In the early years of oil and gas exploration and development in the United States a number of courts ruled that an energy company-lessee had an implied obligation to drill a test well on the mineral rights of its freehold owner-lessor within a reasonable time period after the lease was signed. The reasonable time period varied with the circumstances but the courts made it clear that energy company-lessees could not hold a freehold leases for multiple years without drilling. These early judicial decisions gave rise to uncertainty. To resolve this uncertainty, energy companies began to include provisions to pay delay rentals in freehold leases. Under these provisions the implied obligation to drill a well could be postponed by an annual payment from the energy company-lessee to the freehold owner-lessor. The typical annual payment in the ‘unless’ form of American freehold lease which was imported into western Canada after the 1947 Leduc discovery was $1 per acre per annum.
Failure to pay the $1 per acre per annum delay rental in an unless lease on time and in the correct amount resulted in Canadian courts striking down valuable energy company-lessees in a number of instances in the 1950’s1,2. As a result, most energy companies developed policies of sending delay rental checks to freehold owner-lessors or their depositories by registered or double-registered mail well before the anniversary date of their leases and maintaining records of these payments throughout the period that their leases remained in place.
The impact of the powerful oil and gas industry lobby has changed many things over time.
In 1995, a Court of Queen’s Bench judge considered a situation in which an energy company-lessee had a procedure in place to send delay rental checks by registered mail at least a month before the anniversary date of the lease. The lease before the judge provided that the delay rental check was deemed to be received on the date of mailing. The energy company could only produce records of a letter and check requisition dated a week before the lease anniversary date and had not sent the letter and check by registered mail. The evidence was that it took 2.5 days on average for a letter to be delivered from the energy company’s Calgary office to the freehold owner-lessor’s bank depository in Edmonton. The depository had received the letter and check 9 days after the anniversary date. The trial judge ruled that the burden of proof in establishing that a delay rental payment had not been paid on time (ie mailed) rested with the freehold owner-lessor, not with the energy company-lessee. You or I might view the evidence as supporting the conclusion that the energy company-lessee had not mailed the letter by registered mail because registration would establish that the mailing was late. The trial judge, relying on evidence of the energy company’s usual practice with respect to delay rentals, found as a fact that the letter and delay rental check had been mailed prior to the anniversary date3. The Court of Appeal did not disturb the trial judge’s finding of fact4.
A freehold owner-lessor has no control over his or her energy company-lessee’s records. If the energy company fails to keep incriminating records, it is clearly impossible for a freeholder to prove that a delay rental check was not mailed on time.
Most energy companies who lease freehold mineral rights using the CAPL 91 lease form avoid the potential for late payments of delay rentals by striking out the ‘Periodic Payments’ section under ‘Rentals’ and including with the lease bonus consideration a ‘Lump Sum’ payment equal to the annual delay rental payment times the number of years after the first year of the primary term.
The CAPL 99 freehold lease form makes no reference to delay rental payments. The drafters of this lease form presumably assumed that Canada’s corporate-friendly courts would not emulate the early American courts in imposing an implied obligation on an energy company-lessee to drill a test well on the mineral rights of its freehold owner-lessor within a reasonable time period after the lease was signed.
1. East Crest Oil Company Ltd. v. Strohschein and Strohschein Alta. S.C. App. Div.  A.J. No. 47
2. Canadian Fina Oil Ltd. v. Paschke Alta. S.C. App. Div  A.J. No. 62
3. Paddon Hughes Development Company v. PanContinental Oil Ltd. Alta. Q.B.  A.J. No. 811
4. Paddon Hughes Development Company v. PanContinental Oil Ltd. Alta. C.A.  A.J. No. 1120