Gas leases – ask before signing

“Use and occupy the lands to such extent as may be necessary or convenient”;
“the right to complete any geological and geophysical surveys”;
“primary term”;
“delay rental”;
“not produced for any cause whatsoever beyond the lessee’s reasonable control”;
“spacing unit”;
“unitized development”;
“surface rights”;
“automatic renewal”;
“additional acreage”.

The language of production and storage of natural gas leases may appear esoteric and is often confusing. However, with expansion of natural gas markets and increasing interest in available underground storage, more and more landowners in Southwestern Ontario are being confronted with such leases and are considering surrender of sub-surface rights. Before entering into leases, landowners should consider the extent of the rights they are conveying and potential liabilities they may be incurring.

Provisions common to many production and storage leases currently in use constitute a significant concern for landowners. While such leases are expressed to be for a specified number of years, and may provide for termination in default of drilling or production, these leases invariably contain provisions which permit their indefinite extension in time upon payment of a minimal annual rental. In effect, such leases provide the leasing company with an option on sub-surface rights which may continue in perpetuity at the cost of only a small yearly payment to the landowner. While the lease continues, the landowner has no further right to convey or otherwise deal with the sub-surface rights in his lands.

Of equal concern to landowners are lease provisions which purport to eliminate or limit a leasing company’s liability for damages and injuries caused by its operation because of, for example, some neglect or default of the landowner. Considering the limited financial return to landowners under these leases and their lack of control over the leasing company’s operations, landowners must be vigilant to ensure they do not incur liability either during the period of the company’s operation or upon the abandonment of facilities.

The location and depth of facilities and the construction and maintenance of temporary and permanent access also pose concern for landowners, particularly with respect to interference with agricultural operations. Landowners should not surrender to the leasing company blanket rights to locate facilities and access upon their lands, but should ensure they retain rights to determine these issues.

Certainly compensation provisions of production and storage leases are of critical significance to landowners. In addition to industry competitive royalties, landowners should establish before entering into leases the minimum compensation to which they will be entitled upon the leasing company undertaking investigation and development activities on their lands for both access and facilities sites. Such minimum compensation should include provision for present and future crop loss, disturbance damages and temporary and permanent impacts. Compensation for storage rights should address increased payments after designation, payment for lands not included in the storage pool, and payment for unproduced residual resources. Landowners should not be content to leave pooling or unitization of production within the sole discretion of the leasing company.

Most landowners presented with production and storage leases for their consideration find the legal language of leases hard to understand and feel ill-equipped to attempt negotiation of the issues concerning them with the leasing company. In response to landowner concerns, and recognizing that landowners will be more successful in negotiating collectively satisfactory lease amendments, the Gas Lease Landowners of Ontario (GALLO) has recently formed to represent and promote landowner interests. The members of GALLO are landowners throughout Southwestern Ontario who share concerns about the present form of leases with which they have been presented and who would like to negotiate a form of lease which better protects landowner interests. Any readers interested in obtaining more information about GALLO and its objectives should contact:
Mike Unsworth
R. R. #2,
Tupperville, ON N0P 2M0

Len McMurphy
(519) 692-4367

Jerry Burns
GALLO Public Relations
(519) 692-5127

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