Non-Compliance in a Dangerous Time: The Pitfalls of Section 27 of the Surface Rights Act

The primary purpose of the Surface Rights Act is to avoid litigation when an obstinate landowner rejects all reasonable offers for compensation in exchange for access to their property. When negotiations breakdown, the Surface Rights Board intervenes and establishes the terms, including compensation, of the surface lease. By offering an alternative to a privately negotiated lease, the Act promises to break deadlocks between lessor-landowners and lessee-operators resulting in expedited energy projects. Further, it is hoped that by providing an alternative to the more adversarial judicial system, more amicable relations between landowners and operators will develop even in less than ideal circumstances.Unfortunately, Section 27 of the Surface Rights Act appears to be undermining the goal of facilitating amicable relations. Section 27 aspires to initiate the renegotiation of a surface lease every 5 years. Such renegotiations are necessary so that the parties can review the compensation payable in light of variables arising and evolving over the lease term. These variables include: the compensation that other landowners recently received, the per acre value of the land, the actual loss of use, and other adverse effects such as damages. The problem lies in Section 27’s requirement that obliges the operator to notify the landowner of the opportunity to renegotiate the lease. Predictably, the landowners rely upon this notification requirement. The Act, however, provides no punitive measure for non-compliance; this, in turn, leaves the operator to follow market incentives. Since renegotiating a lease usually costs the operator more through additional compensation payouts, this incentive encourages the operator, as a rational market actor, to ignore the notification requirement. Non-compliance with the requirement frustrates the landowner when he or she discovers they were short changed by the operator; this ultimately undermines the goal of amicable relations. Undermining amicable relations is precisely what the drafters of the Surface Rights Act were attempting to avoid. In contemplation of this regulatory failure, this article explores the pitfalls of this legal quagmire for landowners, the Alberta government, and even the operators who appear to be profiting from the situation.

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