Delete “and to store and recover any substances injected into the Lands”.

There is no provision in the lease providing any compensation to you in the event the oil company decides to use your lands for storage purposes. Clause 4(a) specifically states that no royalty shall be payable on non-leased substances injected and recovered from the Lands. A lease agreement is supposedly for the mutual benefit of the owner-lessor and the oil company-lessee. If your oil company-lessee benefits from using your mineral interests for storage purposes, should you not share in this benefit?

Delete “drilled subsequent to the effective date hereof and”.

This wording provides unscrupulous operators with the opportunity to drill a well in a spacing unit offsetting yours, lease your lands, complete the well for production and drain your lands during the primary term of your lease from a well which is not an offset well under clause 1(h) (“Understanding Your Lease Agreement - The Offset Clause”). If the oil company refuses to delete this portion of clause 1(h), you should check the status of all wells in laterally or diagonally offsetting spacing units. If there are no wells other than dry holes in offsetting spacing units, you need not be concerned. If there are, you may want to insist on the deletion.

Delete “any acts for or incidental to any of the foregoing”.

This subclause is far too broad.  The habendum clause (“Understanding Your Lease Agreement - Habendum Clause”) provides for your lease to be continued beyond its primary term so long as there are operation upon the said lands.  Is raising capital to conduct well operations an act ‘incidental’ to well operations?  Is holding a meeting to discuss raising capital ‘incidental’?

Amend the second sentence to read: “In computing the current market value at the wellhead, the Lessee may deduct any reasonable expense incurred by the Lessee in processing and transporting the Leased Substances beyond the wellhead (including a reasonable rate of return on investment), provided that the Royalty shall not be less than __ percent of the Royalty that would have been payable to the Lessor if no such expenses had been incurred by the Lessee.” 

The Crown does not allow the expenses associated with water disposal, separating and treating to be deducted - why should you (“Deductions from Freehold Royalties”, “Understanding Your Lease Agreement - The Acanthus Decision”

Delete the entire clause and substitute: “The current market value for that portion of the leased substances comprised of natural gas and the condensate and natural gas liquids contained therein shall be equal to the Reference Price for the said substances as published by the Alberta Department of Energy, less any intra-Alberta transportation allowances or fractionation allowances permitted in determining the Crown’s valuation price for Crown royalty purposes. Provided that, in the event that the Alberta Department of Energy or its successor ceases to publish monthly Reference Prices, transportation allowances and fractionation allowances, the current market value of natural gas and the condensate and natural gas liquids contained therein shall be based on the method then used by the Alberta Crown to establish a price for the said substances for Crown royalty purposes.”

As it stands, the clause permits an unscrupulous oil company-lessee to assign low priced, arms-length gas sales contracts or transactions to the lands of freehold owners and higher priced sales contracts or transactions to Crown lands. Because the Crown demands a royalty based on the weighted average price of all gas and gas by-products sold in the Province during the previous month (the ‘Reference Price”), the effect of assigning sales contracts or transactions in this way is to minimize the oil company’s overall royalty obligation (“Gas Contract Manipulation”). 

Add the following phrase: “including, without limiting the generality of the foregoing, all financial information relating to the reasonable expense deducted by the Lessee in determining the current market value at the wellhead”.

Delete entirely and substitute as Clause 7(e): “If, at any time during or after the Primary Term, the Lessee wishes to unitize the Lands or the Leased Substances or any portion, zone or formation thereof with any other lands, zones, formations or substances, the Lessee shall provide the Lessor with a copy of the proposed Unit Agreement together with a written request that the Lessor approve the proposed unitization. Any and all such requests by the Lessee shall be accompanied a summary of the basis and manner of the proposed unitization, including the manner of allocating unitized production among the tracts of land proposed to be unitized. The consent of the Lessor to such unitization shall not be unreasonably withheld.” 

As it stands clause 7(e) is convenient for an oil company-lessee because it gives the lessee the right to unitize your lands in any manner it chooses without your consent. In some cases it is in your best interest, as a freehold owner-lessor, to enter into a unit agreement, but in other cases it is not (“Understanding Your Lease Agreement - Pooling and Unitization”). The vast majority of the more than 750 unit agreements in Alberta were formed before oil company-lessees began to demand these extraordinary powers. Why should you give up and important right for the convenience of your oil company-lessee?

