Recourse From Unreasonable Decisions By Surface Rights Board

Originally published in Blakes Bulletin on Energy - Oil & Gas, October 2007

On October 4, 2007, the Supreme Court of Canada dismissed a landowner’s application for leave to appeal the decision of the Alberta Court of Appeal in Imperial Oil Resources Ltd. v. 826167 Alberta Inc., 2007 ABCA 131 (Imperial Oil).

The Court of Appeal’s decision upheld a ruling of the Court of Queen’s Bench, which significantly reduced a landowner’s favourable award of compensation by the Surface Rights Board (the Board). The Supreme Court of Canada’s refusal to grant leave to appeal crystallizes the law in Alberta with respect to the manner in which such compensation is quantifiable, the obligations of the Board to follow that scheme, and the nature and right to appeal decisions made by the Board.

In particular, this decision demonstrates that recourse is available from unreasonable awards of compensation by the Board.

At common law, the holder of a mineral right has the right to enter and use the surface of the land in order to explore for and to develop the minerals. In Alberta, however, the Surface Rights Act, R.S.A. 2000, c. S-24, overrides the common law and strikes a compromise between agriculture and the oil and gas industry. In addition, under the legislative scheme in Alberta, the holder of a pipeline or power line permit has a statutory right to acquire land to build the pipeline or power line.

The Surface Rights Act requires that the resource company or other person wanting to use the surface of the land (known as the operator) obtain a right to do so in one of two ways: either by obtaining the consent of the landowner and any occupants of the land, usually through a surface lease or grant of easement; or alternatively, by obtaining a Right of Entry Order from the Board. Where a Right of Entry Order is granted, the Board will hold a hearing to determine the amount of compensation payable by the operator to the landowner and any occupants. In addition, where a surface lease or Right of Entry Order provides for payments of compensation on an annual or continuing basis, after five years and every five years thereafter, either the operator or landowner may apply to the Board to have that compensation varied.

The lands in question in Imperial Oil comprised surface leases for 58 well sites and six access roads located in the North Tilley area of Alberta. Before the Board, the landowner, a rancher, sought to vary the annual compensation payable under these surface leases from CAD 95,191.50 per year to CAD 189,200 per year. The operator, Imperial Oil Resources Ltd. (Imperial), argued that the appropriate compensation should be CAD 115,631.50. The Board substantially acceded to the landowner’s request, varying the rate of compensation payable to CAD 179,750 per year.

The Board’s decision was principally grounded upon findings that the surface lease arrangement in question adversely affected the landowner’s ranching operation in a unique manner, and further that other surface leases entered into by the landowner and other operators with respect to other property owned by the landowner established an effective "pattern of dealings" suggesting increased compensation. The Board rejected Imperial’s submission that the proper comparison to draw in determining compensation was against the pattern of dealings taking place in the surrounding area rather than the particular agreements entered into by the owner on his own lands. The Board accepted the landowner’s evidence that he was an amiable individual who was easy to get along with and whose leaseholders willingly paid the rates demanded. The Board was unmoved by Imperial’s evidence suggesting that the agreements put forward by the landowner were the result of coercion and negotiations made under duress.

Imperial appealed the Board’s decision to the Court of Queen’s Bench.

An appeal from the Board proceeds as a new, or de novo, hearing. Unlike other appeals, new evidence is tendered before the Court and the matter proceeds essentially as a new hearing. Significantly, even though treated as a new hearing, a court will only interfere if the Board’s decision is unreasonable, as they are considered experts in these matters.

On the basis of new evidence, the Court of Queen’s Bench reduced the award issued by the Board from CAD 179,750 to CAD 120,340. This reduction in continuing compensation was upheld by the Court of Appeal and leave to appeal was refused by the Supreme Court of Canada.

The Court of Queen’s Bench also awarded Imperial its legal costs incurred to obtain an injunction against the landowner in respect of his blockades. While the Board had initially rejected this application, the Court ultimately awarded these costs as an entitlement for steps taken to enforce legal rights.

This decision confirms that continuing compensation payable to landowners is calculated according to two distinct categories:

1. "loss of use" of the property under lease; and
2. "adverse effect" of the lease upon the remaining property, including nuisance and inconvenience arising thereby.

The Board is obligated to break down compensation awards with specific reference to the two defined heads.

The Court of Queen’s Bench held, and the Court of Appeal affirmed, that the Board should have regard to established patterns of dealings between landowners and resource companies. Both the Court of Queen’s Bench and the Court of Appeal provided guidance on the approach to be taken to pattern of dealings evidence:

1. a pattern of dealing arises where there are such a number of deals established so that it may be said that a pattern has been established by negotiation between the landowners and oil companies in a district;
2. the principle contemplates "comparable" patterns of dealings, in terms of the rights granted, the type of land, proximity, date, acreage and the nature of the parties;
3. the pattern of dealings must be the result of amicable negotiations between motivated parties and be broadly representative of the general condition of the industry; and
4. while the Board has discretion to depart from awards suggested by the appropriate pattern of dealings, it would have to provide "cogent reasons" for so doing.

The Court of Queen’s Bench held, and the Court of Appeal affirmed, that the Board erred in preferring the limited pattern of dealings suggested by the landowner, on his own lands, with a limited number of companies, in relation to a small number of wells, as against clear evidence of an established pattern of dealings encompassing a large number of wells, involving major producers on adjacent similarly positioned lands.

The isolated pattern of dealings utilised by the Board was particularly inappropriate considering the nature of the agreements of which it consisted. Evidence was tendered and accepted to the effect that those leases relied on by the Board related to "very specific needs" which justified a "premium" compensation package not appropriately applied under other circumstances. It was also noted that these agreements themselves made no reference to loss of use or effect on the land, and that one lease even related to a completely different resource operation (oil, rather than natural gas), which confounded the attempted comparison. Finally, reference was also made to the actions of the landowner himself who tended to blockade entry to his property if his demands were not addressed. For these reasons, agreements extorted out of other operators, at "a rate which exceeds that paid for comparable leases on adjacent lands," did not disclose an appropriate pattern for comparison.

This decision demonstrates that recourse is available from unreasonable decisions by the Board. Where the Board makes a decision that is unreasonable with regard to the general and freely negotiated pattern of dealing in the area, courts may be willing to intervene. The degree of willingness of the courts to intervene in surface rights matters remains to be seen, but if this case proves indicative of Alberta’s approach to these matters, then intervention in justified circumstances should be expected.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.