Prior to the introduction of CAPL (Canadian Association of Petroleum Landmen) leases in 1988, hundreds of different forms of freehold lease agreement were used in western Canada. Today, the vast majority of oil companies operating in Canada present freeholders with CAPL lease forms. Despite the many differences between existing freehold lease forms, almost all provide the oil company-lessee with the exclusive right, but not the obligation, to explore for hydrocarbons owned by the freehold owner-lessor for a period of time (the primary term) and to produce any hydrocarbons which may be found to exist until these hydrocarbons are exhausted. In return for granting this exclusive right to the oil company-lessee, the freehold owner-lessor typically receives an initial cash payment (the bonus consideration), a share of any hydrocarbons produced (the royalty), and an annual rental payment during the primary term before production begins (the delay rental) (“The Development of the Freehold Lease”).

A freehold oil and gas lease which provides for the above relationship is not a lease in the usual sense of the word. If you lease your farm or your house, you expect your property to be returned to you at the end of the lease term in the same condition as it was when you leased it. The very purpose of a freehold oil or gas lease is the removal of any oil and gas which may be found to exist within the freeholder’s lands. Clearly, if the purpose of the lease is achieved, the property can not be returned to the freehold owner in the same condition as when it was leased. A freehold oil and gas lease is also not a sale of your mineral interests in the ground. The Supreme Court of Canada has characterized a freehold lease agreement as a profit � prendre for an uncertain term¹ A profit � prendre is “a right to take something off the land of another person.”²

The legal characterization of a freehold oil and gas lease as a profit � prendre has profound implications for freeholders. If a freehold oil and gas lease was a true lease, landlord and tenant law would apply - if a lessor under a typical property lease (the landlord) does not receive the compensation stipulated in the lease agreement, the landlord has the right to re-enter the premises and seize any moveable property of the lessee in satisfaction of the outstanding obligation. Canadian courts have found that a profit � prendre does not create a landlord - tenant relationship for purposes of re-entry³. One result of this is that oil companies have no ‘incentive’ to pay freehold royalties on time, and it is common practice for oil company-lessees to ignore the dates specified for royalty payments in freehold lease agreements⁴,⁵. Similarly, if a freehold lease was a sale of the freeholder’s mineral interests, the freehold owner could presumably rely on the rules of common law and the statutory regulations which apply to the sale of real property - when you sell your house, both the actions of the involved real estate agent and the form of transfer agreement are subject to regulation. There are no statutory regulations whatsoever in Alberta governing the form of a profit � prendre or the actions of the land agents who typically deal with freehold owners, and freeholders are left in a regulatory ‘no-mans land’ (“The Role of Regulatory Authorities”). When disputes arise, freehold owners must rely entirely on the wording of their lease agreement, wording which is drafted by oil company lawyers for the benefit of oil companies.

Freehold lease agreements have historically been presented to freehold owners as multi-page, printed documents containing certain blank spaces. Many freeholders have fallen into the trap of assuming that, because the agreement presented to them looks ‘official’, all of the printed terms and conditions in the lease agreement have been approved on their behalf by some government agency. Nothing could be further from the truth. Prior to 1988, the only party approving the form of freehold lease agreement presented to a freeholder was the oil company seeking to lease the freehold owner’s mineral interests. In the case of the post-1988 CAPL leases, these lease agreements have been approved of by the Canadian Association of Petroleum Landmen and the Natural Resources Section of the Canadian Bar, but neither of these groups acts on behalf of freehold owners. 

For many years following Leduc, the only blank spaces in the printed lease agreements presented to freehold owners were spaces corresponding to the legal description of the freeholder’s mineral interests and the bonus consideration to be paid. At the time, most individually-owned freehold oil and gas remained in the hands of the surface owner who typically farmed the lands in circumstances which were even more challenging than those facing today’s farmers. To most struggling farm families in the 1940's, 50's and 60's, a freehold lease bonus payment and an annual $1 per acre delay rental payment meant survival. As a result, the vast majority of freehold lease agreements entered into by western Canadian freeholders in this period were for a primary term of 10 years with a royalty rate of 12 �% and a delay rental of $1 per acre. In most instances, these lease agreements were also executed with no changes whatsoever to the terms and conditions contained in the body of the agreement. 

Freehold ownership in Alberta is concentrated in the southern portion of the Province, and most of the major oil and gas pools in southern Alberta were discovered in the two decades following Leduc. Because of the 10-year primary term in most freehold lease agreements negotiated during this period, many of these leases were proven productive during their primary terms and remain binding on the current generation of freehold owners. Being bound by a 12 �% royalty rate negotiated under different economic circumstances 40 or 50 years ago may seem unfair (“Royalty Rates”), but there are some advantages to these old lease agreements. Most of these leases were the products of a single oil company’s legal advice and the lease terms and conditions had, in general, not been modified to circumvent the judicial battering which the more ‘freeholder-friendly’ Canadian courts of an earlier era administered to oil companies. In particular, some of the practices of oil company-lessees which are specifically allowed for under current CAPL lease forms (“CAPL Leases”) may not be permitted under these old lease forms.

Whether your mineral rights are leased under an ‘old’ form of freehold lease agreement or under a post-1988 CAPL lease agreement, you can’t change the terms and conditions in an agreement which is binding upon you. You can however ensure that you understand what the various clauses in your lease mean (“Understanding Your Lease Agreement”). You can also take steps to monitor activity on and adjacent to your mineral interests to ensure that your oil company-lessee is complying with these clauses (“Technical Information Request”). 

If your mineral interests are not leased, or are about to become open, and you are approached by a land agent seeking to lease your interests, you will probably be asked to execute a CAPL lease form. You can avoid many of the pitfalls which plague freehold owners whose mineral interests have already been leased under CAPL leases by insisting on changes ("CAPL 99 Suggested Modifications”). You may also be able to increase your bargaining power and more fully protect yourself by ensuring that you are aware of the land and well activity on and adjacent to your mineral interests (“Technical Information Request”). 

All freehold owners should have a copy of whatever lease agreement is binding upon their mineral interests. If you don’t have a copy of yours, call or write your oil company-lessee and ask for a copy. Be sure to also ask for copies of any other agreements which may be binding upon your mineral interests - in many circumstances, pooling or unit agreements may have been entered into which amend the terms of your lease agreement. 

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