Canada: Mineral Royalties: When Do They "Run With The Land"?

The challenging commodity price environment will likely bring renewed focus on the rights and obligations that will be impacted if insolvency overtakes exploration and production companies. The British Columbia Supreme Court's recent decision in Re: Walter Energy Canada Holdings, Inc. is a case in point. The case dealt squarely with the question of whether a mineral royalty "runs with the land" – a question that takes on significantly greater importance in the insolvency context.

The facts of the case are relatively straightforward. Walter Energy and certain of its affiliates ("Walter Energy") operated a number of significant mining properties in northeast British Columbia. Walter Energy was granted an initial order under the Companies' Creditors Arrangement Act in December 2015. Within a month, the court had approved a sales and investment solicitation process ("SISP") and appointed a chief restructuring officer to engage in parallel efforts to explore liquidation scenarios.

The SISP resulted in a proposed transaction for the going-concern sale of the mining properties. Walter Energy sought court approval of the transaction which was opposed by the holder of certain royalty rights. The royalty holder argued that the royalty "ran with the land" and that Walter Energy was not entitled to transfer the properties without regard to those rights. He sought a declaration that he had in effect a security interest in the properties, and that such interest took priority over Walter Energy's interests in those properties. Walter Energy argued that the royalty holder's interest was merely contractual, being the right to receive certain monies in the event of production and sale of coal.

The court dismissed the royalty holder's application on the basis that the agreement at issue was not intended to grant the royalty holder an interest in the property. The court reinforced the view that the determination of whether a royalty constitutes an interest in land depends on the intention of the parties as reflected in the particular agreement. In attempting to discern the parties' intention, the court will likely give significant weight to two factors:

  1. Whether there is a statement in the royalty agreement that the royalty is an interest in land or is to run with the land; and
  2. Whether the granting or conveyance language refers to an interest in minerals in situ as opposed to merely reflecting an entitlement to a monetary amount arising and calculated by reference to minerals once extracted, processed and sold.

Parties negotiating royalty agreements in the present economic environment would be well served in ensuring that their agreements are clear on these points. Those with existing royalties may wish to reassess the language of their agreements so as to fully understand how their rights and obligations might be impacted in the event of a bankruptcy or court-supervised restructuring.

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