July 20, 2015
Commentary
By:
Re:
William M. Laurin
Privity of Estate and Privity of Contract in Freehold Mineral Leases
1. The Issue.
In anticipation of a pending Alberta Court of Appeal decision regarding the interplay of privity
of estate and privity of contract in the context of freehold mineral leases a review of the Queen’s
Bench decision serves as useful context for reaching general conclusions in respect of:
•
The Fee Simple Owner vs. The Lessor’s Interest. Distinguishing the rights of the fee
simple owner firstly from the rights of a person entitled to exercise some or all of the
benefits accruing to the lessor’s interest under a mineral lease pursuant to a two-party
(i.e. assignor and assignee only) “Assignment of Mineral Lease”, and secondly from the
rights of a person recognized by the lessee as able to exercise all of the rights of the
lessor interest under a lease pursuant to a three-party (i.e. assignor, assignee and lessee)
“Assignment & Novation Agreement”.
•
Practical Consequences. From the lessor’s perspective, determining who are the
“proper” parties to a mineral lease determines, inter alia, who is able to amend the lease,
demand well information, consent to an assignment, enforce an environmental indemnity,
issue an offset notice, or exercise the take-in-kind provisions.
2. The Decision.
On November 25, 2013 the Alberta Court of Queen’s Bench released its decision in Stewart
Estate v TAQA North Ltd., 2013 ABQB 691 1 (the “Decision”).
3. Background.
The Decision involves five 1960s vintage freehold petroleum and natural gas leases (the
“Leases”) covering most of Twp. 27, Rge. 1W5M: Section 25 (the “Lands”) near Crossfield,
Alberta. The plaintiffs were the current fee simple mineral owners and a top-lessee, whose toplease would become effective only if it was determined that the existing Leases had terminated
(the “Plaintiffs”). The defendants were the oil and gas companies who were the current lessees
under the Leases (the “Defendants” or the “Lessees”). The Leases differed from one another
slightly, but the provisions that were key to the issues in the Decision were substantially the
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same, namely the Leases provide for a 10 year primary term (the “Primary Term”) and
continuing so long thereafter as there was production of leased substances from the Lands (the
“Secondary Term”). During the Secondary Term, if production had ceased and the lessee
commenced further drilling or working operations within 90 days, each Lease remained in force
so long as operations continued and if they resulted in production. The Leases included the
typical proviso to the effect that “if ... any well ... is shut-in, capped, suspended or otherwise not
produced as the result of a lack of or an intermittent market, or any cause whatsoever beyond the
Lessee’s reasonable control, the time of such interruption or suspension or non-production shall
not be counted against the Lessee ...”, or a slight variation on such wording (the “Third
Proviso”).
Merville V. Stewart (“Mr. Stewart”), as the registered freehold mineral owner of most of the
E½ of the Lands, granted Scurry Rainbow Oil Limited a Lease dated November 30, 1967 in
respect of the NE¼ of the Lands, and a Lease dated January 7, 1964 in respect of the SE¼ of the
Lands (the “Stewart Leases”). By way of a Transfer of Land dated March 1972 (the “1972
Mineral Transfer”) Mr. Stewart transferred 50% of his fee simple interest in the NE¼ of the
Lands, and 100% of his fee simple interest in the SE¼ of the Lands, to his family holding
company, Jerome Development Limited (“Jerome Development”). The 1972 Mineral Transfer
is dated in 1972 but was filed at the Land Titles office in 1974, with certificates of title issued
May 1974 indicating that Jerome Development was the owner of all mines and minerals, other
than coal, as to a 100% interest in the SE¼ of the Lands and as to an undivided 50% interest in
the NE¼ of the Lands. Jerome Development continues to be the registered freehold mineral
owner of the 100% interest in the SE¼ of the Lands and of the 50% interest in the NE¼ of the
Lands. From 1974 to 2008, Mr. Stewart continued to be the registered freehold owner of the
remaining 50% interest in mineral rights in the NE¼ of the Lands. He died in 1984 however this
50% interest was only transferred to the beneficiaries of his estate (the “Stewart Beneficiaries”)
in 2008. About a month before trial, by an agreement dated December 8, 2011 and a transfer of
land registered on January 5, 2012 (the “2012 Mineral Transfer”), this 50% interest in the NE¼
of the Lands was also transferred to Jerome Development by the Stewart Beneficiaries. There is
no direct evidence that the lessor’s interest under the Stewart Leases were assigned to Jerome
Development in 1974 or at any other time thereafter, other than what the Plaintiffs submit can be
implied from the wording of the 1972 Mineral Transfer.
