Prairiesky Royalty Ltd v Yangarra Resources Ltd, 2023 ABKB 11
Opinion
Court of King’s Bench of Alberta Citation: Prairiesky Royalty Ltd v Yangarra Resources Ltd, 2023 ABKB 11 Date: 20230106 Docket: 1701 08362 Registry: Calgary Between: Prairiesky Royalty Ltd. Plaintiff - and - Yangarra Resources Ltd. Defendant _______________________________________________________ Reasons for Judgment of the Honourable Justice M.H. Bourque _______________________________________________________ Table of Contents I. Introduction . 3 II. Issues . 3 III. Background Facts . 4
IV. Issue 1: Does the 8% Royalty arising from the 2011 Royalty Agreement constitute an interest in land? 5 A. Legal Framework . 5 1. Gross overriding royalties as interests in land . 6
a) Whether the underlying interest is an interest in land . 7
b) The intention of the parties to create an interest in land . 9
(1) The Vandergrift approach . 9
(2) The Dynex ABCA Approach . 10
(3) Dianor ’s clarification of the Dynex test 11
(4) Manitok Energy (Re) 12
(5) Accel Canada Holdings Limited (Re) 12
(6) Bacanora Minerals Ltd v Orr-Ewing . 13 2. Current state of the law .. 14
a) Examination of the parties’ intentions from the agreement as a whole and the surrounding circumstances . 14
b) The core indicia of an interest in land . 15 B. Analysis . 16 1. Whether the Crown Lease, out of which the 8% Royalty was carved, is an interest in land 16 2. Whether the parties intended the 8% Royalty to constitute an interest in land . 17
a) Interpreting the 2011 Royalty Agreement as a whole along with the surrounding circumstances 17
(1) The surrounding circumstances . 17
(2) The granting clause . 19
(3) The “Interest in Land” clause . 21
(4) The “Term”, “Surrender”, and “Area of Mutual Interest” clauses . 22
(5) The “Taking in Kind” clause . 23
(6) The “Pooling” and “Unitization” clauses . 23
(7) The “Assignment” clause . 25
b) Conclusion as to the parties’ intention to create an interest in land . 27 V. Issue 2: Does the 8% Royalty have priority over Yangarra’s interest in the Crown Lease? . 27 A. Are the parties’ interests legal or equitable? . 29 1. The 8% Royalty . 29 2. Yangarra’s interest in the Crown Lease . 30 B. As two legal interests, does PrairieSky’s 8% Royalty have priority over Yangarra’s interest in the Crown Lease? . 32 C. The defence of bona fide purchaser for value does not apply . 33 D. Conclusion as to the priority of competing interests . 33 E. Expert Evidence and Proposed Expert Evidence . 34 VI.
Issue 3: What remedy, if any, is appropriate? . 34 I. Introduction [ 1 ] The overarching question before me is whether the successor in interest to a Crown petroleum and natural gas lease is bound by an overriding royalty that was originally granted by a predecessor lessee as consideration for the funding for the acquisition of the lease.
[ 2 ] The Plaintiff, PrairieSky Royalty Ltd. (“PrairieSky”), is the successor to the original grantee’s interest in an April 1, 2011 Royalty Agreement (the “2011 Royalty Agreement”) under which an 8% overriding royalty (the “8% Royalty”) was granted in respect of oil and gas recovered under Crown Petroleum and Natural Gas Lease No. 0579030039 (the “Crown Lease”). The 8% Royalty grantor’s undivided interest in the underlying Crown Lease was transferred to Relentless Resources Ltd. (“Relentless”) in 2013.
The Defendant, Yangarra Resources Ltd. (“Yangarra”), acquired Relentless’ interest in the Crown Lease in 2016. [ 3 ] PrairieSky seeks a declaration that Yangarra is bound by the 8% Royalty and monetary judgement against Yangarra for outstanding royalty payments plus interest. In its defence, Yangarra asserts that the 8% Royalty is not an interest in land that could run with the lands subject to the Crown Lease and, therefore, could not encumber subsequent lessees.
In the alternative, if the 8% Royalty does constitute an interest in land, Yangarra asserts it is a bona fide purchaser for value without notice (“BFPV”) under the law of equity and, therefore, should not be bound by the 8% Royalty. [ 4 ] This is a case where the Torrens system of land registration and transfers is not determinative of the priority of the competing interests. Certificates of title are generally not issued for Crown-owned lands.
Further, caveats and other encumbrances that can otherwise be registered to provide notice to potential purchasers of an overriding royalty on freehold minerals cannot be registered against Crown-owned minerals pursuant to s 202(
a) of the Land Titles Act , RSA 2000, c L-4 (the “ LTA ”). Therefore, to determine whether the defence of BFPV applies here, the Court must determine the nature of the parties’ interests — legal or equitable — and apply the common law rules of priority to PrairieSky’s prior interest in the form of the 8% Royalty and Yangarra’s subsequent interest in the Crown Lease. [ 5 ] For the reasons that follow, I find that the 8% Royalty arising from the 2011 Royalty constitutes an interest in land. I have also found that each of the 8% Royalty and Yangarra’s interest in the Crown Lease are legal interests.
Given that it was first in time, the 8% Royalty has priority over Yangarra’s interest in the Crown Lease. II. Issues [ 6 ] To determine whether Yangarra is bound by the 8% Royalty, the following issues must be resolved: Issue 1: Does the 8% Royalty arising from the 2011 Royalty Agreement constitute an interest in land? Issue 2: If the 8% Royalty is an interest in land, does it have priority over Yangarra’s interest in the Crown Lease? To determine this issue, the following sub-issues must individually be determined: (
i) Are the parties’ interests legal or equitable? (ii) As two legal interests, does PrairieSky’s 8% Royalty have priority over Yangarra’s interest in the Crown Lease? Issue 3: What remedy, if any, is appropriate? III. Background Facts [ 7 ] The Crown Lease conferring “the exclusive right to explore for, work, win and recover petroleum and natural gas within and under” the Southwest ¼
Section 7, Township 41, Range 5, West of the Fifth Meridian in Alberta (the “Royalty Lands”) was initially granted to Westhill Resources Limited (“Westhill”) and O’Sullivan Resources Ltd. (“O’Sullivan”) in 1979. Upon obtaining the Crown Lease, Westhill and O’Sullivan entered into a royalty agreement (the “1979 Royalty Agreement”) with Success Oil Ltd. (“Success”), under which a 2% gross overriding royalty was granted in respect of petroleum substances produced, saved, and sold after the date thereof from the Royalty Lands (the “2% GOR”).
While the status of the 2% GOR in this case is not in dispute, its treatment throughout the various transfers of interest in the Crown Lease and the 1979 Royalty Agreement provide useful context for the status and treatment of the 8% Royalty in question. [ 8 ] The Lands subject to the Crown Lease were further circumscribed by deep rights reversion in 1984, which excluded petroleum and natural gas rights below the base of the Cardium Formation. The Crown Lease thus encompasses petroleum and natural gas to the base of the Cardium Formation.
As unpatented Crown lands, there is no certificate of title associated with the Lands that otherwise exists for freehold minerals pursuant to the LTA . [ 9 ] By September 28, 1987, the Crown Lease had been transferred to Trarion Resources Ltd. (“Trarion”), and Solar Energy Resources Ltd. had succeeded Success in its interest in the 1979 Royalty Agreement and the underlying 2% GOR. [ 10 ] On April 1, 2011, Home Quarter Resources Ltd. (“Home Quarter”) entered into a Purchase and Sale Agreement with Trarion, through which Home Quarter acquired Trarion’s 100% interest in the Crown Lease.
On April 1, 2011, Trarion assigned its interest in the 1979 Royalty Agreement to Home Quarter via an assignment and novation agreement. The transfer of the Crown Lease from Trarion to Home Quarter was registered by the Minister of Energy pursuant to s 91(1) of the Mines and Minerals Act , RSA 2000, c M-17 ( MMA ) on May 11, 2011. [ 11 ] On April 1, 2011, Home Quarter also entered into the 2011 Royalty Agreement with Range Royalty Limited Partnership (“Range Royalty”).
Under the 2011 Royalty Agreement, Home Quarter granted the 8% Royalty to Range Royalty pursuant to an ongoing land fund arrangement between the parties. The arrangement entailed Range Royalty funding Home Quarter’s acquisition of various
lands in consideration for the reservation of a royalty (the “Land Fund Arrangement”). The nature of the Land Fund Arrangement andthe standard form royalty agreement used thereunder are discussed further at paragraphs [74]–[78]. [12] On June 11, 2013, Home Quarter entered into an Asset Exchange Agreement with Relentless Resources Ltd. (“Relentless”),through which it conveyed its 100% interest in the Crown Lease to Relentless.
