Oil Revenue/Surface Lease Retention

When purchasing land, especially agricultural land, buyers must be aware of many different rights that can be sold or are not sold in the transaction. One specific interest in land of concern is governed by surface leases, usually with an oil company or other entity that leases a part of the subject land, and the rights that flow from that arrangement. Operators in the oil industry access lands by agreement or by Surface Rights Board Orders which will be registered at Land Titles. The agreement or Order will usually provide an annual payment to the land owner for the use of the land and the disturbance that the use causes to the land owner.

These leases can be assigned to the buyer of the land with or without adjustment as of the closing date of the sale transaction. This issue to assign or retain the lease revenue is part of the purchase price negotiation. We note that the annual payments “prepay” ahead of the term due, as an example, paid in May of 2022 for June 9, 2022, to June 8, 2023. Further, a seller can retain the surface lease revenue for a fixed term, as an example 10 years, or could negotiate to retain the current payment they have received with the next cheque going to the buyer. The seller can retain the surface lease revenue for their lifetime, the joint lives of a selling husband and wife, or the revenue can be retained by the seller and their heirs for as long as the lease revenue continues being paid. These oil retention agreements should be registered by way of caveat on title. There is some case law that deals with situations where the failure to register the retention agreement can result in the payment of the revenue to the current land owner rather than the buyer of the land.

A practical issue with retention agreements tied to the lifetime of an individual is to determine when the party who retains the revenue has passed away and triggering the payments to now be payable to the buyer or current land owner. Searching obituaries and Google searches, contact with family members of the sellers, or seeking legal advice and utilizing land titles proving caveat processes are some of the resources that may lead to information or action in this regard. A fixed amount of time for the lease payment retention is more certain if you act for the buyer.

We would recommend seeking legal advice prior to the purchase of lands that have retention agreements registered on title or if you have any questions as the seller of lands where these interests in land are involved.

Authors: Mae Chow and Hamza Mandour (July 12, 2022)