Pursuant to assignment agreements dated March 1, 1977 (the “1977 Lease Assignments”) Mr.
Stewart appeared to have transferred his interests in the Stewart Leases to Snell Farms Ltd.
(“Snell Farms”), who were not a party to the litigation. Snell Farms executed the 1977 Lease
Assignments, prepared in part on pre-printed forms and entitled “Assignment of Natural Gas
Lease”, which stated that Mr. Stewart has agreed to assign the Stewart Leases for one dollar and
other valuable consideration. The 1977 Lease Assignments were sent to the appropriate lessees
and from 1977 to 1982 royalties under the Stewart Leases were paid to Snell Farms. In June
1982 the lessees were informed by counsel for Wheatland Farming Co. Ltd. (“Wheatland”) that
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Snell Farms had changed the royalty payee under the Stewart Leases to Wheatland, who were
also not a party to the litigation. In summary, the foregoing factual circumstances result in a
privity of estate 2 arising between Jerome Development and the Lessees under the Stewart
Leases, and a privity of contract 3 arising between the Snell Farms/Wheatland and the Lessees
under the Stewart Leases, through an assignment without an acknowledged novation 4.
In September, 1968, pursuant to the terms of the Leases, the Lessees pooled their interests under
a pooling arrangement (the “Pooling Agreement”) whereby they combined their interests in
each of the Leases such that any production or deemed production of leased substances from the
Lands constituted a continuation of all of the Leases. As a consequence of the Pooling
Agreement the lessors became entitled to royalties in respect of their acreage based pro-rata
share of leased substances produced and marketed from any well drilled on the Lands. On
September 17, 1968 a well was spud at 7-25-27-1W5M on the Lands (the “07-25 Well”), and the
main issue in the Decision was whether the Leases terminated in accordance with their terms as a
result of a cessation in operations and production when the 07-25 Well was suspended from
August 1, 1995 through to January 13, 2001. The Plaintiffs submit that it was shut-in because it
no longer met the operator’s internal profitability hurdles and not as a result of a lack of or an
intermittent market, and that thus the Defendants cannot rely on the Third Proviso to continue
the term of the Leases. The Defendants submit that the 7-25 Well was shut-in because it was
uneconomical, that this was a prudent decision by the Lessees, and accordingly that the Leases
never terminated. Specifically, the issue was whether the Lessees were required to operate the
07-25 Well at a loss, or at a nominal return, in order to preserve and continue the Leases.
The 07-25 Well was drilled by Jefferson Lake Petrochemicals of Canada Ltd. (the “Well
Operator”, predecessor to one of the Defendants, and one of the original Lessees), in September
1968, within the 10 year primary term of the Lease on the SE¼ of the Lands. Two potentially
producing formations were discovered, the Basal Quartz and the Wabamun formations. The
initial target formation for the well had been the Wabamun formation, which was 2,000 feet
deeper, and produced sour gas, but for various reasons relating to transportation and processing,
the Well Operator decided to produce gas initially from the shallower Basal Quartz formation
which was drill stem tested on October 30, 1968, and perforated on August 20, 1970.
2
Privity of estate is a “mutual or successive relation to the same right in property”, such as the relationship between a
landlord and tenant, and refers to the legal relationship two parties bear when their associated estates constitute one
estate in law. Privity of estate involves rights and duties (i) that run with the land, (ii) that original parties intend to bind
successors, and (iii) that touch and concern the land.
3
The doctrine of privity in the common law of contract provides that a contract cannot confer rights or impose
obligations arising under it on any person or agent except the parties to it. The premise is that only parties to contracts
should be able to sue to enforce their rights or claim damages as such.
