FHOA Lease: Non-negotiable sliding scale royalty rate varying from 10% to 32% depending on both the volume and price of the oil or gas produced. The freehold owner has the option of granting the energy company-lessee a negotiable reduced royalty rate for a negotiable period of time (similar to Crown leases).
CAPL Leases: Fixed negotiable royalty rate (typically 15% to 18%).
The royalty provisions in the FHOA Lease are designed to level the Crown v. freehold playing field which has become grossly unbalanced since the prairie provinces amended their royalty rates and introduced royalty holidays subsequent to 2008.
Freehold Mineral Tax
FHOA Lease: Energy company-lessee pays 100% of freehold mineral tax – increases effective royalty by up to 2%.
CAPL Leases: Freeholder pays royalty share of freehold mineral tax.
Since the energy industry convinced the federal government to abolish Resource Allowance there is no longer any reason for freehold owners to pay their royalty share of freehold mineral tax.
FHOA Lease: The price of oil, gas and natural gas liquids is the greater of the actual price received by the energy company-lessee (including any hedges) and the current market price, and in the case of gas, the price used by the Crown to calculate Crown royalties.
CAPL Leases: Prices subject to manipulation.
The FHOA Lease eliminates the possibility that an unscrupulous operator will manipulate gas contracts or hedges so as to minimize its overall corporate royalty burden at the expense of its freehold owner lessors.
FHOA Lease: Deductions limited to what the Crown allows with a cap of 15% on the rate of return on any capital invested in gas gathering and processing facilites. Separate negotiated caps on deductions for oil and gas.
CAPL Leases: Deductions for both gas and oil limited only by single negotiated cap for both oil and gas.
Recent judicial decisions involving deductions from freehold oil royalties and historically low natural gas prices have resulted in some energy companies aggressively increasing deductions and, in some instances, making claims for past deductions.
Deeps Rights Reversion
FHOA Lease: Rights below deepest zone proven capable of production in paying quantities revert to freeholder at end of primary term (similar to Crown).
CAPL Leases: No deep rights reversion.
Crown leases and the leases of sophisticated corporations that own freehold mineral rights have included a deep rights reversion clause for decades.
FHOA Lease: A shut-in well continues the lease beyond its primary term only if the well is capable of producing the leased substances in paying quantities (reasonable expectation of profits) and if a substantial suspended well payment is made.
CAPL Leases: A shut-in well continues the lease if it is “capable of producing the leased substances” (CAPL 88 and 91) or “capable of production of the leased substances” (CAPL 99). The Alberta Court of Appeal has ruled that to continue a CAPL 91 lease the shut-in well must be capable of producing in meaningful quantities in its existing configuration. CAPL 88 & 91 leases require only a token shut-in payment. CAPL 99 leases require a substantial shut-in well payment.
Crown leases and the freehold leases of sophisticated corporations have prevented leases being continued for speculative purposes with the ‘paying quantities’ test for decades.
FHOA Lease: No right to unitize without freeholder’s consent
CAPL Leases: Oil company-lessee can unitize without consent of the freeholder.
Unitization may radically alter the rights of a freehold owner for decades – why would any rationale freehold owner allow an energy company-lessee to do this without his or her consent? Neither the Crown nor sophisticated corporate freehold owners allow the energy company-lessee to unitize without their consent.
FHOA Lease: Protection from wells completed for production after the date of lease from laterally and diagonally offsetting spacing units. Production from multiple offset wells is summed to calculate compensatory royalties.
CAPL Leases: CAPL 88 & 91 – Protection only from wells in laterally adjacent spacing units. Production from multiple offset wells is averaged to calculate compensatory royalties. No protection if a well drilled to the depth of the offset well exists on the spacing unit including the freeholder’s lands; CAPL 99 – Production from multiple offset wells is averaged to calculate compensatory royalties unless the wells produce from different formations. Protection from laterally and diagonally adjacent spacing units but no protection from offset wells drilled before date of lease and brought on production after the date of the lease.
The Offset Wells clause in the FHOA Lease has been designed to address the multitude of deficiencies in fairness in the clause in CAPL Leases – averaging rather than summing the production from multiple offset wells; old dry holes on a section eliminating offset protection for gas wells; the restricted meaning of ‘adjacent’; the non-restrictive meaning of formation in pools and units; etc.
FHOA Lease: Lessee required to remove caveats after lease termination and amend or re-file caveats 60 days after the end of the primary term to reflect deep rights reversion.
CAPL Leases: No requirement to amend or remove caveats.
A deep rights reversion clause in a freehold lease is of little benefit to a freehold owner if the caveat protecting the lease is not amended or re-filed by the energy company-lessee to make the availability of deep rights apparent to other energy companies.
FHOA Lease: Negotiation, mediation, binding arbitration or litigation at the option of the freeholder. Freeholder has the right to acquire well in the event of default.
CAPL Leases: The freeholder risks becoming involved in litigation in the event of filing a notice of default and even if the freeholder succeeds in a legal action the energy company-lessee can continue to the lease.
The FHOA Lease counters the offensive nature of the ‘bulletproof’ CAPL Lease default clause and provides a fair and reasonable method of resolving disputes.
FHOA Lease: Either freeholder or oil company-lessee can assign but must nominate one designated representative. Oil company-lessee assignees jointly & severally liable for performance.
CAPL Leases: CAPL 88 & 91 – assignment by freeholder is restricted but assignment by oil company-lessee is not. If one of the energy company-lessee’s assignees defaults the original lessee has no responsibility.
Would you rent your house to someone under an agreement that allowed the tenant to sublet to someone else and not bear any responsibility?
FHOA Lease: Detailed reporting understandable by the freeholder
CAPL Leases: No reporting requirement.
The lack of clear understandable royalty reporting is a significant issue with most freehold owners.
Standard of Operations
FHOA Lease: Operations conducted diligently, competently and in good faith taking into account the interests of both the energy company-lessee and the freehold owner-lessor in protecting the freeholder from drainage, fully developing the leased mineral rights and producing and marketing the leased substances.
CAPL Leases: Operations conducted diligently, carefully and in a workmanlike manner.
Good faith (performance of a contract which fulfills the reasonable expectations of honest people) is not generally recognized in contracts by the courts of the prairie provinces.
FHOA Lease: Contains no Entire Agreement clause thereby allowing the courts freedom to imply covenants in the lease to the extent permitted by common law
CAPL Leases: The clause in CAPL leases specifically denies the existence of implied covenants.
An entire body of law has developed in the United States which implies covenants in freehold leases requiring energy company-lessees to protect their freehold owner-lessors in circumstances not specifically addressed in the lease agreement.
FHOA Lease: The clause extends the 10-year ultimate bar set forth in the Alberta Limitations Act (you cannot sue for something that happened more than 10 years ago even if you didn’t know about the something) to the length of the lease plus two years.
CAPL Lease: The ultimate bars in the various provincial limitation statutes apply.
A short ultimate bar encourages unscrupulous energy companies to breach freehold leases in situations where the freehold owner is unlikely to discover the breach. Saskatchewan has a 15-year ultimate bar and its limitation statute does not provide for contractual amendments to this bar as does Alberta’s statute. Manitoba limitation statute has no ultimate bar.