Home Quarter also transferred its interest in the 1979Royalty Agreement to Relentless via a June 20, 2013 Assignment and Novation Agreement, and its interest in the 2011 RoyaltyAgreement to Relentless pursuant to a Notice of Assignment. [13] Effective December 19, 2014, PrairieSky acquired Range Royalty, assuming all its rights, liabilities, obligations, property, andassets by way of a plan of arrangement. As a result, PrairieSky became the successor to Range Royalty’s interest in the 2011 RoyaltyAgreement and the underlying 8% Royalty.
The same day, PrairieSky issued a “Notice to Industry” informing all of Range Royalty’scontractual counterparties — including Relentless and Yangarra — of its acquisition of Range Royalty, and advising that all notices,correspondence, documentation, invoices, or payments related to contracts with Range Royalty should be directed to PrairieSky. [14] By 2016, Yangarra held the lands adjacent to the Royalty Lands subject to the Crown Lease. Yangarra wanted to maximizethe acreage across which it could drill a horizontal well in the area. Accordingly, Yangarra’s Vice President of Land, Mr.
Faminow,approached Relentless — the lessee at that time — about acquiring the Crown Lease. Yangarra originally offered to acquire the CrownLease and an existing well, 102/04-07-041-05W5 (the “4-7 Well”), for $500. The purchase price was ultimately lowered to $1.00,however, after Yangarra obtained an environmental site evaluation of the 4-7 Well site, which revealed some potential environmentalliabilities that Yangarra would have to assume. [15] Following an expedited period of due diligence, on June 13, 2016, Yangarra and Relentless executed an Agreement ofPurchase and Sale for the Crown Lease and the 4-7 Well.
The transaction closed on June 17, 2016, at which point Relentless andYangarra had entered into an Assignment and Novation Agreement under which Relentless assigned its interest in the 1979 RoyaltyAgreement to Yangarra. The 2011 Royalty Agreement, however, was missed in due diligence and was never formally assigned byRelentless to Yangarra. [16] A horizontal well was eventually drilled into the Royalty Lands (the “4-7 Horizontal Well”) after Yangarra had acquired theCrown Lease from Relentless and commenced production in October, 2016.
After discovering the well and the nonpayment of the 8%Royalty, on May 11, 2017, PrairieSky sent a demand notice to Yangarra and Relentless requesting payment of the outstanding royaltiesattributable to the production allocated to the portion of the well producing from the Royalty Lands. In response, Yangarra asserted thatit is not bound by the 8% Royalty. IV. Issue 1: Does the 8% Royalty arising from the 2011Royalty Agreement constitute an interest in land? A.
Legal Framework [17] When an owner of the mines and minerals leases the rights to extract the resources from the land to a third party, they willoften reserve for themselves an unencumbered share or interest in the minerals or petroleum substances produced by the lessee. This isreferred to as a “royalty interest” or a “lessor’s royalty”.
When a lessee or holder of the working interest in the in situ minerals grants anunencumbered share or interest in the minerals or petroleum substances produced to a party in exchange for money or other services, thatinterest is called an “overriding royalty” or a “gross overriding royalty” (hereinafter referred to as “GORs”; Dynex, infra, at para 2). [18] The concept of a GOR is concisely described in Curry v Athabasca Resources Inc, 2022 SKKB 221 at para 41, citingMichael A Thackray, Canadian oil and gas, loose-leaf (Rel 186, Nov 2021) 3d ed, vol 1(Vancouver: LexisNexis, 2017) [Thackray] at §7.67: The overriding royalty is the right to take, in kind or money, a share of future mineral production from a well without the obligation topay a proportionate share of drilling or producing costs.
The overriding royalty is limited to an interest in the production of specifiedsubstances from the land and does not include any of the possessory rights normally associated with a working interest. This type ofroyalty is extremely versatile and is used as a means of raising funds, providing incentives, or spreading risk by retaining an economicinterest in a mineral prospect without retaining any associated liability (such as in a farmout).
This versatility has led to a great variationin the language found in royalty agreements and a royalty agreement may consist of a two or three-sentence letter or a lengthy andcomplex document. [19] The present case concerns a GOR granted by the lessee of Crown-owned minerals to a royalty company as consideration forthe royalty company funding the acquisition of the lease. 1.
Gross overriding royalties as interests in land [20] The contemporary test for determining whether a royalty interest is an interest in land was articulated by Virtue J of this Courtin Vandergrift v Coseka Resources Ltd, (ABQB) at para 29, 67 Alta LR (2d) 17 [Vandergrift], and was later adoptedby Major J, for a unanimous Supreme Court of Canada, in Bank of Montreal v Dynex Petroleum Ltd, 2002 SCC 7 [Dynex], aff’g Bankof Montreal v.
Enchant Resources Ltd., 1999 ABCA 363 [Dynex ABCA][1] at para 22 (the “Dynex test”): …under Canadian law a “royalty interest” or an “overriding royalty interest” can be an interest in land if: 1) the language used in describing the interest is sufficiently precise to show that the parties intended the royalty to be a grant of aninterest in land, rather than a contractual right to a portion of the oil and gas substances recovered from the land; and
2) the interest, out of which the royalty is carved, is itself an interest in land. [21] However, the question of whether royalties carved out of oil and gas leases can constitute interests in land has been debatedsince the earliest days of western Canada’s oil and gas industry (see e.g., Publix Oil and Gas Limited (Re), (ABCA),[1936] 3 WWR 634).
The growing pains of “trying to come to grips with some of the novel legal problems created by the industry’spresence in our country” were amplified by the application of English common law concepts of property that were “developed in vastlydifferent circumstances”(Scurry-Rainbow Oil Limited et al v Galloway Estate et al, (ABKB) [Scurry-Rainbow] atpara 17, 8 Alta LR (3d) 225; aff’d, 1994 ABCA 313; leave to appeal denied, [1994] SCCA No 475).
Such an approach risked outcomesthat were “out of touch with the realities of the industry and that deviate[d] from the sorts of solutions needed by the affected parties”(Scurry-Rainbow at para 17). [22] Notwithstanding the practical approach of Canadian courts toward upholding the intention of industry practices overadherence to the old common law, anachronistic common law strictures of property rights continue to arise in arguments under the guiseof new facts. The present case is no different.
The following review of the development and current state of the law is thus intended toprovide context for the arguments made on the specific facts in this case.
a) Whether the underlying interest is an interest in land [23] With respect to the second arm of the Dynex test, the common law once held that an interest in land could only be derivedfrom a corporeal hereditament, and not an incorporeal hereditament (see Berkheiser v Berkheiser and Glaister, (SCC),[1957] SCR 387 [Berkheiser] at 390; see also discussion of Laskin J (dissenting), in Saskatchewan Minerals v Keyes, (SCC), [1972] SCR 703 [Saskatchewan Minerals] at 721–722).
The Ontario Court of Appeal recently described the difference betweenthe two in Third Eye Capital Corporation v Ressources Dianor Inc, 2018 ONCA 253 [Dianor] at para 31: A corporeal hereditament is an interest in land that is capable of being held in possession, such as a fee simple. An incorporealhereditament is an interest in land that is non-possessory such as easements, profits à prendre, and rent charges.
Under each type ofincorporeal hereditament, the holder has an interest in land. [24] The prohibition on the issuance of an interest in land from an incorporeal hereditament had to do in large part with the remedyof distress. Distress allows for the seizure of someone’s property as security for the performance of an obligation. A royalty carveddirectly from a lessor’s mineral rights — a corporeal hereditament — in consideration for the lessee’s right to take minerals from theland — an incorporeal hereditament — has been analogized to a rent charge (Dynex ABCA at para 59).
Ordinarily, a lessor’s right todistrain in the event of a lessee’s default was a necessary incident of a rent. In the case of leases for upstream oil and gas ventures,however, the “idea that royalty owners could summarily seize drilling and producing equipment worth millions of dollars, especially infields where drainage might be going on, is unthinkable” (Dynex ABCA at para 64, citing WH Ellis, “Property Status of Royalties inCanadian Oil and Gas Law” (1984) 22 Alta L Rev 1 at 10).
A lessor’s royalty and overriding royalties are thus without the right ofdistrain. [25] Absent the right of distrain, “the argument goes, a royalty cannot be treated as rent nor can an overriding royalty” (DynexABCA at para 63).
In result, royalty interests arising from a working interest in third-party mineral rights — such as oil and gas or miningleases — were not considered interests in land (see Alicia K Quesnel, “Modernizing the Property Laws that Bind Us: ChallengingTraditional Property Law Concepts Unsuited to the Realities of the Oil and Gas Industry” (2003) 41 Alta L Rev 159, at pp 172–173). [26] In the seminal case of Berkheiser, however, the Supreme Court of Canada characterized an oil and gas lease as a profit àprendre (i.e., the right to take something from another’s land) and held that such leases can be interests in land (at 392).
