knew with certainty how much oil or gas existed beneath the owner’s land, it might be possible to structure an agreement for sale of the subsurface resource to an interested oil and gas development company. But one never knows before drilling what the subsurface holds and even after drilling the full potential of the subsurface is seldom known. Owners of subsurface minerals are understandably reluctant to enter into an outright sale of their mineral rights for fear that an undiscovered nirvana lurks beneath the surface. Oil and gas development companies are equally reluctant to pay owners prices for an outright sale of their minerals based on the mineral owner’s perception of what might be found to exist. Out of this conundrum has evolved the oil and gas lease.
The oil and gas lease is an exceeding complex legal document that grants the oil and gas developer the right, but not the obligation, to explore for the leased substances for a specific period of time (the primary term). If the leased substances are found to exist during the primary term, the lease continues for so long as there is the capability of production. The owner receives a bonus consideration upon signing the lease (substantially less than what might be expected from an outright sale) and a royalty share of any production revenues.
In the case of leases granted by governments and sophisticated corporate owners of mineral rights, the owner of the resource prescribes the form of lease agreement (see “Crown Leases”, “Other Industry Lease Forms”). Such leases provide significant protection for the owner of the resource.
Historically, the freehold leases signed by individual freehold owners have been prescribed not by the owner of the resource but by the company seeking to lease the freehold owner’s mineral rights. Quite naturally, such leases have been designed to protect the interests of the company leasing the mineral rights, not the owner of the resource. Since the advent of CAPL (Canadian Association of Petroleum Landmen) leases a quarter century ago, freehold leases have not been the product of any one oil and gas developer’s legal department, but of the collective wisdom of the members of the CAPL and the Natural Resources Section of the Canadian Bar.
Governments and sophisticated corporate owners of mineral rights have the technical expertise and financial resources necessary to fully enforce the terms in the oil and gas lease agreements they have prescribed. Very few individual freehold owners have either technical expertise or the financial resources necessary to fully enforce the terms in their freehold lease agreements through the courts.
If an owner of property leases that property to a tenant and the tenant fails to pay the rent agreed upon in the lease, the landlord does not have to go to court to collect. The landlord has the right to seize the tenant’s property from the leased premises to recover the rent that is owed. This is known as the right of distress or distrain.
Canadian courts have found that royalties are a form of rent1. As the potential to receive royalties is the principal motivator of most freehold owners in leasing their mineral rights, one might think that in cases of late or non-payment of royalties a freehold owner would have the right of distress or distrain. Not so because a freehold oil and gas ‘lease’ is not really a lease. The Supreme Court of Canada has ruled that a freehold oil and gas lease is not a lease but a profit `a prendre2 (a right to enter into and take from the land of another). In result, late payment of royalties is endemic in western Canada.
The principle proponent of CAPL leases, the late John B. Ballem, Q.C., said it best: “the CAPL lease is pretty well bullet proof”3 – no matter what the energy company-lessee does or doesn’t do, the freehold lease continues unless the energy company-lessee decides it no longer wants the lease.
FHOA urges individual freeholders to make changes to CAPL leases (or to the lease forms used by land agents which are based on the CAPL 91 lease form) to more fairly balance their own interests with those of the company seeking to lease their mineral rights.
1. Scurry-Rainbow Oil Limited v. Galloway Estate, Alta. Q.B.,  A.J. No. 227
2. Berkheiser v. Berkheiser and Glaister, S.C.C.  S.C.R. 387
3. Some Issues Surrounding the “Conventional” Oil and Gas Lease, Ballem, J.B. in Working with the Oil and Gas Lease, p. 316, Insight Press, Toronto, 1998