Surface Facilities – Compensating “Adverse Effects”

AgriLaw: May 2010

The lease of agricultural lands for construction of hydrocarbon production and storage surface facilities usually includes provision for reviewable annual compensation. This right to compensation is not limited to the leased land rights but also includes compensation for damages attributable to the surface facilities. What compensation is the landowner entitled to?

The Alberta Court of Appeal has recently upheld a decision of a trial court which determines that, under Alberta’s Surface Rights Act, landowners are entitled to compensation both for loss of use of the leased land and the adverse effect of these surface facilities on the remaining lands and the landowner. To quantify these factors, the court may have reference to “a pattern of dealing” establishing standard compensation rights, or alternatively the actual loss of use and adverse effect that arises as a consequence of the surface facilities.

In the case under review, both the trial and appellate courts rejected compensation values on the basis of “a pattern of dealings” in the absence of evidence of the geographic area in which the compensation pattern allegedly applied or how the leases selected to provide such compensation values compared to other leases in the area. In addition, the trial court referred to “the need for the agreements within the pattern of dealings to rest upon an unfettered negotiation process.” Relying upon earlier cases, the court stated that this requires evidence that “the sale was freely and willingly made without coercion, compulsion or compromise” and that “two equal competing parties met on an equal open basis and freely and voluntarily entered into a settlement unaffected by the power of compulsion and expropriation and unaffected by any other extraneous factors determined only to reach this settlement on the basis of an amount that represented a fair value for the rights that the operator wished to take from the owner.”

Having determined that no “pattern of dealings” had been established, the trial court held that a calculation of the actual loss of use and adverse effect requires a valuation on a per acre basis of the revenues which the landowner has lost due to inability to use the land subject to the surface lease; quantification of the effect of the obstruction of the surface facilities on the remaining land; and quantification of noise and other aesthetic impacts resulting from the operation of the surface facilities. Valuation of loss of use is generally to be calculated on the basis of gross production values on a prospective basis. With respect to the adverse effect of the surface facilities on the remaining land and the landowner, the trial court stated:

“…it is my view that while there may be tangible and intangible components to adverse effect, they cannot be completely divorced from one another. For example, while there is a quantifiable equipment cost to working over the same piece of land two or more times, simultaneously, there is an added stress on the operator to ensure that he or she does not hit any of the structures on the well site. Simultaneous with the extra caution being taken with each extra pass, there is extra time being expended.”

In addition, the court recognized that this compensable adverse effect is not limited to direct operational impacts but includes interruption of the landowner’s peaceable possession of the land. The trial court observed:

“… The adverse effect does not arise solely from the exclusion of the leased parcel from the landowner’s operation, the existence of the physical structures, or, the presence of an access road. It also arises from the need to interact with the operator as a business associate. The problem for the landowner is that it did not voluntarily choose to have this business relationship, and the operator constitutes a business associate that does not have the same objectives for the use of the now mutually-held business asset, the land, as the landowner.“

Generally speaking, the landowners in question are engaged in agricultural operations. Like the operators, they are operating a business, but in effect, are forced to hand over the use of one of their major business assets, their land, for contrary use by a third party. It is difficult to conceive that any business owner would ever willingly engage in voluntarily relinquishing use of its business assets. Yet that is what the farmer, the rancher, must do.”

Landowners impacted by hydrocarbon surface facilities are entitled to be compensated for not only their lost production from lands occupied by the surface facilities but also the impacts which these facilities have on the productivity of the remaining lands and on these landowners’ business operations and their families. On review of such compensation, landowners must be in a position to prove and quantify these losses.