Notwithstandingthe Berkheiser Court’s break from the old common law, litigants continued to argue — and some judges agreed — that an interest inland could not issue from an incorporeal hereditament such as a profit à prendre, including oil and gas and mining leases (see DynexABCA at para 22 and Dynex at para 9). [27] Upon considering overriding royalties arising from oil and gas leases in Dynex, however, the Supreme Court definitivelydispatched with the “common law prohibition on the creation of an interest in land from an incorporeal hereditament” (at paras 18–21).By extension, a contract conferring a royalty interest does not need to give the royalty holder an interest in the reversion or the right ofdistrain for the royalty to constitute an interest in land (McDonald v Bode Estate, 2018 BCCA 140 at paras 43, 45, citing Dynex at para11).
The Court held that, “[g]iven the custom in the oil and gas industry and the support found in case law, it is proper and reasonablethat the law should acknowledge that an overriding royalty interest can, subject to the intention of the parties, be an interest in land”(Dynex at para 18). [28] The Dynex Court, at para 6, endorsed the policy reasons reviewed by the Alberta Court of Appeal as the basis for concludingthat overriding royalties can be interests in land (Dynex ABCA at paras 34–45).
These non-exhaustive reasons can be summarized asfollows: • Royalties routinely play an integral role in financing oil and gas ventures, which often involve huge capital costs and high risk. Byspreading the financial risk among different stakeholders, royalties also serve to stabilize industry volatility (Dynex ABCA at para 34). • The risked-capital of a single high-stakes oil and gas venture may be too great to justify the investment.
Royalties offer an enticingalternative for the investor who “is betting that the many losses will be made up by the small fraction of successes” (Dynex ABCA atpara 35). • Royalties may be “used to compensate employees whose efforts determine the success of a project”, but who otherwise might lackthe capital to finance the project themselves (Dynex ABCA at para 34). • The success of an upstream oil and gas venture depends, to a large degree, on the subsurface geology of a specific location.Royalties offer a means of investing in the geologic prospectivity of “a particular piece of property” instead of “a particular operator or
company” for which there are other means of investing. “The investment return on a royalty results from the success of the propertyregardless of who owns or is working the property” (Dynex ABCA at paras 35–36). • Non-operating interests such as royalties further mitigate the high risks associated with oil and gas ventures by defining how thebenefits of mineral ownership are shared, by minimizing taxes, and by delegating operatorship and allocating risks and rewards “withoutinvoking many objectionable features associated with creating a conventional business association” (Dynex ABCA at para 43). • If royalties were not considered interests in land, they would extinguish upon the transfer of the underlying lease to a third party,rendering the lease more valuable to the successor lessee who is not obligated to pay the royalty.
This may create a perverse incentive forcreditors holding their debtors’ leases as security to petition them into unnecessary bankruptcies to realize the increased value ofliquidated leases formerly encumbered by royalties (Dynex ABCA at para 45).
b) The intention of the parties to create an interest in land [29] Given that a profit à prendre can be an interest in land, the second part of the Dynex test is easily satisfied in the case ofroyalties carved from mineral leases that confer on the lessee the right to extract minerals or petroleum substances from the land.Disputes since Dynex have instead largely focused on the first part of the test and interpreting whether the parties intended to create aninterest in land.
(1) The Vandergrift approach [30] To understand the uncertainty that has continued to follow royalties as interests in land since Dynex, it is useful to start withthe Vandergrift decision. Though Vandergrift laid out the modern test for royalties as interests in land, it still applied antiquatedcommon law strictures of real property to the intention-of-the-parties analysis.
Notwithstanding the fact that the royalty agreement inVandergrift provided that “[a]ll terms and conditions of this Agreement shall run with and be binding upon the lands”, the trial judgeheld that the contract’s language and the absence of traditional incidents of an interest in land defeated its characterization as an interestin land. [31] Emphasis was placed on the fact that the recitals of the royalty agreement in question described the royalty as a “grossoverriding royalty on all petroleum substances recovered from the lands” instead of “petroleum within, upon, and under the lands”(Vandergrift at paras 35–26).
The gross overriding royalty was subsequently defined in the body of the agreement as an interest “in allpetroleum substances found within, upon or under the lands” (paras 35–36, emphasis added). This was taken to connote an interest in thepetroleum after it had been “found” (presumably by the drill bit) and extracted from the subsurface, not as an interest in the petroleumsubstances in situ (at para 36). [32] The remaining references to the gross overriding royalty in the agreement spoke of “a share in production”, “petroleumsubstances sold”, and “petroleum substances produced”.
Relying on previous authorities, the trial judge in Vandergrift couched thelanguage in those references as conveying an intent to create a contractual interest in petroleum substances severed from the lands asopposed to an interest in land itself (at para 36, citing Vanguard Petroleums Ltd v Vermont Oil & Gas Ltd, (ABKB) atpara 19, 72 DLR (3d) 734, and Emerald Resources Ltd v Sterling Oil Properties Mgmt Ltd, (ABCA), 3 DLR (3d) 630at 640, aff’d (SCC)). [33] The trial judge also found that the absence of certain traditional incidents of an interest in land affirmed the royalty’s merecontractual nature.
If the royalty did create an interest in land, the trial judge reasoned that one would expect the royalty holders to havethe “right to enter upon the lands to explore for and extract the minerals” (Vandergrift at para 38). Further, the royalty agreementprovided that “nothing herein shall be construed as requiring [the royalty grantor] to conduct exploratory operations or to drill a well onthe lands” (at para 35). In other words, not only could the royalty holders not extract the minerals themselves, but they couldn’t compelthe grantor to do so either (at para 38).
The trial judge found this fatal to the interest being characterized as an interest in land, whichharkens to the old common law requirement that the interest holder have some measure of control over the interest in question for it to becharacterized as an interest in land (see, e.g., St. Lawrence Petroleum Limited et al v Bailey Selburn Oil & Gas Ltd et al, (SCC), [1963] SCR 482 at 489–491 [St.
Lawrence Petroleum]). [34] While the Supreme Court adopted the two-part test articulated by Virtue J in Vandergrift, it did not directly grapple with theVandergrift decision’s application of old common law concepts in the intention-of-the-parties analysis. Consequently, there has beenlingering uncertainty as to whether a royalty can be an interest in land if the royalty agreement doesn’t (
a) describe the interest withwords to the effect of “in, under, or upon the land”, and (
b) include a royalty holder’s right to enter upon the lands and extract theresources (see e.g., St Andrew Goldfields Ltd v Newmont Canada Limited, at paras 102–104, [2009] OJ No 3266,aff’d 2011 ONCA 377 [St. Andrew Goldfields]; Third Eye Capital Corp v Dianor Resources Inc, 2016 ONSC 6086 at paras 25–30;Bacanora Minerals Ltd v Orr-Ewing, 2021 ABQB 670 , 2021 ABKB 670 at paras 74–80). [35] Nevertheless, the Dynex decision upheld the underlying decision of the Alberta Court of Appeal in Dynex ABCA, whichaddressed these issues head-on.
(2) The Dynex ABCA Approach [36] The Alberta Court of Appeal stressed that the intention of the parties to establish either a contractual interest or an interest inland must be assessed “from the agreement as a whole, along with the surrounding circumstances, as opposed to searching for somemagic words” (Dynex ABCA at para 73). This was based on the practical approaches of Laskin J (dissenting) in Saskatchewan Minerals(also cited approvingly in Dynex, at paras 10–12); Matheson J in Canco Oil & Gas Ltd v Saskatchewan, (SKQB),[1991] SJ No 22 (QL) [Canco]; and Hunt J in Scurry-Rainbow.
[37] In Saskatchewan Minerals, Laskin J held, at 725 (emphasis added): The words in which [a royalty] is couched may show that only a contractual right to money or other benefit is prescribed.
However, ifthe analogy is to rent, then the fact that the royalty is fixed and calculable as a money payment based on production or as a share ofproduction, or of production and sale, cannot alone be enough to establish it as merely a contractual interest. [38] Matheson J held the following in Canco at para 58 (emphasis added): The consideration for the grant … of the 3% gross royalty was not expressed as relating to any right to enter, explore and removepetroleum substances from the designated lands.
Whatever may have been the true consideration, surely the principal questions arewhether [the royalty grantor] was capable of granting an interest in the lands and whether it intended to do so and whether itaccomplished that intention. As owner of a designated interest in mines and minerals in fee simple [the royalty grantor] clearly possessedan interest in the lands, and the wording of the Royalty Agreement permits of no other conclusion but that [the royalty grantor] intendedthat the grant of the 3% gross royalty should constitute an interest in the lands.
