Railways and Pipelines – Increased Compensation

AgriLaw: September 2010

Railway companies and pipeline companies often conduct their operations in close proximity.  Where energy pipelines cross beneath railroad tracks, these parties have entered into “crossing agreements” which, upon payment by the pipeline company of an annual nominal rental, permit the pipeline company to construct and operate its pipeline on the railway lands buried underneath the railroad tracks.  Where such railway lands become surplus to the railway company’s requirements and are acquired by a third party, the continuing pipeline operations may interfere with the purchaser’s intended use of the land.  Is the purchaser entitled to compensation for interference with this intended use?

In a recent decision of the Alberta Court of Queens Bench, the court was required to determine the validity of the assignment of a crossing agreement and entitlement of the purchaser to pursue a claim for increased compensation against the pipeline company.  The railway company had entered into crossing agreements with two pipeline companies many years ago but, upon a portion of the lands becoming surplus, sold these lands to a third party purchaser and assigned to the purchaser a proportionate share of “rents or other payments” and “the benefit of all covenants and agreements and guarantees and indentures” with respect to the lands conveyed.  The crossing agreements granted to the pipeline companies permission to construct, maintain and repair their pipelines upon payment by the pipeline companies of nominal annual compensation, and their agreement to indemnify the railway company from all “loss, costs, damage, injury (and) expense” resulting from the pipeline companies’ operations.  Prior to completion of the conveyance of the lands and the partial assignment of the crossing agreement, the pipeline companies were notified by the municipality that the purchaser was seeking approval for a proposed development of a residential subdivision on the lands being purchased from the railroad.  Neither pipeline company objected to the sale.

Following completion of this conveyance, the purchaser notified the pipeline companies that the annual rental was to be paid to him and of his intention to extract gravel from the lands in conjunction with the subdivision development.  The pipeline companies opposed this proposed use of the land and brought an application to the court for a declaration that the partial assignment of the crossing agreement was void and that the purchaser should be limited to the nominal annual payment payable under the crossing agreement.

In dismissing the pipeline companies’ application, the court rejected the argument of the pipeline companies that the partial assignment of the crossing agreements required their consent because it imposed upon them “greater burdens”.  The court stated:

“I remain unconvinced that an imposition of ‘greater burdens’ means the partial assignment is invalid.  If there are new burdens on the Applicants, these are no different than any other land under which the pipelines pass, held by private citizens of Alberta.  The sale of the surplus railway land to (the purchaser) may well mean that the Applicant’s long run of minimal financial obligations regarding those lands is over.  It may well be a case of the train having simply left the station.  I see nothing in the Crossing Agreements which suggest that the benefits of them were to continue in perpetuity.”

The consequences of this decision for the pipeline companies are significant.  In its decision, the court comments:

“The Crossing Agreements are standard form and there are more than 3,000 such agreements in existence in Alberta; 7,000 in western Canada and another 2,500 similar agreements in place in Quebec and Ontario …

Upon conclusion of these proceedings (the purchaser) intends to renew his (Surface Rights Board) application for compensation which arises from a clause in the Crossing Agreement providing for a nominal annual fee.  There is evidence which suggests that this amount collected annually, was an administration fee or alternatively that it was simply nominal consideration to complete contractual terms and was ultimately used to cover administrative costs.  (The purchaser’s) application before the Surface Rights Board was for a review of the annual fee as a ‘rate of compensation’ which could then facilitate an increase from the $10 to about $120,000 based on loss of use or adverse effect.”

Purchasers of surplus railway lands should carefully review the provisions of any crossing agreement which may have been assigned to them.  Their continuing entitlement to annual compensation may not be limited to the nominal amount provided in the agreement.  To the extent that their intended use of the land is adversely affected by the presence of the pipeline and its operation, they may be entitled to increased compensation.