In the last couple of years, the SRB and courts have made it clear that Loss of Use is calculated using Gross Revenue for dryland and normal irrigation crops. On some specialty crops the Board may reduce the figure to a Gross Margin with cash input costs deducted. This precedent exists to protect the landowner from crop damage that may occur on the lease site. By law, an energy company may access their lease at any time, totally destroy the crop and all the inputs that have gone into it, and the landowner has no recourse for redress. The Loss of Use component of the annual compensation covers the loss. The over-riding principle of energy development in the Province of Alberta, is that in return for being subject to expropriation of their land, the landowner is not to be made worse off, or rather is to be made whole.
A Farmer’s Advocate Office publication (Negotiating Surface Rights, Agdex 878-1) found on the Alberta Government’s "Ropin the Web" (Agriculture, Food and Rural Development) (Appendix # 7) website states that compensation should approximate the value of gross annual production from the area lost, since major operating expenses relating to capital, labor, equipment, and overhead are virtually unaffected by the loss of a small acreage of land. The Surface Rights Board generally awards gross revenue for grains and oilseeds and looks at some input costs for special crops. In the Lemay decision SRB # 2006/0133 they stated on page 9 (bottom), "Moreover, compensation for forage, cereal and other standard or non-specialized crops is typically based on a gross loss of use calculation. This practice is widely acknowledged by the Board in its decisions, the courts, the oil and gas industry, and the farm and ranch industry."
In Surface Rights Board Decision No. 2003/0161, Talisman Energy Inc. v. Paziuk at 7, the Board stated:
The Board was presented with an inordinate amount of diverse evidence. In regard to land value, the Board accepts the evidence of Mr. Hoover as he is an accredited appraiser and presented evidence of comparable land sales. The Board does not accept his calculations of loss of use. It has been the Board’s practice to award gross amount except in the production of specialty crops wherein input costs may exceed net profit.
In Canadian Natural Resources Ltd. v. Bennett & Bennett Holdings Ltd., 2008 ABQB 19, paras 125 &126 Justice Langston reiterated:
One methodology which I do consider to be in error is the deduction of expenses from all crops grown, in the case of Mr. Hoover, and from all crops grown on irrigation, in the case of Mr. Thompson. In calculating loss of use, the Board has consistently stated that costs are only to be deducted in the case of specialty crops grown on irrigation. In fact, in Talisman Energy Inc. v. Paziuk, 2003/0161, the Board rejected Mr. Hoover’s evidence because he took the same approach taken in this case:
"The Board accepts Mr. Hoover’s evidence of land value. He is an accredited appraiser and presented evidence of comparable land sales. The Board does not accept his evidence regarding loss of use. It has been the Board’s practice to award the gross amount except in cases of specialty crops wherein input costs may exceed net profit."
In its decision in this case, the Board also stated expenses should be deducted from gross production when specialty crops are grown, and did not refer to deductions from any other production. I see no reason to depart from this methodology.
The Board and Courts have also been clear that the "Pattern of Dealings" evidence does not apply to Loss of Use calculations, rather the specific crop rotations, yields and prices of the landowner need to be considered. Generally, the Operator does not have this information and seeks to use provincial average yields and prices to discount the returns presented by the landowner.
Judge Langston’s comments in paragraph [124] of Canadian Natural Resources Ltd. v. Bennett & Bennett Holdings Ltd., 2008 ABQB 19 corrects this practice.
Again, I emphasize that the purpose of this critique is not to discount the usefulness of the Thompson and Hoover reports in their entirety, but to stress that they can only be considered as aids in assisting the Court at arriving at appropriate compensation. There are two main reasons for this. The first is that the reports are based on past events, not future forecasts. Secondly, the reports are largely a statistical analysis and do not reflect the specific workings of the Bennett operation.(emphasis added)
In Surface Rights Board Decision No. 2006/0133, Lemay . v. EOG Resources at 10 top the Board again said:
Saying this, the Board holds some reservations as to the accuracy of pattern evidence as it pertains to ascertaining loss of productive use. However, as noted above, the Board finds the Operator’s empirical calculations to be lacking in terms of their specific applicability to the Respondents’ farming operation. Although the Operator provided information of gross returns, this information was adjusted and ultimately presented in evidence as net returns. From this, the net returns were portrayed as the correct approach to compensating for loss of use.