The fact that [the royalty grantor] did not utilize all of thewording, or type of wording, considered by some persons as perhaps essential, can surely not detract from an otherwise clearlymanifested intention to create an interest in the lands. [39] And in Scurry-Rainbow, Hunt J held, at 474: There is in my view an unreality about placing too heavy an emphasis upon fine distinctions as the selection of words such as “in” ratherthan “on”.
Notwithstanding the significance that the courts have sometimes attached to these word choices, I doubt that parties whosigned leases …should be taken to have intended to create an interest in land as opposed to a contractual right, as a result of suchminuscule differences in language….Rather, it is more appropriate to consider the substance of the transaction (namely, what were theparties actually trying to achieve?) and to regard the words they have used from that perspective. [40] After reviewing primary and secondary authorities in Canada and the US, the Court of Appeal in Dynex ABCA came up witha non-exhaustive list of indicia that can be used to identify whether a royalty was intended to be an interest in land (at para 84): 1.
The underlying interest is an interest in land (corporeal or incorporeal); 2. The intentions of the parties, as evidenced by the language of the grant and any admissible evidence of the surroundingcircumstances or behaviour, indicate that it was understood that an interest in land was created/conveyed; 3. The interest is capable of lasting for the duration of the underlying estate.
(3) Dianor’s clarification of the Dynex test [41] In Dianor, the Ontario Court of Appeal reconsidered the Dynex decision in light of the trial judge’s application of theVandergrift approach, which it described as “a serious misapprehension … in the application of Dynex” (para 68).
As I have also notedin paragraph [34], Dynex merely adopted the test laid out in Vandergrift — it did not adopt its reasoning (Dianor at para 69). [42] The Ontario Court of Appeal clarified that the old common law approach subsumed by the Vandergrift decision is no longerapplicable (para 71): The purpose of the Supreme Court and the Court of Appeal of Alberta in Dynex [and Dynex ABCA] was to step away from therequirement that a royalty right had to have the incidents of a working interest or a profit à prendre in order to constitute an interest inland, so that royalty rights could play their useful role in financing the industry and spreading risk. [43] In Dianor, the agreements in question stated that the parties intended the gross overriding royalties to create interests in landthat run with the lands, and that they were to be calculated on production as opposed to the value of the minerals in situ (at paras 26–27).Overruling the trial judge, the Court of Appeal held that “the fact that the GORs are calculated on production does not defeat the clearintention of the parties that the GORs constitute interests in land” (at para 77). [44] I note also that if a GOR was defined as a reservation of the minerals or petroleum substances in situ, it “would necessarilydetract from the title of the fee simple owner of the mines and minerals, and be tantamount to a grant of an undivided interest in themines and minerals, resulting in co-ownership” (Canco at para 29).
Defining a GOR as a share of the lessee’s interest in the in situminerals would essentially elevate the royalty holder’s interest to a working interest, potentially exposing the royalty holder to aproportional share of abandonment costs and other environmental liabilities. These are precisely the kind of impracticalities that theDynex ABCA and Dynex lineage of decisions have sought to avoid by holding that royalty interests need not be framed as an interest inthe in situ minerals to constitute an interest in land.
(4) Manitok Energy (Re) [45] Manitok Energy Inc (Re), 2018 ABQB 488 , 2018 ABKB 488 [Manitok] was the first decision of this Courtfollowing Dianor to consider whether a royalty constituted an interest in land based on the intention of the parties. Manitok involved a“Producing Royalty” granted “in respect of all Oil Volumes within, upon or under the Royalty Lands”, but was calculated on volumes ofoil produced at their point of sale (at para 8).
The royalty holder was entitled to the first 140 barrels of oil produced per day from thesubject lands for an initial period of 8 years, after which its interest would grind down by 10% per year relative to the prior (at para 10).Further, the royalty agreement explicitly stated that the “[Producing Royalty] constitutes, and is to be construed as, an interest in land andruns with the Royalty Lands and the Parties intend that the Producing Royalty shall be an interest in land” (at para 7). [46] Relying on Dynex ABCA, Dynex, and Dianor, Horner J held that neither the Producing Royalty’s framing as “a fixedquantity of production per day”, nor restrictions on the royalty holder’s right of entry could defeat the characterization of the Producing
Royalty as an interest in land so long as “the parties’ intention to make it so is sufficiently clear” (at para 22). Similarly, the argumentthat the Producing Royalty should not be characterized as an interest in land because it decreased with time was rejected (at para 24).Horner J’s decision on this point hinged on the fact that the decrease in the Producing Royalty was commensurate with reservoirdepletion and the royalty agreement was drafted to preserve the Producing Royalty until the documents of title expired (at para 24).
Inother words, the Producing Royalty was capable of lasting for the duration of the underlying estate, satisfying the third indicia of aninterest in land articulated in Dynex ABCA (see para [40]).
(5) Accel Canada Holdings Limited (Re) [47] In Accel Canada Holdings Limited (Re), 2020 ABQB 182 , 2020 ABKB 182 [Accel], Horner J again had theoccasion to consider whether multiple royalties constituted interests in land based on the intention of the parties to the royalty agreements(leave to appeal dismissed on the interest in land issue: 2020 ABCA 160). [48] Accel entered into an Asset Purchase and Sale Agreement with ARC whereby Accel, as purchaser, granted ARC, as vendor, agross overriding royalty in the underlying Petroleum and Natural Gas Rights as partial consideration for the transaction of those assets(the “ARC GOR”; at para 4).
The ARC GOR would only crystallize if Accel defaulted on its obligation to pay a deferred purchase priceplus interest by a specific date (at para 43). Upon triggering, the ARC GOR payments would grind down the outstanding amounts owedby Accel to ARC for six months, at which point ARC would provide Accel notice of the remaining balance and Accel would be given 10days to pay the remaining balance in full (paras 43–47).
If Accel did not pay the remaining balance within 10 days, the ARC GOR wouldcontinue in perpetuity (at para 47). [49] Horner J opined that the ARC GOR could be interpreted as an interest in land “considering the potential for a royalty interestin perpetuity and plain wording of the provision stating that the ARC GOR creates an interest in land” (at para 41).
Conversely, the ARCGOR could be construed as a contractual right to payment given that the Asset Purchase and Sale Agreement envisioned the ARC GOR“as a mechanism of ensuring payment and could be read to establish a contractual agreement to pay secured by a royalty interest” (atpara 10). [50] Given the ambiguity, Horner J considered ARC’s post-contract conduct as an exception to the parol evidence rule todetermine the issue.
The most salient evidence was that ARC “registered a security agreement and a land charge at the Personal PropertyRegistry…which identified ARC as the secured party, [Accel] as the Debtor and the collateral as all the Debtor’s right, title, estate andinterest in the Petroleum Substances produced from the Royalty Lands” (at para 61). The Personal Property Security Act, RSA 2000, cP-7 (“PPSA”) precludes the registration of interests in land [s 4(f)]. [51] Given (
a) the tortuous waterfall of conditions that had to materialize for the ARC GOR to continue in perpetuity (i.e., to lastfor the duration of the underlying estate) and (
b) the surrounding circumstances, including ARC’s post contract conduct consistent withthe intention that the ARC GOR serve as security for payment of the deferred purchase price, Horner J found the parties intended theARC GOR to be just that — a contractual right to security for payment, and not an interest in land (at para 63). [52] To secure bridge financing for its capital requirements, Accel also entered into Royalty Purchase Agreements with BEST.Under those agreements, BEST provided financing and would obtain GORs as repayment if Accel didn’t repay BEST the debt plus areturn by a set date (at para 9).
Neither repayment was met, so BEST assumed two GORs payable “until an Aggregate Proceeds Amount(“Payout”) had been paid pursuant to the royalty payments due under the GOR Agreements” (the “BEST GORs”; at para 10). “Payout”was structured such that Accel was obligated to pay BEST the greater of either the purchase price of the BEST GOR plus $1M, or thepurchase price of the BEST GOR plus “interest at a rate of 59.4% per annum calculated and compounded monthly” (at para 10). [53] The fact that the BEST GORs created “limited reversionary interests that terminate upon repayment of the [debt]” weighed infavour of their characterization as security interests for the repayment of the proceeds of the financing arrangement as opposed tointerests in land (at para 89–91).
(6) Bacanora Minerals Ltd v Orr-Ewing [54] Despite this Court’s endorsement of Dianor’s clarification of the Dynex test and the Dynex ABCA approach to the intention-of-the-parties analysis in Manitok and Accel, I am aware that the Court’s recent decision in Bacanora Minerals Ltd v Orr-Ewing, 2021ABQB 670 , 2021 ABKB 670 [Bacanora] may appear to have resurrected the Vandergrift approach of searching for certainmagic words that convey an intent to establish an interest in land. [55] Bacanora dealt with a GOR carved from the grantor’s lithium mining claims and pending mining claims in Mexico.