4
Assignment is the transfer of rights held by one party, the assignor, to another party, the assignee. An assignment of
rights must be distinguished from the concept of novation which involves the replacement of the original party with a
new party, or the replacement of the original contract with a new contract. Since novation creates a new contract, it
requires the consent of all parties whereas assignment does not require the consent of the non-assigning party, although
in the case of assignment the consent of the non-assigning party may be required through a contractual provision.
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The 07-25 Well is located on the west side of Highway 2, north of Airdrie, Alberta and north of
the 07-25 Well is the boundary to the East Crossfield D1 Unit (the “Crossfield Unit”) which
produces sour gas from the Wabamun formation. Wells from the Crossfield Unit produced to
the East Crossfield Gas Plant (the “Amoco Plant”), to the north of the 07-25 Well and west of
Highway 2. In 1968 the Well Operator approached the operator of the Crossfield Unit (the “Unit
Operator”) to attempt to include production from the Wabamun formation in the 07-25 Well
included in the Crossfield Unit and to have it processed at the Amoco Plant. The Unit Operator
offered extremely unattractive terms for inclusion of the 07-25 Well in the Crossfield Unit; terms
that apparently would leave the working interest holders in the 07-25 Well with a very small
fraction of production from the Crossfield Unit. The working interest owners instead decided to
add equipment at the site of the 07-25 Well to do the minimal processing necessary to enable the
Basal Quartz formation sweet gas to be transported directly to a sales gas line and bypass the
Amoco Plant. Production from the Basal Quartz formation in the 07-25 Well commenced in
March 1971 and continued, subject to certain cessations in production, until June 1980 when the
well was shut-in.
In November 1977, the working interest owners again considered completing and testing the 0725 Well in the Wabamun formation and applying to the Energy Resources Conservation Board
(the “ERCB”) for common processing status to tie in the 07-25 Well to the Amoco Plant. The
operator of the Amoco Plant (the “Plant Operator”) recommended to the 07-25 Well working
interest owners that they prove the productivity of the Wabamun formation in the 07-25 Well
and develop plans for placing it on-stream. Production from the Basal Quartz formation was
subsequently suspended in September 1980 and the perforations were cemented. The 07-25
Well was completed in the Wabamun formation on May 16, 1978 and production commenced in
March 1981 and continued, subject to certain cessations in production, until July 1995. An
agreement dated November 1, 1980 was put in place between the 07-25 Well working interest
owners and the Plant Operator relating to the processing of the Wabamun formation sour gas at
the Amoco Plant. The 7-25 Well produced from the Wabamun formation from March 1981
through July 1995. In July 1995, the 07-25 Well was suspended in the Wabamun formation and
was not produced from the end of July 1995 through January 2001 (the “Production
Cessation”). During the Production Cessation shut-in royalty payments or annual rental
payments or delay rentals under the various Leases (the “Suspended Well Payments”) were
paid by the then Lessees to the then lessors.
In February 1993 the maximum daily contract quantity under the gas sales contract for the 07-25
Well was reduced, reflecting the fact that the well’s deliverability was so low that the gas
purchaser was able to take whatever gas was produced from the well on a year-round basis. In
June 1994 the daily contract quantity under the gas purchase contract was further reduced. In
1994 and 1995, the working interest owners were facing a situation where the 07-25 Well was
uneconomical. The Well Operator was reviewing price forecasts for gas that anticipated
decreasing prices, and its operating cost structure, to determine which wells were not covering
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their variable costs. Early in 1995 the 07-25 Well was “on the knife edge”, not generating much
cash flow and not losing much, but by mid-year, the well was losing money on the order of tens
of thousands of dollars a month. On July 31, 1995 the Well Operator suspended the 07-25 Well
due to its low raw gas production rate and the high field gathering fee charged by the Plant
Operator. Of significance is the recognition that the 07-25 Well was suspended on a temporary
basis until pricing and conditions improved because it was uneconomical at the current pricing of
the day, and not because there was no market for the gas. The notification form submitted to the
ERCB stated that the reason for the suspension of the well was that it was “uneconomic to
produce at this time”.
