Section 19 of the Perpetuities Act and the oil and gas lease as a fee simple determinable estate of a profit à prendre

PDF version: Section 19 of the Perpetuities Act and the oil and gas lease as a fee simple determinable estate of a profit à prendre 

Statute commented on: Perpetuities Act, RSA 2000, c P-5.

In a couple of years we will “celebrate” the fortieth anniversary of the Perpetuities Act of 1972, SA 1972, c 121. They may not know it yet, but the wildest celebrations will be heard from those who hold oil and gas leases granted after July 1, 1973 which are still in force. Here’s why. After that date, as each and every oil and gas lease reaches its fortieth birthday, the lessor’s possibility of reverter for terminating the lease for want of production comes to an end; thenceforward the lease can only be terminated for cause (as described in the default clause of the leases) such as the non-payment of royalties, which causes can typically be cured without losing the lease. Lessees will become the effective owners of the oil and gas estate.

This will likely come as a great surprise to lessors who, after all, imagined that they were granting a lease and not a perpetual right to any oil and gas that might be found on their lands. It may also come as a surprise to the drafters of the Perpetuities Act – the report of the Alberta Law Reform Institute that led to the adoption of the Act and this particular section (pp. 55 – 59) does not discuss the peculiar status of oil and gas leases. It may be that the legislature will want to change this result before it is too late.

Or it may simply be that I am wrong!

In any event, here, in a little more detail, is the basic argument. The argument assumes that the oil and gas lease is in the form of a short fixed primary term (anything from ten years to two years) which is continued thereafter for so long as there is production (or operations or some such defined term) on the leased lands.

  1. An oil and gas lease is not a true lease but a profit à prendre: Berkheiser v Berkheiser, [1957] SCR 387.
  2. A profit must be granted for an estate known to the law: Berkheiser per Justice Kellock quoting Halsbury. Estates govern duration. In this case the most convincing estate characterization of the oil and gas lease is that of a fee simple determinable of an incorporeal entitlement: Berkheiser.
  3. At common law the possibility of reverter on a determinable fee was treated as vested (and not contingent) and therefore not subject to the rule against perpetuities.
  4. Section 19 of the Perpetuities Act changes the common law rule in two ways. First, it makes the possibility of reverter subject to the rule in the same manner as the right of re-entry for breach\satisfaction of a condition subsequent. And second, section 19 establishes that the perpetuity period for these two interests is not the general commercial period of 80 years (s 18) but the shorter period of 40 years (s 19(3)). Thus, “if the event that determines the determinable interest does not occur [want of production\operations in our case] within the perpetuity period [40 years], the provision shall be treated as void for remoteness and the determinable interest becomes an absolute interest.”

And why am I writing this now? Well, it’s that time of year when I am teaching perpetuities to first year property law students and this issue seems a lot more practical and pressing than class closing and class splitting rules! And, if we’re going to do anything about this anomalous result it’s time we got the discussion going

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http://ablawg.ca/2011/11/01/section-19-of-the-perpetuities-act-and-the-oil-and-gas-lease-as-a-fee-simple-determinable-estate-of-a-profit-a-prendre/
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About Nigel Bankes

B.A., M.A. (Cantab.), LL.M. (UBC). Professor. Chair of Natural Resources Law. Member of the Alberta Bar. Please click here for more information.
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3 Responses to Section 19 of the Perpetuities Act and the oil and gas lease as a fee simple determinable estate of a profit à prendre

  1. Nigel, I think you just love to cause trouble! :) You’re probably giving people heart attachs on this one.

  2. WML and Nigel says:

    WML comments as follows. Nigel’s responses follow.
    • WML: As unconventional” resources require the introduction of external energy/fracking in order to be produced (eg. shale gas, SAGD, CBM, tight oil), they are by definition not fugacious – does this shift us away from a profit such that as we move along the hydrocarbon compound chain (i.e. methane-liquids-light oil-heavy oil-oil sands-asphalt-brea-coal) the nature of the estate changes, as does the impact of the Perpetuities Act.