TheGOR was framed as a right to 3% of the revenue from the grantor’s sale of raw or processed lithium-bearing ore extracted from the lands(paras 27–28). The agreement stated that the GOR “shall constitute a covenant running with the Assets” (i.e., the mining claims)demonstrating that it was an interest capable of lasting for the duration of the underlying estate (at para 29).
The trial judge neverthelessheld that the GOR created a contractual right to payment as opposed to an interest in land (at paras 79–80). [56] In coming to this conclusion, the trial judge held that “the wording of the GOR is similar to the agreements discussed inVandergrift and Vanguard in that the royalty is based upon minerals ‘obtained’ (ie: ‘recovered’ or ‘found’, as per Vandergrift) and,similar to Vanguard, is based upon their value following their removal from the land” (para 79).
With great respect, this approach to theintention-of-the-parties analysis (i.e., the Vandergrift approach) is no longer applicable based on the jurisprudence outlined above.
Thefact that a GOR is calculated on the value or revenue from minerals or petroleum substances severed from the land cannot defeat theotherwise clear intention of the parties that it constitute an interest in land. [57] Further, the fact that a GOR doesn’t entail the royalty holder’s right to enter upon the lands and extract the resourcesthemselves (i.e., it doesn’t create a profit à prendre; see Bacanora at para 79), cannot alone preclude it from being an interest in land ifthe parties otherwise intended it so.
[ 58 ] This is not to say that the gross overriding royalty in Bacanora should be construed as an interest in land. That case arose in the context of a different extractive industry in another jurisdiction. I also note that McCarthy J stated, at para 81, that he “did not think that whether the underlying interest is in the land itself or is otherwise in rem , is determinative of the issue” before him and that he determined the issue “should it be deemed relevant upon appeal”.
Given this, I simply hasten to say that the trial judge’s approach to interpreting whether the gross overriding royalty constituted an interest in land is not, in my view, reflective of the current state of the law and should not be read as reviving the Vandergrift approach that was disavowed by the Alberta Court of Appeal in Dynex ABCA , the Ontario Court of Appeal in Dianor , and by this Court in Manitok and Accel . 2. Current state of the law
a) Examination of the parties’ intentions from the agreement as a whole and the surrounding circumstances [ 59 ] As the Court of Appeal stated in Dynex ABCA , the approach to examining the intention of the parties to establish an interest in land must consider “the agreement as a whole, along with the surrounding circumstances, as opposed to searching for some magic words” (at para 73, aff’d 2002 SCC 7 ; see also Dianor at para 63 ; Accel at para 16 ). [ 60 ] The role of the reviewing court is to ascertain the
interpretation of the royalty agreement that promotes or advances the true intention of the parties at the time of contracting.
This must be done on an objective basis, focused on what a reasonable person would infer from the ordinary grammatical meaning of the terms of the agreement, “consistent with the surrounding circumstances known to the parties at the time of formation of the contract” ( Creston Moly Corp v Sattva Capital Corp , 2014 SCC 53 at paras 47–49 [ Sattva ]; IFP Technologies (Canada) Inc v EnCana Midstream and Marketing , 2017 ABCA 157 at para 79 , leave to appeal to SCC refused 37712 (5 April 2018) [ IFP Technologies ]). “[T]he words of one provision must not be read in isolation but should be considered in harmony with the rest of the agreement and in light of its purposes and commercial context” ( Tercon Contractors Ltd v British Columbia (Minister of Transportation and Highways) , 2010 SCC 4 at paras 64–65 ; IFP Technologies at paras 79, 81–84). [ 61 ] With respect to the surrounding circumstances, courts must consider the facts that were known, or ought to have been known, by the parties at the time of contracting ( Sattva at paras 58, 60 ; IFP Technologies at para 83).
This necessarily includes the genesis, aim, or purpose of the agreement; the nature of the relationship created by the agreement; and the nature or custom of the particular industry ( Sattva at para 48 ; IFP Technologies at para 83, Nexxtep Resources v Talisman Energy Inc , 2013 ABCA 40 at para 33 [ Nexxtep Resources ]).
By extension, courts must interpret royalty agreements according to sound commercial principles and business sense to avoid results that are unrealistic, absurd, or unreasonable with respect to the commercial realities of the industry ( IFP Technologies at para 88; Nexxtep Resources at para 35 ). [ 62 ] Subjective evidence of the parties’ intentions such as post-contract conduct is presumptively inadmissible ( IFP Technologies at para 87; Alberta Union of Provincial Employees v Alberta Health Services , 2020 ABCA 4 at para 44 ; Accel at para 28 ).
With respect to royalty agreements pertaining to freehold minerals, this includes the practice of registering a caveat with the land titles office or a security interest with the Personal Property Registry in relation to the royalty. Such post-contract conduct is only admissible where the words of an agreement “can be reasonably interpreted to have more than one meaning”, resulting in ambiguity as to whether the parties intended for the royalty to be an interest in land ( Accel at para 28 ).
b) The core indicia of an interest in land [ 63 ] Where a royalty agreement expressly states that the royalty in question constitutes an interest in land, is to be construed as an interest in land, or runs with the lands subject to the royalty or the underlying interest in land (an “Interest in Land Clause”), I find the foregoing jurisprudence suggests that such language creates a strong, but rebuttable presumption that the royalty is indeed an interest in land. After all, it is a cardinal principle of contract
interpretation that the parties intend what they have said ( Canlin Resources Partnership v Husky Oil Operations Limited , 2018 ABQB 24 at para 38 , citing Ventas Inc v Sunrise Senior Living Real Estate Investment Trust , 2007 ONCA 205 at para 24 ). [ 64 ] A common thread since Dynex ABCA has been an emphasis on whether the royalty interest can last for the duration of the underlying estate ( Dynex ABCA at para 84 ; Manitok at para 24 ; Accel at para 51 ).
If a royalty is drafted to extinguish before the underlying interest in land out of which the royalty was carved, it may rebut a presumption that the royalty itself is an interest in land.
Conversely, if the royalty is drafted to run with the underlying interest in land in perpetuity, it will reinforce the nature of the royalty as an interest in land. [ 65 ] Therefore, where the Dynex test distinguishes an interest in land from “a contractual right to a portion of the oil and gas substances recovered from the land”, the distinction is between an interest in the produced resource that continues in perpetuity versus a contractual right to a portion of the produced resource as security for payment or performance of an obligation ( see Accel at para 3 ).
Whereas the former is capable of lasting for the duration of the underlying estate, a contractual right to security for payment or performance would extinguish upon repayment of the debt or performance of the obligation. This
interpretation is supported by the policy reasons for upholding GORs as interests in land articulated in Dynex ABCA (at paras 35–36 ): a GOR that is capable of lasting for the duration of the underlying interest in land reflects an investment in “a particular piece of property”, whereas a GOR designed to extinguish upon repayment of a debt or performance of an obligation more closely reflects an investment in “a particular operator or company”. [ 66 ] The presence of an Interest in Land Clause in an agreement that creates a royalty capable of lasting for the duration of the underlying interest in land may be sufficient to satisfy the Dynex test.
Whether or not ambiguity remains, the whole of the contract and the surrounding circumstances must nevertheless be considered to determine whether the parties intended the royalty to constitute an interest in land ( IFP Technologies at para 82). Still, courts cannot ignore the words chosen by the parties to a royalty agreement that clearly connote an intention to create an interest in land ( IFP Technologies at para 89; Hudson King v Lightstream Resources Ltd , 2020 ABQB 149 at para 109 ).
To rebut the presumption of an interest in land arising from the plain wording of a royalty agreement, the remaining indicia and the surrounding circumstances would have to significantly contradict the intention of the parties to create an
interest in land and the ability of the royalty to last for the duration of the underlying estate. B. Analysis 1. Whether the Crown Lease, out of which the 8% Royalty was carved, is an interest in land [ 67 ] PrairieSky submits that the Crown Lease out which the 8% Royalty was carved is a working interest or a profit à prendre and, therefore, is unquestionably an interest in land capable of satisfying the second branch of the Dynex test.
I agree ( see Dianor at para 60 ; Orphan Well Association v Grant Thornton Ltd , 2019 SCC 5 at para 11 [ Grant Thornton ] ). [ 68 ] Nevertheless, Yangarra argues that, because the rights conferred on PrairieSky through the Crown Lease are limited to the working interest in the minerals and do not entail ownership of the minerals in situ , PrairieSky was only able to grant an interest in the Crown Lease pursuant to the maxim “ nemo dat quad non habet ” — a seller cannot confer a greater title than that which they hold (the “ nemo dat ” principle).
