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Freehold Leasing Agents June 2017 Negotiator Article

Freehold Leases - is it fair that the lease agreements that Canadian freehold owners have been asked to execute for the past century have been drafted by energy company lawyers for the protection of their clients without input from the freeholders who own the property which is the subject matter of the lease agreement? Other owners of mineral rights (provincial governments, the federal government, and large corporations such as EnCana Corporation and ExxonMobil Corporation) prescribe the form of lease agreement under which energy companies lease their mineral rights (see “Other Industry Lease Forms”)? FHOA has drafted a freehold lease agreement which more fairly balances the rights of the individual freehold owner and the oil company (see "Freehold Friendly (FHOA) Lease"). 

Rentals - is it fair that the $1 per acre per year delay rental payment required to be paid to a freeholder by an energy company-lessee to maintain a freehold lease if no well has been drilled after the first year has not increased for more than half a century (see "Understanding Freehold Leases”)?

Royalty Rates - is it fair that provincial governments periodically modify (on both a ‘go-forward’ and retroactive basis) the royalty rates charged under their oil and gas leases to correspond to the prevailing economic conditions whereas the royalty rates in freehold oil and gas leases remain fixed thereby creating an unbalanced playing field (see "Crown v. Freehold Royalty Rates")?

Price - is it fair that energy companies pay royalties on gas and gas by-products produced from wells on Crown lands (mineral rights owned by provincial governments) based on deemed prices determined by the government, whereas some energy companies manipulate their gas contracts so as to allocate low priced gas to freehold owners (see "Gas Contract Manipulation")?

Deductions from Royalties - is it fair that the deductions which energy companies are allowed to make from Crown oil and gas royalties are determined by provincial regulations, whereas deductions from freehold royalties are effectively left to the discretion of the energy company that has leased the freeholder’s mineral rights (see "Deductions from Royalties")?

About Royalty Reporting - is it fair that almost all of the multitude of agreements typically entered into between one energy company and another have been standardized as have all of the numerous forms industry regulators and provincial governments require energy companies to file, yet the energy industry has not standardized freehold royalty reporting forms? In most cases, the information provided to freeholders as backup to royalty checks is incomprehensible to a layman and, in some cases, no backup whatsoever is provided (see "About Royalty Reporting").

Continuation of Freehold Leases with Shut-In Wells - is it fair that Crown leases in Alberta, Saskatchewan and Manitoba can only be continued beyond their primary term by production or by wells which are capable of producing in paying quantities, while some energy companies have held freehold leases in these provinces for speculative purposes for decades with shut-in wells which are uneconomic to produce under either current or any reasonable estimate of future oil and gas prices (see "Shut-in Wells”)?

Deep Rights - is it fair that almost 30 years after the Alberta government retroactively amended Crown leases to reclaim for the Province the rights to oil and gas below the deepest geological formation proven capable of production in paying quantities by the energy company that had leased the Crown mineral rights and 12 years after the Saskatchewan government followed suit, the leases which land agents present to freeholders almost invariably include no ‘deep rights reversion’ clause and allow the energy company-lessee to earn all of the freehold owner-lessor’s mineral rights to the center of the earth with a well which is capable of production from a shallow formation (see "Deep Rights")?

Caveat Amendments - is it fair that in situations where a freeholder succeeds in negotiating a deep rights reversion clause in his lease, Alberta Land Titles not only refuses to allow the description of the caveat registered by the energy company-lessee against the freeholder’s title to indicate that the lease includes a deep rights reversion clause but, in situations where the lease has reached the end of its primary term and the rights below the deepest zone proven capable of production have reverted to the freehold owner, Alberta Land Titles refuses to allow the caveat to be amended thereby preventing other energy companies that might be interested from knowing that the freeholder’s rights below the deepest zone capable of production are available for lease? In Saskatchewan, the Information Services Corporation or ISC, the provincial Crown Corporation responsible for registries, which operates under the same Torrens land system as Alberta, provides a simple form for changing the description of the interests claimed under a caveat.

