Canada: The (Limited) Rights And Obligations Of Tenants In Common

Last Updated: January 10 2019
Article by Laura M. Gill and Leanne Desbarats

INTRODUCTION

Many contracts in the oil and gas joint venture context provide that the parties' ownership in assets is held as "tenants in common". For example, the 2015 CAPL Operating Agreement provides at Clause 1.05(A):

[...] The Parties intend that their interests in the Joint Lands and in all other Joint Property will be held as tenants in common, subject to those modifi- cations expressly provided under the Agreement [...] When there is no agreement governing co-ownership of property, the default legal position under the Law of Property Act (the main legis- lation governing property ownership rights in Alberta) and the common law is that the parties hold their interests as tenants in common, and except as varied by contract, have the corresponding rights and obligations with respect to that ownership. For example, this is relevant in the world of Construction, Ownership and Operation Agreements which are frequently negotiated but ultimately go unsigned. What does it mean to be a tenant in common then? As reviewed below, the concept of tenancy in common is rooted in historical property law principles, initially developed under English law, and then adopted into Canadian law. In practice, the precise rights and obligations associated with being a tenant in common are somewhat antiquated and may offer less protec- tions than one might expect. The law governing tenants in common can always be varied by contract. Contracting parties should ensure that the applicable contract documents reflect the desired relationship between them, and also make sure to always sign their agreements.

... the concept of tenancy in common is rooted in historical property law principles, initially developed under English law, and then adopted into Canadian law. In practice, the precise rights and obligations associated with being a tenant in common are somewhat antiquated and may offer less protections than one might expect.

TENANCY IN COMMON IN THEORY

English and Canadian law recognize the following basic principles with respect to co-ownership of property:

  1. Right of Possession and Use: each co-owner is entitled to possession of the common property and the use and enjoyment thereof and no co-owner can oust another co-owner from the common property.
  1. 2. Law of Waste: a co-owner cannot destroy the common property. 3. Duty to Account: if one co-owner receives more than its share (which is its percentage ownership interest in the property) of the revenue from the property, it is under a duty to account to the other co-owners.

TENANCY IN COMMON IN PRACTICE

The rights and obligations of parties in a tenancy in common relationship are somewhat limited:

  1. Right of Possession and Use: In practice, this principle means that a co-owner cannot physically prevent another co-owner from being on the common property. While the law is not entirely clear, there does not seem to be any support in the cases for the proposition that co-owners owe each other any obliga- tions with respect to making decisions about the common property. Therefore, in the oil and gas context, a non-op- erator likely would not have solid ground to argue that an operator owes them duties with respect to decision making on the basis of being a tenant in common.
  2. Law of Waste: The Law of Property Act describes waste as "unreasonable use of land," meaning that a co-tenant is likely only liable for voluntary and equitable waste. Voluntary waste is conduct that diminishes the value of land, and equitable waste is severe and malicious destruction of the property. Theoretically, a party could argue that a co-owner who produces from the land (for example, through independent operations) dimin- ishes the value of the lands, which would constitute waste. On this basis, a co-owner could seek an injunc- tion to stop the independent operation, bring an action for an accounting of profits, or seek damages as a result of any loss in value to the lands. However, there is no precedent in Canadian cases where such relief has been sought and courts in the United States have found that an oil and gas owner has a right to develop its inter- est in the lands even without the consent of the other co-owners.

Despite the frequency in which parties enter into co-tenancy relationships, the law does not offer broad protections to parties in a relationship of tenants in common. While theoretically parties may have rights with respect to the use and enjoyment of the property, waste and accounting for profits, the law in Canada has not to date developed any significant precedents that parties could rely on to seek remedies relating to those rights.

  1. Duty to Account: A tenant in common does not have any right to claim reimbursement for capital expendi- tures, including repairs and current expenses it incurs (except if there has been a partition and sale of the property). By way of illustration, if there is no operating agreement in place, an operator spending money for the joint account without the consent of non-operators would not be able to make a claim for costs incurred for joint operations. The duty to account only applies where a party has received payment in excess of its proportionate share of the property from a third party. An accounting is not required in situations where one co-tenant has received more than its share from its own operation of the property. Therefore, in the oil and gas context, a right to an accounting may arise from receipt of processing fees from third parties in a facility, but an accounting is not likely to be required from a co-tenant's own operations on the lands.

CONCLUSION

Despite the frequency in which parties enter into co-tenancy relationships, the law does not offer broad protections to parties in a relationship of tenants in common. While theo- retically parties may have rights with respect to the use and enjoyment of the property, waste and accounting for profits, the law in Canada has not to date developed any significant precedents that parties could rely on to seek remedies relat- ing to those rights. The best course of action is to set out the rights and obligations governing co-owners expressly in a contract, and parties should be sure to execute the relevant agreements to have binding and enforceable rights over the shared lands. 

Originally published by Landman

Footnotes

1. Laura Gill is a partner and Leanne Desbarats is an asso- ciate in the Calgary office of Bennett Jones LLP.

2. See also for example, the 1974, 1981 and 1990 CAPL Operating Agreements and the 1997 CAPL Farmout Agreement.

3. Law of Property Act, RSA 2000, c L-7, s 8.

4. Martin M Olisa, "Legal Problems Arising Out of Co-Ownership of Oil and Gas Leasehold Estate and Facilities" (1970) 8:2 Alta L Rev 177 at 178–79.

5. For further discussion of tenants in common as it relates to independent operations see Rob Desbarats, Jay Todesco and Kate Royer, "Sole Risk Provisions in Joint Operating Agreements for Unconventional Oil and Gas Development" (2016), Alta L Rev at 417, avail- able online: https://www.albertalawreview.com/index. php/ALR/article/view/472/464 .

6. Patrick H. Martin and Bruce M. Kramer, Williams & Meyers, Oil and Gas, looseleaf, (New York: LexisNexis, 1997), s 502.

7. Martin M. Olisa, "Legal Problems Arising Out of Co-Ownerships of Oil and Gas Leashold Estate and Facilities" (1970), Alta L Rev at 178, available online: https://www.albertalawreview.com/index.php/ALR/ article/viewFile/539/532 page 178.

8. Thorsteinson v Olson, 2014 SKQB 237 at para 140.



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