Respectfully, this misapprehends the nature of royalty interests, the nemo dat principle, and the second branch of the Dynex test. [ 69 ] First, GORs such as the 8% Royalty granted under the 2011 Royalty Agreement are non-operating interests that do not entail an independent ownership interest in the land or the underlying lease ( Dynex ABCA at para 43 ; Dianor at paras 39, 72 ). GORs confer an unencumbered share or interest in the resources extracted from the lands pursuant to the underlying working interest ( Dynex at para 2 ; Dianor at para 34 ).
Moreover, as the Ontario Court of Appeal aptly stated in Dianor : “royalty rights-holders have no interest in working the land, nor do holders of the working interest or the profit à prendre want their operations to be subject to the working rights of a royalty rights-holder” (at para 72). The 2011 Royalty Agreement is no different — it does not purport to confer on the royalty holder an ownership interest in the in situ minerals or a working interest in the minerals equivalent to the lessee’s interest.
It confers an interest in the grantor lessee’s entitlement to the substances produced from the land. [ 70 ] Second, a GOR is not a “greater” interest than a leasehold or working interest in the in situ minerals, nor is it equal to a working interest. It is a distinct interest derived from a leasehold or working interest. Carving a GOR out of mineral lease does not offend the nemo dat principle, nor does that principle elevate a GOR to a working interest on par with the underlying leasehold interest.
In the words of Laskin J in Saskatchewan Minerals : “[i]n principle, a mining lessee whose holding is an interest in land in respect of which he has a royalty obligation should be able to grant or submit to an overriding royalty in respect of that interest to take effect as itself an interest in the lessee's holding” (at 724–725, quoted approvingly in Dianor at para 76 ). Home Quarter, as lessee, had the right to convey a share in its own entitlement to the petroleum and natural gas recovered from the lands in accordance with the Crown Lease, and it did so when it granted Range Royalty the 8% Royalty.
To find otherwise would undermine the useful role that GORs play in financing and spreading risk in upstream extractive industries. [ 71 ] Having established that the Crown Lease is an interest in land satisfying the second branch of the Dynex test, the question is not whether Home Quarter had the capacity to grant an interest in land, but whether Home Quarter and Range Royalty intended the 8% Royalty carved out of the Crown Lease to be an interest in land. [ 72 ] Finally, I reject Yangarra’s argument that section 91(4) of the MMA applies to determine the effective date of the transfer of a Crown Lease.
I agree with PrairieSky’s argument in response that this provision does not govern the transfer of actual ownership of the working interest, but rather governs the transfer of the registered interest in a Crown Lease. Subsection 91(4) of the MMA provides that “[o]n the registration of a transfer, the transferee becomes the lessee with respect to the agreement, the undivided interest in the agreement or the part of the location so transferred”. Importantly, lessee is defined in
section 1 as “the holder according to the records of the Department of an agreement”. Clearly, subsection 91(4) does not purport to determine the time at which ownership rights pass as between contracting parties. Those rights are determined by the contractual arrangements made by the contracting parties. 2. Whether the parties intended the 8% Royalty to constitute an interest in land
a) Interpreting the 2011 Royalty Agreement as a whole along with the surrounding circumstances
(1) The surrounding circumstances [ 73 ] At trial, PrairieSky’s witnesses gave evidence of the circumstances surrounding the formation of the 2011 Royalty Agreement. Mr. Lebbert (Range Royalty) and Mr. Purdy (Home Quarter) were experienced land professionals and vice presidents of their respective companies at the inception of the Land Fund Arrangement and the formation of the 2011 Royalty Agreement. As non- party witnesses, they were uniquely positioned to provide insight into the circumstances surrounding the formation of the 2011 Royalty Agreement.
I found both witnesses were candid and credible and note that their evidence regarding the circumstances surrounding the 2011 Royalty Agreement was not challenged. As such, I accept their evidence, summarized below. (
a) The Home Quarter-Range Royalty Land Fund Arrangement [ 74 ] Range Royalty was created in 2005 to invest in royalty interests and distribute the royalty income to it shareholders. Its limited partnership agreement prohibited Range Royalty from operating or investing in wells or facilities in order to avoid liability for abandonment and reclamation obligations.
As a pure royalty company, ensuring that its royalty interests were construed as interests in land that ran with the subject lands and could not be extinguished through subsequent transactions, bankruptcies, or receivership proceedings was an important consideration for Range Royalty. Accordingly, Range Royalty retained a lawyer to prepare a standard form royalty agreement with an “Interest in Land” clause. [ 75 ] Home Quarter was initially set up by the principals of Range Royalty, including Mr. Lebbert, to operate a number of undeveloped Crown leases assigned to it by Range Royalty in exchange for a royalty.
Thereafter, Range Royalty and Home Quarter put
an undeveloped land fund arrangement in place whereby Range Royalty would fund the land acquisitions identified and secured by Home Quarter in exchange for a royalty ( i.e. , the Land Fund Arrangement). [ 76 ] Home Quarter’s purchase of the Crown Lease from Trarion in 2011 was one such acquisition. Range Royalty elected to fund the acquisition of the Royalty Lands in exchange for the 8% Royalty and used the standard form royalty agreement its lawyer had drafted for all such transactions as the precedent for the 2011 Royalty Agreement.
By design, there were no negotiations respecting the drafting of the 2011 Royalty Agreement beyond the royalty amount. Nevertheless, Home Quarter was well aware of the terms and nuances of the agreement as the standard form royalty agreement had been discussed and agreed to by Home Quarter and Range Royalty at the outset of the Land Fund Arrangement. Mr. Lebbert described this from Range Royalty’s perspective in direct examination: Q Were there any negotiations between Home Quarter and Range Royalty with respect this royalty agreement? A No. Q Can you please turn to clause 9.5 which is on page 9? A Yes.
Q It says 9.5 interest in land. What was your commercial understanding of this clause? A The purpose of this clause is - is to confirm that the royalty interest that was subject to the document was an interest in land running with the lands, and it was there forever. Q What do you mean it was there forever? A It was, long as the lands were in existence the royalty was against the lands. So, if -- royalties -- royalty pairs change hands regularly as companies swap assets, trade assets. Royalty owners tend to stay the same. So, it’s just to make sure that the royalty was recognized, it’s there.
We - we were putting up money and - and again it was -- in those days through bankruptcy, some ba - some receivers were trying to - trying to wash caveat, wash royalty interests in bankruptcy, and we wanted to make sure that you couldn’t do that. ... Q Was this clause 9.5 ever discussed with Home Quarter? A They -- it was discussed, this is our document, this is what we use. [ 77 ] Mr. Purdy confirmed substantially the same from Home Quarter’s perspective on direct examination: Q And you mentioned earlier that through the land fund arrangement, Range Royalty would receive a royalty.
Up until the 2011 time frame, did you ever have any discussions with Range Royalty as to whether those royalties would constitute an interest in land or merely a contractual right? A Yeah, we had discussions via just the - the - the standard royalty agreement they gave us to review and attach to the land fund agreement. It had a specific interest in land clause within the royalty agreement that we reviewed and discussed with them. Q When did you review that and discuss it with Range Royalty? A Right at the start when Home Quarter was created in 2010. [ 78 ] Mr.
Purdy elaborated further on cross examination: Q And - and essentially, that [the 2011 Royalty Agreement] was the agreement that was provided by Range Royalty to Home Quarter. There wasn’t an active negotiation regarding the agreement?
A No - no negotiation but at the start of -- when we started Home Quarter and raised the original financings in 2010, we were given the opportunity to go through it in detail, and ask questions and - and -- yeah, we were comfortable with the - the format, but we were definitely able to ask questions and have discussions. [ 79 ] Recognizing that the foregoing evidence may be construed as pre-contractual negotiations that would be inadmissible if
presented as subjective evidence of the parties’ intentions (see IFP Technologies at paras 84–85), it is worth reiterating that Mr. Lebbertand Mr. Purdy are non-party witnesses. As such, I find their evidence “is far more objective evidence of the parties’ intentions than after-the-fact evidence from opposing parties about oral statements made during negotiations” (IFP Technologies at para 85).
Moreover, theirdiscussion of the formation of the Land Fund Arrangement and the circumstances surrounding the 2011 Royalty Agreement was notcontentious and is admissible evidence of the factual matrix that I am obligated to consider when interpreting the terms of the contract(IFP Technologies at para 85).
(2) The granting clause [80] Clause 2.1 of the 2011 Royalty Agreement (the “Granting Clause”) reads: There is hereby granted to and owned by Grantee an overriding royalty of eight (8%) percent of: (
a) the quantity, if Grantee elects to take the Overriding Royalty in kind pursuant to the
Section of this
Article entitled “Taking inKind”; or (
b) the Value, if Grantee has not elected to take the Overriding Royalty in kind pursuant to this
Section of this
Article entitled“Taking in Kind”; in the Petroleum Substances within, upon, or under the Royalty Lands to the extent of the Reported Volumes attributable to Grantor’sWorking Interests in the Royalty Lands…[emphasis added] [81] “Petroleum Substances” is defined in clauses 1.1 as “Crude Oil, Gas and Condensate”.
