Dream of the priest by the lake (7)
I believe the answer is:
reverie
'dream' is the definition.
(reverie is a kind of dream)
'the priest by the lake' is the wordplay.
'the priest' becomes 'rev'.
'by' says to put letters next to each other.
'the lake' becomes 'erie' (Lake Erie is one of the Canadian/US 'Great Lakes').
'rev'+'erie'='REVERIE'
'of' acts as a link.
(Other definitions for reverie that I've seen before include "I revere in daydream" , "daydreaming" , "A day dream; a word used in the first ever 2 dn" , "Daydream, meditation" , "Wool-gathering" .)