From 1995 to 2000 the 07-25 Well was “kept on the radar” of the Well Operator to see if any
conditions changed to make it economical. In November 2000, the Well Operator received an
independent operations notice (the “ION”) with respect to the 07-25 Well from a working
interest owner, with a proposal to abandon the Wabamun formation and recomplete the Basal
Quartz formation. The Well Operator agreed to participate and the re-completion, which
commenced on January 13, 2001, required isolating the Wabamun formation, pressure-testing
and further plugging and then re-entering the Basal Quartz formation through its blocked casing.
The working interest owner performed the abandonment and re-completion. Once production
was established from the Basal Quartz formation, the Well Operator resumed its position as
operator and the 07-25 Well was tied-in and made ready for production to the Amoco Plant. At
this time gas prices were extremely high, approaching $14 per million cubic feet, and the Amoco
Plant had a different Plant Operator so the processing fees were lower than they had been in
1995.
There are, in our view, three key issues of interest in the Decision. The first key issue, which is
addressed in this Commentary, is an analysis of the distinction between the rights of a fee simple
mineral owner under privity of estate, and those of the lessor under privity of contract, in the
context of a petroleum and natural gas lease. The second key issue, which is addressed in a
separate Commentary, is interpreting the Third Proviso in respect of Secondary Term
continuation. The third key issue, which is also addressed in a separate Commentary, is the
appropriate measure of damages in circumstances of a freehold petroleum and natural gas lease
termination.
4. Conclusions of the Court in the Decision.
The Defendants submitted that Jerome Development and members of Mr. Stewart’s family (the
“Jerome Group”) had not established that they were proper parties to seek a declaration that the
Stewart Leases had terminated. The Court agreed on the basis of the general rule that all parties
to a contract must be before the Court to ensure that (i) no injustice is done to any party to an
action or other interested persons, (ii) the parties are not prejudiced by not having all proper
parties before the Court, (iii) all interested parties will be bound by the decision so there is no
risk of subsequent proceedings by persons not before the court and thus avoid the need for
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multiple suits, and (iv) the court will be able to effectively adjudicate all issues in question. A
Court must be “perfectly certain that no injustice is done, either to the parties before it, or to
others who are interested in the subject matter”. The failure of the Plaintiffs to name Snell
Farms and Wheatland as parties to the action was a fundamental and fatal flaw in their case with
respect to the Stewart Leases, and their application for declarations that the Stewart Leases had
terminated must fail on the basis that Snell Farms and Wheatland, whose rights may be affected
by the declarations sought, were not parties before the Court in the litigation. The Defendants
had the evidentiary burden of establishing on a balance of probabilities that there are parties who
are interested in the issue of the validity of the Stewart Leases that are not before the Court, and
they were able to satisfy that evidentiary onus. Once they had done so, the onus shifted back to
the Plaintiffs to refute the validity of the 1977 Lease Assignments on a balance of probabilities
and to satisfy their burden of demonstrating that the parties before the Court are the only
interested parties. The Plaintiffs had not done so. The Defendants need only establish that there
are interested parties that are not before the Court, and they need not prove the validity of the
1977 Lease Assignments as it is the Plaintiffs who asserted that they are the proper lessors.
The Plaintiffs submitted that since Mr. Stewart transferred 100% of his interest in the SE¼ of the
Lands and 50% of his interest in the NE¼ of the Lands to Jerome Development in 1972, he
could not assign any further interest in the SE¼ Stewart Lease to Snell Farms in 1977 because he
no longer owned such interest. The Defendants never asserted that Mr. Stewart assigned his fee
simple interest in the Lands to Snell Farms, instead they point out that, as a basic principle of oil
and gas law, leasehold interests are separate and distinct from fee simple interests: Scurry
Rainbow Oil Ltd. v Kasha (1996), 1996 ABCA 206 (CanLII) 5 (“Kasha”) at para 25. The Court
of Appeal in Kasha reiterates as accepted law that, after a mineral lease has been granted, the
lessor has three kinds of legal interests in the land and minerals (i) the surface interest, (ii) the
right to receive rents and royalties under the existing mineral lease, and (iii) a reversionary
interest in the minerals in place, contingent upon the termination of the existing mineral lease.
At paragraph 28 of Kasha Justice O’Leary noted that a Court should follow a “two-step
approach” to a determination of the nature of an interest assigned subsequent to the granting of a
mineral lease. The first is to characterize the interest retained by the lessor following the mineral
lease over and above the fee simple interest in the reversion. In Kasha, that interest only
consisted of the right to receive royalties, as there was no surface interest. In the Decision Mr.
