Most Canadian oil and gas exploration and development in the decades immediately following the 1947 Leduc discovery was conducted by ‘the majors’ - large corporations with established production in the United States. Individual freehold ownership is the rule rather than the exception in the lower 48 states of the American union and, prior to Leduc, each of the majors had developed its own form of freehold lease agreement based on years of judicial battering of freehold leases by American courts. The majors brought their existing freehold lease forms with them when they descended upon western Canada in the late 1940's. All of these early lease forms were based on the ‘Producers 88' lease - a so called ‘unless’ lease form which terminates on its own terms ‘unless’ the oil company-lessee does certain things.
During the 1950's and 1960's, Canadian courts were generally sympathetic to the plight of individual freehold owners and a number of these ‘unless’ freehold lease agreements were terminated by the courts, much to the consternation of the energy industry. CAPL (Canadian Association of Petroleum Landmen) leases essentially arose in response to these judicial decisions. The CAPL lease form is not the product of a single company’s legal department, but of the collective business experience of the landmen who comprise the CAPL and the collective legal experience of the lawyers who comprise the Natural Resources Section of the Canadian Bar Association. CAPL leases differ from ‘unless’ leases in their basic structure. Rather than terminating automatically ‘unless’ the energy company-lessee does certain things, CAPL leases attempt to bring all of the energy company-lessees obligations to the freehold owner-lessor under the default clause in the lease. This default clause contains a judicial ascertainment provision whereby after a final judicial decision confirming the lessee’s breach of its obligations the lessee has 30 days to commence to remedy the breach. The effect of this ‘or’ structure is that no matter what an oil company-lessee does or doesn’t do, it is impossible for a freehold owner-lessor to terminate a CAPL lease, through the courts or otherwise, without the energy company-lessee’s consent. The late Mr. John B. Ballem, Q.C., who was the principal proponent of a standard form CAPL lease and was, described as the dean of Canada’s energy bar1, considered CAPL lease forms to be “bullet proof”2. FHOA considers the ‘bullet proof’ structure of CAPL leases to be not just unfair, but offensive.
FHOA recommends a number of changes to CAPL leases on its website. Whereas many freeholders have succeeded in negotiating some of these changes, very few freehold owners have succeeded in amending the fundamental bullet proof structure of the CAPL lease.
To provide freehold owners with choice, FHOA drafted a ‘freeholder-friendly’ freehold lease form which more fairly balanced the rights of the freehold owner-lessor and the energy company-lessee in 1995. This lease was amended in 2012 to address recent issues impacting freehold mineral rights (see “Freehold Friendly (FHOA) Lease”).
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1. Ballem’s Legal Text a Classic, Calgary Herald Business Section, Oct. 28, 1999
2. Some Issues Surrounding the “Conventional” Oil and Gas Lease, Ballem, J.B., in Working with the Oil and Gas Lease, 1998, Insight Press, Toronto, p. 315