In turn, those substances are defined asfollows: “Condensate” means a liquid hydrocarbon product that existed in the reservoir in a gaseous phase at original conditions and that isrecovered from a gas stream… “Crude Oil” means crude petroleum oil and any other hydrocarbon, regardless of density, that is or is capable of being produced from awell in liquid form… “Gas” means natural gas, both before and after it has been subjected to absorption, purification, scrubbing or other treatment or process,and includes all liquid hydrocarbons other than Crude Oil and Condensate. [82] “Reported Volumes” is defined as “those production volumes of Petroleum Substances…reported…from each wellhead onthe Royalty Lands” (emphasis added). [83] Yangarra submits that the Granting Clause and the foregoing
definitions are indicative of a right to revenue from the workinginterest in the Crown Lease as opposed to an interest in land. While the granting clause uses terminology that has historically beenassociated with an interest in land (“within, upon, or under the Royalty Lands”), Yangarra notes that the grantee’s interest is limited to ashare of the volume of Petroleum Substances extracted from the land, as evidenced by the underlined words in the above clauses. [84] Relying on Vandergrift, St.
Lawrence Petroleum, and a strict reading of the first arm of the Dynex test (at para 22), Yangarraessentially argues that a “contractual right to a portion of the oil and gas substances recovered from the land” must be distinguished froman interest that runs with the land (emphasis added). As explained at paragraphs [64]–[65], the purpose of the first arm of the Dynex testis to distinguish an interest in the produced resource that continues in perpetuity (an interest in land) from a contractual right to theproduced resource as security for payment or performance of an obligation.
I do not find the fact that the 8% Royalty is framed as aninterest in the Petroleum Substances produced from the Royalty Lands relevant to the intention of the parties to create an interest in land(Canco at paras 29–30). [85] Yangarra’s position also betrays an assumption that only an interest in the minerals or petroleum substances in situ can be saidto run with the land. Yet, as Yangarra points out in its related nemo dat argument, the Crown maintains ownership of the minerals in situand, as a result, lessees of Crown minerals can’t convey an interest in the ownership of the minerals in situ.
If Yangarra’s impliedassumption were true, no royalty carved out of a lease of mineral rights would ever be capable of being an interest in land without theexpress consent of the fee simple owner of the mines and minerals. This would significantly frustrate the useful role that royalties play inupstream extractive industries. [86] Further, the assumption that only an interest in the in situ minerals or petroleum substances can be an interest in landeffectively seeks to restore the prohibition on the creation of an interest in land from an incorporeal hereditament.
Respectfully, that isnot the law nor the practice of the oil and gas industry. Yangarra’s position embraces precisely the type of anachronisms the AlbertaCourt of Appeal in Dynex ABCA and the Supreme Court in Dynex sought to do away with (see also Dianor at para 71). [87] The Dynex test is predicated on an understanding of the important role that royalties play in extractive industries, whichwould be undermined if GORs were not capable of running with the land unless they entailed an interest in the in situ resource.
Whethera GOR is framed as an interest in the in situ resource or as a share of the resources extracted from the lands is not determinative of theparties’ intention to convey an interest in land. [88] The Granting Clause does not merely articulate an undertaking to pay the royalty holder a portion of the Produced Substancesor proceeds from the sale thereof.
The words “granted to” and “owned by” connote the conveyance of ownership in respect of the 8%Royalty as opposed to a mere contractual right to a portion of the Produced Substances as security for payment of a debt or performanceof a service (Bensette v Reece, (SKQB) at para 21, (1969) 7 WWR 705, rev’d on other grounds CanLII 975 (SKCA), (SK CA), [1973] 2 WWR 497; Scurry-Rainbow at para 102; Blue Note Mining Inc v Merlin Group Securities Ltd,
2008 NBQB 310 at para 40 , aff’d 2009 NBCA 17 ; St. Andrew Goldfields at paras 101–102 ). I find those words support the inference that the parties intended the 8% Royalty to be a proprietary interest in land.
(3) The “Interest in Land” clause [ 89 ] Clause 9.5 (the “Interest in Land Clause) of the 2011 Royalty Agreement reads as follows: The Overriding Royalty constitutes an interest in land, shall be regarded as covenants running with the Royalty Lands, caveatable under the lands registration systems in the provinces where the Royalty Lands are situate and enforceable against Grantor and any successors in interest to Grantor. [emphasis added] [ 90 ] As previously noted at paragraph [4], s 202(
a) of the LTA prohibits the registration of caveats or other encumbrances affecting Crown-owned minerals, rendering the underlined portion of the Interest in Land clause moot. Yangarra submits that the inclusion of such language that is incongruent with the 8% Royalty undermines the surrounding plain words that otherwise demonstrate an intention to establish an interest in land. Both Mr. Lebbert and Mr. Purdy testified that to, to their knowledge, one could not register an encumbrance on Crown Lands. Mr.
Lebbert in particular testified that Range Royalty did not register or caveat the 2011 Royalty Agreement because it was his understanding that this was not possible. Given that both Mr. Lebbert and Mr. Purdy knew at the time of contracting that it was not possible to register a caveat affecting Crown-owned minerals in Alberta, Yangarra submits that the inclusion of the underlined portion indicates Range Royalty and Home Quarter never turned their minds to clause 9.5 and whether the 2011 Royalty Agreement operated to create an interest in land. [ 91 ] Yet, Mr.
Lebbert testified that the Interest in Land Clause was included in the 2011 Royalty Agreement “to confirm that the royalty interest that was subject to the document was an interest in land running with the lands, and it was there forever.” PrairieSky submits that Mr. Lebbert’s and Mr. Purdy’s testimony that they reviewed and discussed clause 9.5 in the context of the standard form agreement used for the 2011 Royalty Agreement suggests they clearly turned their minds to whether the 8% Royalty would constitute an interest in land.
PrairieSky further submits that the remainder of clause 9.5 sufficiently demonstrates the parties’ intention that the 8% Royalty constitute an interest in land. I agree with PrairieSky. [ 92 ] I accept the testimony of Mr. Lebbert and Mr. Purdy that Range Royalty and Home Quarter used a standard form royalty agreement to execute transactions pursuant to their Land Fund Arrangement, and that they did so to ensure certainty and consistency of the terms of the royalties created, regardless of the type of land subject to each royalty agreement.
I find that the retention of the underlined portion of clause 9.5 in the 2011 Royalty Agreement reflects the use of the standard form agreement. I find that its inclusion does not detract from the otherwise plain wording of clause 9.5 that clearly suggests the parties intended the 8% Royalty to constitute an interest in land. [ 93 ] Moreover, the language of the underlined portion of clause 9.5 is permissive; it does not impose on the royalty holder an obligation to register the 8% Royalty such that it would be rendered unenforceable. It merely implies that the royalty holder may do so.
The fact that the royalty holder cannot do so in the circumstances does not detract from the surrounding portions of the Interest in Land Clause: “[t]he Overriding Royalty constitutes an interest in land, shall be regarded as covenants running with the Royalty Lands ... and enforceable against Grantor and any successors in interest to Grantor”. [ 94 ] I find that clause 9.5 strongly conveys the parties’ intention that the 8% Royalty constitutes an interest in land that runs with the underlying Lands and is enforceable against Home Quarter’s successors in interest to the Crown Lease.
(4) The “Term”, “Surrender”, and “Area of Mutual Interest” clauses [ 95 ] Clause 9.6 of the 2011 Royalty Agreement (the “Term Clause”) provides as follows: This Agreement shall remain in force and effect so long as Grantor or any successors in interest to Grantor retains a Working Interest in the Royalty Lands. Notwithstanding the foregoing, this Agreement shall terminate with respect to any interest assigned to Grantee pursuant to the
Section of this
Article entitled “Surrender”. [ 96 ] “Working Interest” is defined as “the working interests held by Grantor in respect of the Royalty Lands as set out and described in
Schedule “A”, and
Schedule “A” describes the Crown Lease. Accordingly, the Term Clause specifies that the 8% Royalty is to last for the duration of the underlying Crown Lease, regardless of whether the Crown Lease is assigned to a third party.
This further evidences an intention to create an interest in land that runs with the underlying estate in land ( Dynex ABCA at para 84 ). [ 97 ] The Surrender clause (clause 9.1) and definition of “Title Documents” referenced thereunder stipulate that the grantor may only surrender the Crown Lease in accordance with “accepted industry practice” and must first offer to convey its interest in the Crown Lease to the royalty holder before surrendering.