Stewart retained both the surface interest and the right to receive rents and royalties under the
Stewart Leases. The second step under the Kasha analysis is therefore to examine the 1972
Mineral Transfer to Jerome Development to determine what it conveyed.
The Plaintiffs submit that when Jerome Development acquired its interests in 1972, it also
acquired Mr. Stewart’s lessor interests under the Stewart Leases. The Plaintiffs refer to the
(partially) printed words of the 1972 Mineral Transfer to the effect that it was a transfer of “all of
my estate and interest in the said parcel of land”. The Defendants submitted that there was no
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evidence that Mr. Stewart intended to convey his rights as lessor under the Stewart Leases to
receive the leasehold rents and royalties by the 1972 Mineral Transfer. Evidence that he did not
advise the Lessees of a change of payee to Jerome Development in 1972, nor comply with the
terms of the Leases that require evidence of the assignment to be provided to the Lessees is
indicative of the contrary, as is the fact that he appears to have subsequently formally assigned
his rights in respect of the lessor’s interest under the Stewart Leases to Snell Farms in 1977 by
way of the 1977 Lease Assignments that includes the representation that he had the power and
authority to assign the Stewart Leases.
The Plaintiffs further submitted that, with the registration of 1972 Mineral Transfers to Jerome
Development, the title of Jerome Development title became indefeasible pursuant to sections 60
and 203 of the Land Titles Act, RSA 2000, c L-4 6 (the “LT Act”). These sections provide, in
part:
LT Act 60(1) The owner of land in whose name a certificate of title has been granted shall, except in case of
fraud in which the owner has participated or colluded, hold it, subject (in addition to the incidents implied by
virtue of this Act) to the encumbrances, liens, estates and interests that are endorsed on the certificate of title,
absolutely free from all other encumbrances, liens, estates or interests whatsoever except the estate or interest
of an owner claiming the same land under a prior certificate of title granted under this Act or granted under
any law heretofore in force and relating to title to real property. ...
LT Act 203(2) A person contracting or dealing with or taking or proposing to take a transfer, mortgage,
encumbrance, lease or other interest from an owner is not, except in the case of fraud by that person, (a) bound
or concerned, for the purpose of obtaining priority over a trust or other interest that is not registered by
instrument or caveat, to inquire into or ascertain the circumstances in or the consideration for which the owner
or any previous owner of the interest acquired the interest or to see to the application of the purchase money or
any part of the money, or (b) affected by any notice, direct, implied or constructive, of any trust or other
interest in the land that is not registered by instrument or caveat, any rule of law or equity to the contrary
notwithstanding. ...
The Plaintiffs rely on the principle from Darnley v Tennant, 2006 ABQB 575 7 (“Darnley”) at
paragraph 21 that it is a fundamental premise of the land titles system that the owner under a title
issued by the Registrar takes the land free of any unregistered interests, except in the case of
fraud, and that the object of the LT Act is to contain within its four corners a complete system
which “any intelligent man could understand”, and which could be carried into effect in practice
“without the intervention of persons skilled in law”. The cardinal principle of the LT Act is that
the register is everything, and that, except in cases of actual fraud on the part of the person
dealing with the registered proprietor, such person, upon registration of the title under which he
takes from the registered proprietor, has an indefeasible title against all the world. It is arguable,
however, that the indefeasibility of title in Darnley refers merely to the interest that has been
transferred, and the extent of the interest Mr. Stewart intended to transfer to Jerome
Development in 1972 is still an issue, one that should not be finally determined without giving
Snell Farms and Wheatland standing to participate in the litigation.
