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Tuesday, June 8, 2010

Ontario Court of Appeal rules against oil and gas landowner

Tribute Resources Inc. has won a partial victory in its appeal from a decision of Justice David Little that declared an oil and gas production lease (PNG lease) and a gas storage lease (storage lease) terminated. The Court found that the storage lease has terminated, but the PNG lease is still valid and subsisting.


With respect to the PNG lease, the Court of Appeal disagreed that the termination of production from oil and gas wells, although rent was still being paid under the lease, meant termination of the lease. The Court also found that late rental payments did not cause the agreement to terminate:

The Oil and Gas Lease, as I read it, does not stipulate that failure to make the rental payments on time should operate to automatically terminate the contract. Such a construction is inconsistent with the provision of the Oil and Gas Lease that provides:
In the event of default on the part of the Operator in making any payments hereunder or in complying with any of the conditions herein contained, the Land Owner shall notify the Operator by registered mail of his intention to cancel this lease. The Operator shall have 30 days from the receipt of such notice in which to remedy such default failing which the Land Owner may proceed to cancel this lease according to law.
McKinley never gave Tribute notice of default and intention to cancel the lease but accepted the late payments.
As for the storage lease, the Court agreed with Justice Little's findings:

Turning to those questions, I begin with the Gas Storage Lease. I agree with the analysis of the applications judge that the automatic termination clause of Schedule B is a true condition precedent. It provides that the Gas Storage Lease will terminate on the tenth anniversary date “if and only if” Tribute or “some other person” has not made an application to the OEB. The words of the clause and the contract read as a whole do not indicate that the automatic termination provision was for the benefit of one party or the other. Rather, the parties chose a particular event, the non-occurrence of which would terminate the contract. The clause does not place any obligation of performance on Tribute that McKinley could waive. The applications judge was correct to find that the initial acceptance of the rental payment for the ensuing year could not constitute a waiver or estoppel by conduct on the part of McKinley. The applications judge was correct to grant the declaration that the Gas Storage Lease terminated on September 24, 2008.
Also of note in the case is the Court's comment on the applicability of the recent Snopko v. Union Gas decision (also from the Court of Appeal), which confirmed the Ontario Energy Board's exclusive jurisdiction over gas storage agreements. In this decision, the Court clarified that the OEB's exclusive jurisdiction commences only when it has designated a storage area under the OEB Act. In this case, where no designation order had been made (and no storage of gas was taking place), the Court's jurisdiction to determine questions about the termination of the storage agreement was not affected by the OEB Act.

Read the Court of Appeal decision at: Tribute Resources Inc. v. McKinley Farms Ltd., 2010 ONCA 392 (CanLII)

Read Justice Little's original decision at: Tribute Resources Inc. v. McKinley Farms Inc., 2009 CanLII 33043 (ON S.C.)