By extension, the grantor cannot allow the 8% Royalty to extinguish by surrendering or otherwise allowing the underlying Crown Lease to expire by failing to meet the continuation obligations required under the applicable regulations except in accordance with sound industry practices. [ 98 ] Initially granted in 1979, the Crown Lease had been continued indefinitely beyond the primary and intermediate terms by the time Home Quarter became lessee.
Therefore, when the 2011 Royalty Agreement was executed, the Crown Lease or portions thereof would only expire and revert to the Crown if the lessee could no longer demonstrate that the subject geologic zones were productive or potentially productive, and that they were not being drilled at the time of expiry ( Petroleum and Natural Gas Tenure Regulation , Alta Reg 263/1997 ss 15–18).
The Surrender clause therefore implies that the 8% Royalty is capable of lasting for the duration of the productive life of the reservoirs subject to the Crown Lease. [ 99 ] Finally, the Area of Mutual Interest clause (clause 8.1) stipulates that, if the Royalty Lands subject to the Crown Lease revert back to the Crown by expiry or surrender but are reacquired by the grantor within two years, the 8% Royalty shall apply to those lands reacquired by the grantor. Considering the Term and Surrender clauses alongside the Area of Mutual Interest clause, I find the 8%
Royalty was an investment in the success of “a particular piece of property” ( Dynex ABCA at para 36 ), as opposed to an extinguishable mechanism for the repayment of a debt. This further reinforces the parties’ intention that the 8% Royalty constitute an interest in land.
(5) The “Taking in Kind” clause [ 100 ] Clause 2.2 of the 2011 Royalty Agreement articulates the royalty holder’s “right to take in kind or separately dispose of, at its own expense, its [8% Royalty] share of the Petroleum Substances.” This Court has previously held that right of royalty holders to take their royalty in kind reflects a right of personal ownership that is indicative of an interest in land ( Bank of Montreal v Dynex Petroleum Ltd , 2003 ABQB 243 at para 40 ; James H Meek Trust v San Juan Resources Inc , 2003 ABQB 1053 ; Accel at para 50 ).
Yangarra submits that, while provisions allowing for royalty holders to “take in kind” the substances extracted from the land may weigh toward a GOR being characterized as an interest in land, they do not, in and of themselves, create an interest in land. I agree. [ 101 ] With regards to the important role that royalties play in attracting capital for upstream oil and gas ventures, for example, certain investors may lack the operational capacity to physically take possession of and market oil, gas, or condensate, rendering a “take in kind” provision in a royalty agreement potentially irrelevant to them.
The parties’ intention to establish an interest in land therefore should not be dependent on the royalty holder’s ability to take the royalty payment in kind. Nor should emphasis be placed on take-in-kind provisions as indicia of interests in land to the extent they demonstrate the royalty holder’s measure of control over the interest. Such a control-oriented approach incorrectly seeks “to turn the royalty owner’s passive [non-operating] interest into a working interest” ( Dianor at para 73 , quoting Nigel D Bankes, "Private Royalty Issues: A Canadian Viewpoint"
(2003) Private Oil & Gas Royalties, Paper No. 8, Rocky Mountain Mineral Law Foundation at 195). [ 102 ] Moreover, a take-in-kind provision could be equally applicable as a contractual right to take the produced substances in kind as security for the payment of a debt, which would not reflect an interest in land. Absent additional context as to how take-in-kind provisions evidence the intention that the subject GOR constitute an interest in land, I find that the mere presence of such clauses does not illuminate the parties’ intention.
Accordingly, I find the Taking in Kind clause of the 2011 Royalty Agreement neutral with respect to whether the parties intended the 8% Royalty to constitute an interest in land.
(6) The “Pooling” and “Unitization” clauses [ 103 ] Clause 4.1 of the 2011 Royalty Agreement (the “Pooling Clause”) stipulates that the grantor has the discretion to “pool all or a part of the Royalty Lands with any other lands for the purposes of creating a Spacing Unit if such pooling becomes necessary or desirable in the opinion of the Grantor.” Pooling refers to the amalgamation of contiguous tracts of land subject to different ownership within an area of common drainage known as a drilling spacing unit.
Pooling enables the drilling of one well within the drilling spacing unit to preserve optimal reservoir conditions and prevent the drainage of one tract of land by a different working interest-holder.
In the event the Royalty Lands are pooled, the Pooling Clause provides for the payment of the 8% Royalty “on the basis of production deemed to be produced from or allocated to the Royalty Lands on an acreage basis”. [ 104 ] Conversely, clause 4.2 of the 2011 Royalty Agreement (the “Unitization Clause”) stipulates that the grantor must obtain the royalty holder’s written consent “to unitize all or a part of the Royalty Lands with any other lands if such unitization becomes necessary or desirable in the opinion of the Grantor.” Such consent must not be unreasonably withheld.
Unitization refers to the amalgamation of tracts of land subject to different ownership between drilling spacing units. The Unitization Clause similarly provides for the payment of the 8% Royalty “on the basis of production deemed to be produced from or allocated to the Royalty Lands under the plan of unitization”.
The policy concerns underlying the need for pooling and unitization include resource conservation, the fair allocation of the resource to the appropriate owners, and the avoidance of unnecessary drilling ( Oil and Gas Conservation Act , RSA 2000, c O-6 s 4). [ 105 ] Relying on Accel (at para 89 ), Yangarra submits that the absence of a clause requiring the royalty holder’s consent for the grantor to pool the subject lands is indicative of an interest that does not run with the lands. I disagree.
First, while the Pooling Clause indicates the grantor is entitled to pool the lands without the express consent of the royalty holder, the subsequent clause — the Unitization Clause — conspicuously provides for the exact opposite.
If the royalty grantor’s discretion with respect to such operational decisions were indicative of whether the 8% Royalty constitutes an interest in land, the effects of the Pooling and Unitization clauses would negate each other. [ 106 ] Second, as with take-in-kind clauses, placing too heavy an emphasis on the grantor’s discretion — or lack thereof — regarding operational decisions such as pooling and unitization incorrectly seeks to equate passive, non-operating royalty interests with working interests.
As the Dianor Court helpfully explained at para 71, the purpose of the Dynex ABCA and Dynex decisions “was to step away from the requirement that a royalty right had to have the incidents of a working interest ... in order to constitute an interest in land, so that royalty rights could play their useful role in financing the industry and spreading risk.” [ 107 ] Finally, if a grantor were at all times required to obtain the consent of the royalty holder to pool or unitize the lands for a GOR to constitute an interest in land, the ability of the grantor to operate in a manner that upholds conservation and environmental principles may be frustrated.
While clauses that require the express consent of the royalty holder for the grantor to pool the lands within a drilling spacing unit may be overridden by a compulsory pooling order [ OGCA s 80(3)], the Alberta Energy Regulator presently lacks jurisdiction to compel unitization beyond a drilling spacing unit, even if it would promote conservation and environmental principles. Yangarra’s implied suggestion that the consent of royalty holders for pooling and unitization should be required for GORs to constitute interests in land raises the spectre of investor holdouts on such consent.
This risks unnecessarily restricting the pool of investors that operators would be willing to enter into royalty agreements with. [ 108 ] For these reasons, I find the Pooling and Unitization clauses of the 2011 Royalty Agreement neutral with respect to whether the parties intended the 8% Royalty to constitute an interest in land.
(7) The “Assignment” clause
[109] Clause 3.1 (the “Assignment Clause”) incorporates the 1993 Canadian Association of Petroleum Landmen AssignmentProcedure (the “CAPL Assignment Procedure”) and the related “Notice of Assignment” form by reference under the 2011 RoyaltyAgreement. The Assignment Clause reads as follows: The 1993 CAPL Assignment Procedure and the Notice of Assignment form are incorporated by reference hereto and are deemed toapply as if it had been included as a
Schedule to this Agreement, with respect to any assignment of any interest in this Agreement.Notwithstanding the foregoing, Grantor shall not be entitled to assign any interest in this Agreement if Grantor is default of any provisionhereof. [110] Mr. Lebbert explained that the CAPL Assignment Procedure is incorporated into industry agreements as a means of dispensingwith the need to execute assignment and novation agreements every time an interest in an oil and gas agreement or royalty agreement istransferred to a new party.
Instead, by incorporating the CAPL Assignment Procedure, the streamlined Notice of Assignment form isused. [111] Yangarra argues that the incorporation of the CAPL Assignment Procedure and Notice of Assignment form under the 2011Royalty Agreement indicates the parties did not intend for the 8% Royalty to constitute an interest in land for the following reasons: 1. if the 8% Royalty runs with the Royalty Lands, it would always bind the working interest holder of the Crown Lease,rendering a mechanism for the assignment of the 2011 Royalty Agreement to the new owner unnecessary; and 2. if the 8% Roy
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