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The Darnley decision is also relevant with respect to both the 1972 Mineral Transfer and the
2012 Mineral Transfer of the 50% interest in the NE¼ of the Lands from the Stewart
Beneficiaries to Jerome Development. In Darnley, a husband and wife had been the registered
owners of a piece of land, and agreed to sell a portion of the land to Mr. Tennant. Prior to
agreement to sell being registered against title, the land was transferred into Ms. Darnley’s name
only as part of a divorce settlement. The Court found that Ms. Darnley was a bona fide
purchaser for value and not a volunteer, however, the Court also found that there was “something
extra” that amounted to fraud under the LT Act and that the situation thus fell within the
exception to indefeasibility under Section 60 of the LT Act because Ms. Darnley was one of the
covenanters who created the interest in the land, and second, she granted Mr. Tennant an interest
in the land when she was a joint owner of the land. The Court held that Ms. Darnley’s interest
was subject to the rights of Mr. Tennant, as Ms. Darnley had merely changed the quantum of her
interest, and this was “something more” than mere knowledge of the interest. With respect to the
1972 Mineral Transfer, Mr. Stewart, like Ms. Darnley, created the initial interest in land through
the Stewart Leases, and arguably merely changed the nature of his interest from a personal
interest to a wholly-owned family company, of which he was the operating mind. With respect
to the 2012 Mineral Transfer from the Stewart Beneficiaries to Jerome Development, Jerome
Development had been the holder of 50% of the NE¼ of the Lands since 1974, and the eleventhhour transfer of the other 50% interest from the Stewart Beneficiaries to Jerome Development
effective January 5, 2012 simply changed the quantum of its interests (and, in effect, merely
changed the manner in which the Stewart Beneficiaries owned their interests).
A volunteer does not rely on the register, and cannot use the LT Act to better his position as it is
designed to protect third party purchasers for value. As the 2012 Mineral Transfers were
between the Stewart Beneficiaries, as volunteers, and a related party, Jerome Development,
which had knowledge of the unregistered interests in question through the volunteers as
operating minds of Jerome Development, there remains a real issue of whether the principle of
indefeasibility of title would protect Jerome Development’s interest, an issue that should not be
decided without input from Snell Farms and Wheatland. In addition, the Defendants submit that
the circumstances giving rise to the 2012 Mineral Transfer, occurring as it did between the
judicial dispute resolution proceedings and trial, could be considered “fraud” under the LT Act.
This was a transfer with nominal or no consideration in the face of knowledge of what appeared
to be an unregistered interest held by parties not before the Court. The Court in Darnley
recognized at paragraph 29 that a transfer without consideration could raise an inference of
fraud.
The language in the 1972 Mineral Transfer does not derogate sufficiently from the interpretation
that the 1977 Lease Assignments, read as a whole, were intended, and did, transfer Mr. Stewart’s
interest in the Stewart Leases to Snell Farms, such that the Court should give the 1977 Lease
Assignments no weight. A Court may look to the subsequent conduct of the parties to aid in the
proper interpretation of the contractual language in the light of any ambiguities that may arise
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from this language: Kasha at para 45. In the present case, such conduct supports the
interpretation of the 1977 Lease Assignments suggested by the Defendants. The interpretation of
this language suggested by the Plaintiffs would give rise to a commercial absurdity and
contradictions on the face of the 1977 Lease Assignments, and such an interpretation should be
avoided.
The Defendants submit that Jerome Development, through its operating mind Mr. Stewart, knew
that it was not acquiring an interest in the Stewart Leases at the same time. They argue that
Jerome Development knew of the Stewart Leases because (i) Mr. Stewart was the lessor under
both of them and did not assign the Stewart Leases to Jerome Development, and (ii) caveats were
registered on those titles. Further, Jerome Development had corporate knowledge through Mr.
Stewart of the 1977 Lease Assignments in 1977. This state of affairs, and the corporate
knowledge of Jerome Development, remained the same from the time of the 1977 Lease
Assignments through to the present, and whether or not Snell Farms or Wheatland filed caveats
could not have had any impact on Jerome Development and could not have changed anything
insofar as concerns Jerome Development. Jerome Development can be in no better position
today than it was the day the 1977 Lease Assignments were entered into to argue that Snell
Farms has no interest in the Stewart Leases and the matters raised in this litigation. Unregistered
interests can exist independently of the land titles registry, and Snell and Wheatland appear to
have contractual rights and interests created by the 1977 Lease Assignments, and these interests
can exist independent of the land titles registry. A volunteer is in the same position as the
registered owner who may have created and sold unregistered interests. Such a volunteer cannot
rely on the caveat provisions of the LT Act to better its position, as these provisions were
designed to protect third party purchasers for value.