Offset Obligations - Is it fair that many land agents present freehold owners with lease agreements which they know or should know contain no protection from drainage under the Offset Wells clause? Is it fair that many energy company-lessees routinely ignore the offset obligations which they owe to their freehold owner-lessors and essentially adopt a ‘catch us if you can attitude’? Is it fair that some energy companies present freeholders with lease agreements under which no offset obligation arises unless the freehold owner-lessor constantly monitor well drilling and production activity in the vicinity of his mineral rights? In these leases the six month time period in which the energy company must satisfy an offset obligation doesn’t begin to run until the freeholder notifies the energy company of the offset well. (see “Understanding Freehold Leases”, “About Offset Wells”)

The Role of Regulatory Authorities – Is it fair that the Alberta Energy Regulator (formerly known as the “Energy Resources Conservation Board”) (the “AER (formerly known as the “ERCB”)”) takes the position that it has no jurisdiction to become involved in situations where a lessee deprives its freehold owner-lessor of the freeholder’s share of production even though the AER (formerly known as the “ERCB”) is charged with the power to make any just and reasonable order to effect the purpose of the Oil and Gas Conservation Act (Part 3, s. 7) one of the purposes of which is to "afford each owner the opportunity of obtaining the owner’s share of the production of oil or gas from any pool” (Part1, s. 4(d))? In 2011, the Alberta Court of Appeal ruled that to continue a CAPL 91 lease beyond the primary term with a shut-in well under the Suspended Wells clause, the well must be capable of meaningful and material production (see "The Capable of Producing Issue"). Is it fair that the AER (formerly known as the “ERCB”), which has exclusive jurisdiction to decide technical matters such as whether a well is capable of meaningful and material production, “does not consider that it should be the preferred forum to decide questions about the existence or continuation of a freehold lease”? Is it fair that the AER (formerly known as the “ERCB”) has amended well target area regulations to allow wells to be drilled and produced for gas without setback on the north and east sides of sections throughout the area of southern Alberta where freehold mineral rights are found thereby allowing the mineral rights of offsetting freeholders to be drained with impunity in direct violation of its duty to protect correlative rights? (see "The Role of Regulatory Authorities“, “March 13, 2012 AER (formerly known as the “ERCB”) Letter to FHOA”, “Target Areas”)

Judicial Recourse - is it fair that freehold owners, who are denied protection by regulatory authorities and who enter into contingency fee agreements with oil and gas experts because they cannot afford to protect their property rights in any other way, are afforded different and inferior treatment by some judges than the powerful energy companies that can afford to retain technical experts and lawyers on a fee for service basis ("The Role of the Canadian Courts")?

Split-Title Ownership - is it fair that for the past century the Canadian Pacific Railway Company and its corporate successors have been trying to regain the rights to the natural gas which the railway company didn’t want when it sold homestead lands to western Canadian pioneer settlers at the turn of the 19th century and that these efforts have been aided by complicit energy companies and a judiciary apparently more interested in covering up the stench of corporate misdeeds than protecting the property rights of individual freehold owners (see “Genesis of the Problem”, “The CBM Ownership Dispute”, “The Petroleum/Natural Gas Ownership Dispute”)? 

Title Fractionation – freehold mineral rights in Western Canada were initially acquired by pioneer settlers from the Dominion Government prior to 1889, from the Canadian Pacific Railway Company between 1881 and 1912, or from the Hudson’s Bay Company in the period prior to 1908. In many instances, these mineral rights have remained in the same pioneer family for a century or more. Parents tend to treat their children equally in their wills and, because freehold mineral rights have now typically been passed through three or more generations, in many situations the number of individuals holding title to a single tract of freehold mineral rights is growing exponentially. For energy companies the cost to secure or administer lease agreements in these situations becomes prohibitive. Some energy companies have policies which prohibit their land departments from leasing freehold minerals where more than a certain number of freehold owners hold title. Title fractionation ultimately destroys the value of a family’s heritage. Registry offices in Alberta have historically refused to register title in situations where a single tract has more than twenty owners. Saskatchewan has recently changed its policy and now allows up to twenty owners per tract instead of the four per tract previously allowed. This can be expected to exacerbate the problem. Title fractionation of freehold mineral rights in Western Canada is reaching crisis proportions and can only be resolved through proper estate planning (see “Estate Planning for Freeholders”).

 

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