    Nigel: I don’t think that this makes a significant difference. It is true that in Berkheiser, one of the reasons that Justice Rand offers for the incorporeal (profit) analysis rather than the corporeal analysis is that the substances that are the subject of the grant are fugacious\migratory but that is just one of the reasons offered for the conclusion. More important is the language of the grant – does the document grant ownership of the substances in place or only as and when removed. See Tener.
    • WML: Does section 79 of the Law of Property Act (i.e. the term “lease” as used in the Land Titles Act … includes, and is deemed to have included, an agreement whereby an owner of an estate or interest in a mineral … demises or grants or purports to demise or grant to another person a right to take or remove any of the mineral for a term certain coupled with a right subsequently to remove any of the mineral so long as it is being produced from the land within, on or under which that mineral is situated) facilitate lapsing of a caveat protecting a freehold lease by the fee owner notwithstanding the Perpetuities Act, particularly in circumstances where the caveat specifically protects “a lessee’s interest” or a “leasehold estate” as distinct from a profit.
    Nigel: I don’t think so (and in an earlier draft of the blog I had a line to the effect that the Land Titles Act Clarification Act was not relevant). I say that for two reasons: (1) technically the provision is a deeming provision for the purposes of the Land Titles Act and not more broadly (true I may have to deal with Hayes v Mayhood but see the next point), (2) it provides a deemed interpretation of the word “lease” and s.19 does not use that word.
    • WML: Is there a distinction to be drawn between the “contractual rights and obligations” embedded in freehold leases (which are presumably enforceable by and binding upon only the persons who are the actual parties thereto), and the “covenants that run with the land” embedded in freehold leases (which are enforceable by and binding upon subsequent fee simple owners who are not necessarily novated in the contract that is the Lease). In short, does the fee owner hold the remainderman, or does the “person entitled to enforce the contractual rights accruing to the party defined under the Lease as the Lessor” hold the remainderman where they are different? In practice subsequent fee simple owners are rarely fully novated into freehold oil & gas leases.
    Nigel: think that your question goes to the question of whether an oil and gas lease is a lease for the purposes of s.65 of the Law of Property Act and the running of covenants that are real covenants or covenants that touch and concern the subject matter of the demise. I think that that is an interesting question but I don’t think that it is germane here. Why? Because the habendum is a not a covenant; it simply maps out duration.
    • WML: The granting language in Berkheiser is “doth grant and lease … all the petroleum and natural gas … within, upon or under the lands … together with the exclusive right and privilege to explore, drill for, win, dig, remove, store and dispose of, the leased substances” – to my mind this is really two separate rights: (a) a [presumably] non-exclusive grant of all petroleum and natural gas under the lands, and (b) the exclusive right and privilege to explore, drill for, win, dig, remove, store and dispose of, the leased substances. Can it be argued that since only the (b) right is exclusive, only the (b) right is subject to the remainderman – the fee owner at all times retains a fee interest in the molecules themselves because the grant of petroleum and natural gas is non-exclusive, and the Lease only grants a time limited “exclusive right to work”, and further, can that “right to work” be characterized as simply contractual and not an interest in land. In other words, would a lease that just contained the (b) right without the (a) right be an interest in land, or a mere licence?
    Nigel: I think that the holding in Berkhesier is simply that the lease does not work an ademption because the lease does not grant a corporeal fee interest. The corporeal estate remains with the grantor.
    I confess that the lease in Berkheiser does contain large words of grant and apparently a grant of the minerals in place and that this gives me some difficulty but if these minerals were granted in situ that would have worked an ademption (at least on the reasoning offered by Justices Rand and Kellock) and therefore they must be taken to have rejected it.
    • WML: As freehold leases rarely contain a separate “provision causing the interest to be determinable” as per subsection 19(1) of the Perpetuities Act, and instead the offending phrase “so long thereafter” is imbedded in and made part of the habendum, what is the rationale for concluding that the “termination mechanism” in the Lease is void instead of the “continuation mechanism” in the Lease being void? Typically the habendum reads “TO HAVE AND ENJOY the same for the term of ( ) years (herein called the “primary term”) commencing on the date hereof and continuing so long thereafter as operations (as hereinafter defined) are conducted upon the said lands, the pooled lands or the unitized lands, with no cessation, in the case of each cessation of operations, of more than 90 consecutive days.”, and if some portion of that “provision” is to be “treated as void for remoteness”, can it not be argued that the void term is “and continuing so long thereafter as operations are conducted”. In other words, can we not get to a place where instead of the leased substances vesting in the lessee as a result of the Act, the Lease terminates at the end of the primary term as a result of the Act.
    Nigel: The rule against perpetuities only attacks contingent interests. Section 19 of the Act deems the possibility of a reverter to be a contingent interest. It is that interest and no other that is made void after 40 years by s.19(1)). Nothing else is contingent.

  3. Matt Langer says:

    What are your thoughts on the new amendment to s19 of the Perpetuities Act in Bill 24? Will removing mineral rights from the application of s19 completely solve the problem?

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