The Defendants submit that even if Snell Farms and Wheatland were parties before this Court,
they would be entitled to rely on caveats filed by the lessors, citing Hughes v Gidosh, [1971] 1
WWR 641 (Alta SC) (“Hughes”). Hughes stands for the proposition that a caveat filed by a
lessee in support of a mineral lease protects, by implication, the rights of the lessor as well as the
lessees and constitutes notice to the world of the terms of the lease. A lessor does not have to
file a caveat to protect a reversionary interest in a mineral lease when transferring its other
interests in the land. If Snell Farms and, later, Wheatland are thus put in the position of lessors
by reason of the 1977 Lease Assignments, they are in no worse situation than Mr. Stewart as the
original lessor, nor should they be required to protect their interests against Mr. Stewart by
caveat. The 1977 Lease Assignments purport to bind the Stewart Beneficiaries, and the Jerome
Group freeholders and Jerome Development, which had knowledge of the 1977 Lease
Assignments through its directing mind, should be in no better position than Mr. Stewart to
require the assignees to caveat their interest. There is no unrelated third party acquiring an
interest while relying on the registered title, and even if there were, the caveats filed by the
original lessee would provide notice of the Stewart Leases.
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5. Discussion & Analysis.
While the context of the Decision is a determination of whether the proper parties are before the
court, a number of interesting observations can be made regarding the circumstances under
which the fee simple owner is not the person who is entitled to exercise the rights of the lessor
under a freehold oil and gas lease, and whether different considerations apply to those provisions
of the lease which are purely contractual in nature (“Contractual Covenants”, eg. the right to
receive well information or the right to be indemnified for environmental liability) which are
presumably governed by privity of contract, than apply to those provisions of the lease which are
interests in lands or covenants running with the lands (“Land Covenants”, eg. the obligation on
the lessee to tender to the lessor royalty and rental payments) which are presumably governed by
privity of estate.
To take a simple example:
Day 1
Day 2
Company 1 as the fee simple owner grants to Company A a
freehold oil and gas lease that includes Land Covenants and
Contractual Covenants, and Company A registers a caveat in
respect of the lease.
On Day 2 Company 1 transfers its fee simple ownership to
Company 2, without taking an assignment of the lease.
Day 3
On Day 3 Company 2 enters into a two party “Assignment of
Mineral Lease” document in respect of the lease with Company
1 and serves it on Company A.
Day 4
Recognizing the error of its ways, on Day 4 Company 2 enters
into a three party “Assignment and Novation Agreement”
document in respect of the lease with Company 1 and
Company A.
Company A is obligated to pay the rentals and royalties to
Company 1, and Company 1 remains the only person entitled to
demand well information from Company A or claim indemnity
from Company A.
Company A is obligated to pay the rentals and royalties to
Company 1, and Company 1 remains the only person entitled to
demand well information from Company A or claim indemnity
from Company A.
Company A now becomes obligated to pay the rentals and
royalties to Company 2, however Company 1 still remains the
only person entitled to demand well information from
Company A or claim indemnity from Company A, as Company
2 has not become novated into the lease.
Company A is now obligated to pay the rentals and royalties to
Company 2, and Company 2 is now the person entitled to
demand well information from Company A or claim indemnity
from Company A, as Company 2 has become a party to the
lease.
It follows that the same progression of rights similarly exists for the lessee’s interest in the lease,
and can be illustrated as below on a “strength of claim” basis:
Fee Simple
Owner
Person
Entitled to the
Benefits of
the Lessor’s
Interest
“Assignment”
Person
Recognized
by the Lessee
as able to
Exercise the
Rights of the
Lessor
Person
Recognized
by the Lessor
as able to
Exercise the
Rights of the
Lessee
“Assignment
& Novation”
“Assignment
& Novation”
Person
Entitled to the
Benefits of
the Lessee’s
Interest
Caveator
“Assignment”
Page 10 of 11
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From the lessor’s perspective, determining who are the “proper” parties to a lease determines
who is able to amend the lease, demand well information, consent to an assignment, enforce an
environmental indemnity, issue an offset notice, exercise the take-in-kind provisions.
Page 11 of 11
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