In Surface Rights Board Decision No. 2002/0080 Pengrowth Corporation v. Luimes at 5 the Board stated:
Upon examination of the evidence and testimony, the Board finds the Operator’s offer of $520.00 per acre for loss use of the said lands to be inadequate. This amount is based on a hypothetical model of crop rotation as set out in Exhibit #5. The Board is more inclined to regard the Lessor’s submission (Exhibit 4) as a more accurate portrayal of the actual farming practices employed and/or contemplated by the Lessor. The Board also notes that the Operator did not object to or otherwise submit evidence to countervail the Luimes’ portrayal of their production practices.
Although the said lands do not as yet benefit from a pivot system, they are in fact irrigated by a wheel system and as such, they are capable of producing significantly higher yields and profit than lands not under irrigation. Therefore, the Board finds the amount of $600.00 per acre as annual compensation for loss of use of the 3.80 acres (3.80 x $600.00 = $2280.00) under lease to be fair and reasonable and so fixes.
Judge Langston gave further guidance on the methodology to be used in calculating Loss of Use when he stated in paragraph 163 of Canadian Natural Resources Ltd. v. Bennett & Bennett Holdings Ltd., 2008 ABQB 19:
With respect to the irrigated sites, I find that a loss of use award of $500 per acre, not $600 as awarded by the Board, is appropriate. I have arrived at the $500 per acre figure based upon various considerations. Those pertaining to the reports and evidence of Mr. Thompson and Mr. Hoover are as follows:
- The reports by both Mr. Thompson and Mr. Hoover are more of a statistical analysis than a case study of the Bennett operation.
- While Mr. Hoover was willing to opine on the future of commodity and input prices, like Mr. Thompson, no forecasts were reflected in his report. Given that the role of the tribunal is to look forward and Mr. Hoover felt he able to opine on future trends, a utilization of future forecasts would have been of assistance.
- Mr. Hoover made deductions from gross revenue for all crops, and Mr. Thompson did the same for all crops grown on irrigation. The practice is to assess loss of use on the gross amount for all crops, regardless of where they are grown, except for specialty crops.
- Mr. Thompson used past, and therefore inappropriate, crop rotation cycles. Mr. Hoover’s crop rotation cycles were also not entirely correct.
The Courts have also given the Board guidance on how to differentiate between past and future rotations and prices. In paras 119-124, Justice Langston further stated:
When the issue of annual compensation comes up for review, the negotiation concerns the rent to be paid for the future five-year period, not the past five years. Therefore, when determining the rate of compensation i.e. calculation of the actual loss of use and adverse effect, an analysis of probable future land use must be undertaken.
The Alberta Court of Appeal, in Jorsvick v. Pennzoil Petroleum Ltd., (1988), 88 A.R. 397, stated that the role of the Board was not just to see if there were any changes to the land use which would justify a change in the annual compensation, but that it was to assess compensation afresh:
We emphasize that the function of the Board on each review is to look forward. The ‘changed circumstances’ test, therefore, is not appropriate…. It follows that once either party triggers a review, the entire question of annual compensation is at large, and must again be fixed by the Board on the basis of the material then before it. What happened earlier is merely a factor to be considered. It is not correct to say that the applicant, to gain a change in the award, must show altered circumstances. It is correct to say that, to gain any new award, the applicant will only get the award he proves he is entitled to. The onus is on the applicant, whoever, he may be. There is no presumption for or against the previous award.
Mr. Thompson does not utilize Bennett’s anticipated crop rotation plan in his calculation, but uses one from the past. He agreed that costs of inputs rose from 2000 to 2005, but would not comment on costs of inputs in the future. With respect to crop values, he stated each crop was different and he didn’t know that there was ever a pattern.
Mr. Hoover, did use Bennett’s anticipated crop rotation plan in his calculations. He was also confident enough to opine that a farmer could be reasonably optimistic that both crop values and input costs would rise over the next five-year period, but he did not use this opinion in his calculations. Both calculations of variable costs and gross revenues were based solely on past statistics. (emphasis added).
Again, I emphasize that the purpose of this critique is not to discount the usefulness of the Thompson and Hoover reports in their entirety, but to stress that they can only be considered as aids in assisting the Court at arriving at appropriate compensation. There are two main reasons for this. The first is that the reports are based on past events, not future forecasts. Secondly, the reports are largely a statistical analysis and do not reflect the specific workings of the Bennett operation.(emphasis added)
In SRB Decision No. 2007/0172, Imperial Oil Resources Limited v. Gray & Company Holdings Ltd.1, page 9, the Board stated:
The Operator’s evidence on Loss of Use is problematic in that it tends to rely upon statistical averages for areas such as the entire province which limits its reliability to the specific situation before the Board. Although, there does appear to be a trend within the information to indicate that the actual loss per acre is in fact less than the amount offered of $450.00 per acre, it ignores the evidence of the leases provided by the Lessor.