Re-number as Clause 7 (f) and delete the phrase “whether conducted before, after or during the exercise of the rights and powers granted under this Clause,”

Add the following sentence: “At the end of the Primary Term, the Lessee shall surrender all zones or formations within the Lands which lie below the base of the deepest formation completed for and capable of production of the Leased Substances within the Lands, the Pooled Lands or the Unitized Lands.”

Alberta Crown leases have contained a deep rights reversion clause for a quarter of a century (“Deep Rights Reversion”).

Add new clause 11 (c) as follows: “In the event of the Lessee having registered in the Land Titles Office for the area in which the Lands are situated, the Lease and this addendum or any caveat or other document in respect thereof, the Lessee shall withdraw or discharge the documents so registered within a reasonable time after termination of this agreement. Provided that, in the event the Lease and this addendum shall terminate but only as to a part thereof, the Lessee shall take such steps as may be necessary to amend or replace any caveat or other document registered with respect to the Lease and this addendum to limit it to those parts of the Lease and this addendum that continue in force.”

Some oil company-lessees fail to remove their caveats when a lease terminates leaving their freehold owner-lessors or a subsequent lessee with the cost of clearing title. In the case of deep rights reversion, because oil company-lessees seldom file lease agreements with Land Titles and because the caveats they file usually contain only a cursory description of the underlying lease agreement, a requirement to amend caveats in the event of deep rights reversion is absolutely essential in order to make other oil companies aware of the availability of the freeholder’s deep rights.

Delete the phrase “; nor shall it terminate if the Lessee has within the 30 days of such final determination remedied or commenced to remedy the breach or breaches, and having so commenced to remedy the breach or breaches, thereafter diligently continues to remedy the same”.

If your oil company-lessee does not remedy an alleged breach on the basis that there has been no breach, and the alleged breach is subsequently confirmed by a final judgment of a court, what possible reason is there to give your oil company-lessee a second chance?

Add the following sentences to clause 16 (e): “All payments to the Lessor shall be accompanied by a report setting forth the basis for the payment. The report shall include:

Some freehold owners receive no reports accompanying their royalty payments. Other freehold owners receive reports in which the units of measurement are not reported. Many freehold owners receive reports they do not understand. Most freehold owners have difficulty comparing publicly gas available weighted average gas prices based on heat content ($/gigajoule) to prices reported in their royalty statements in $/1000 cubic meters (“Royalty Reporting”).

Delete the following sentence: “The terms of this agreement constitute the entire agreement between the parties, and no implied covenant or liability of any kind is created or shall arise by reason of anything contained herein.”

Oil and gas exploration and development is a complex business and it is impossible to draft a freehold lease agreement in which all possible eventualities are addressed (“Conflicts Between Oil Company-Lessees and Owner-Lessors”). The Law of Implied Covenants developed in the United States to address this problem and imposes broad unwritten duties on oil company-lessees to properly develop their freehold owner-lessor’s lands. Although no corresponding body of law exists in Canada, there is absolutely no reason why you should agree to specifically exclude implied covenants from your lease agreement. 

Add new clause 24 under the heading “Applicable Law”: “This agreement shall be construed under the laws of the Province of Alberta. The parties hereto agree that the ten-year period for seeking a remedial order under section 3(1)(b) of the Limitations Act, S.A., 1996 c. L-15.1 (the “Act”), as amended, for any claim (as defined in the Act) arising in connection with this lease shall be a period of time equal to the term of this lease plus two years (the “New Limitation Period”). Provided that, in no event shall the New Limitation Period be less than 10 years”

The Limitations Act effectively bars legal actions brought more than 10 years after the cause of the legal action arose and requires legal actions to be brought within 2 years of discovery of a cause of action. Section 7 of the Limitations Act also provides for parties to a contract to set their own ultimate period for purposes of limitations. British Columbia has a 25-year ultimate limitation period.