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Can oil and gas companies reduce surface lease payments?

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Surface leases are common in many rural areas in Alberta. Landowners often enter into surface lease agreements with oil and gas companies (“operators”), which entitles them to place wells on the property and extract natural resources below the surface. In exchange, the landowner receives annual compensation from the operator.  

Especially during economic downturns, it is not uncommon for operators to attempt to reduce their annual payment obligations. This often leaves farmers, ranchers, and other landowners asking themselves one question: is this legal? 

Under the Surface Rights Act, RSA 2000, c S-24, the rate of compensation for a surface lease may be subject to review every 5 years. On the fourth anniversary of the start of the surface lease, the operator must notify the landowner that it wishes to have the rate of compensation reviewed. Both parties are then expected to negotiate in good faith. If an agreement cannot be reached, either party has the right to request a review before the Land & Property Rights Tribunal (the “Tribunal”). No parties may apply to the Tribunal for a review before the 5-year anniversary date. 

In order to apply to the Tribunal, the requesting party must submit a completed Rate of Compensation Review form. The Tribunal will schedule a Dispute Resolution Conference and then a hearing, if necessary. 

At a hearing, the Tribunal will consider two factors in assessing the appropriate rate of compensation:

  1. The loss of use by the owner or occupant of the area granted to the operator; and
  2. The adverse effect on the remaining land of the owner or occupant, due to nuisance, inconvenience, and/or noise that may be caused by the operator. 

In considering the above factors, the Tribunal will often consider evidence with respect to the rate of compensation for similar properties in the area, particularly if there is a “pattern of dealing” (essentially a going market rate in that particular region). If no pattern of dealing is present, the Tribunal will assess evidence on a case-by-case basis relating to loss of use and adverse effect. This may include, but not be limited to, the following considerations:  

  • Is the well located mid-field or a corner location? 
  • Is the land used for crops or grazing? 
  • Is the well active or in the process of reclamation?
  • Is there an access road? 

The parties may also refer to past decisions of the Tribunal. Although previous decisions are not binding on the Tribunal, they will often provide a useful indication of how the Tribunal will assess present cases. 

The party requesting the review has the burden of demonstrating why a higher or lower rate of compensation is justified. The final decision of the Tribunal will be binding upon both parties, subject to either party’s right to appeal to the Alberta Court of King’s Bench. 

Key Take-Aways

  • No party can unilaterally change the compensation payable under a surface lease or apply to the Tribunal to vary the compensation before 5 years has passed since the start of the surface lease term. 
  • After the 5-year term has expired, either party has the right to request a review. If the parties cannot negotiate an agreement between themselves, the matter will go to the Tribunal. 
  • The party requesting the review must demonstrate to the Tribunal why the compensation should be adjusted, having regard to the primary factors of loss of use and adverse effect. This is often done by tendering evidence related to similar surface leases in the area, case-specific evidence, and referring to past decisions of the Tribunal. 

This post provides an overview of the law on surface lease agreements in Alberta. It is intended to provide general information and does not constitute legal advice. If you have a legal issue with respect to negotiating a surface lease agreement, or a rate of compensation review before the Land & Property Rights Tribunal, we recommend you speak with a lawyer directly. Our team of lawyers would be pleased to serve you with advice that is specific to your situation.

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