Canada: Overriding Royalties: Walter Energy, Dianor Resources And The Importance Of Negotiating For An Interest In Land

Last Updated: December 20 2017
Article by Ashley Weldon and Natasha Wood

The downturn in Canada's natural resources sector over the past few years has caused industry and insolvency professionals to consider the complicated area of royalties in the context of insolvency proceedings. Two recent cases indicate the potential adverse effects of insolvencies on royalty owners whose interests do not meet the test for an "interest in land".

Nature of Overriding Royalties

Legal deliberation on the nature of oil and gas royalties traces back to the early 1930s. Cases discussing whether a particular royalty was an interest in land, or whether royalties by their character even could be found to be an interest in land, culminated in the Supreme Court of Canada (SCC) decision in Bank of Montreal v Dynex Petroleum Ltd.1 (Dynex). A stumbling block in earlier decisions was the common law doctrine that an interest in land cannot issue from an incorporeal hereditament (such as a profit à prendre or working interest). In Dynex, the SCC held that the parties "could not offer any convincing policy reasons for maintaining the common law prohibition on the creation of an interest in land from an incorporeal hereditament".2 Therefore, the customs of the oil and gas industry warranted a shift in the law to recognize overriding royalties as an interest in land, subject to the intentions of the parties.

Dynex set out a two-part test. 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 an interest 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.3

Why is an "interest in land" Important?

An "interest in land" is a legal term denoting an interest that "runs" with the land.4 An interest in land allows the holder to register a caveat on the subject land title to give notice to potential purchasers and protect its interest against third parties. In contrast, a contractual interest governs a relationship between the royalty owner and royalty payor and does not attach to the lands. As a result, if the original royalty payor sells its interest to a third party purchaser without specific assignment and novation of the royalty agreement, the royalty owner cannot compel the new purchaser to comply with the royalty obligations.

The Decision in Walter Energy

The value of overriding royalties as interests in land is nothing new to the oil and gas industry, but as demonstrated in the recent British Columbia Supreme Court decision Re: Walter Energy Canada Holdings, Inc5 (Walter Energy), it is of paramount importance in the current climate of the industry. Walter Energy involved an application to the Court by the debtor companies for approval of a transaction for the sale of certain coal mining properties pursuant to the Companies Creditors Arrangement Act [CCAA]. The debtor companies had been granted protection to restructure as a debtor in possession under the CCAA by the Court in December, 2015.

The proposed sale included the Wolverine Mine, to which the applicant Kevin James objected. James was the owner of a 1% gross overriding royalty on coal produced from the Wolverine coal mine (the GORR) pursuant to a royalty sharing agreement (the Royalty Agreement) between James and the debtor's predecessor in interest (WCC). The asset sale agreement listed the Royalty Agreement as an "excluded contract", that would not be assumed by the purchaser. As a result, James opposed the proposed sale on the grounds that his GORR was an interest in land and therefore the Wolverine coal licences could only vest in the purchaser subject to the GORR.

The decision in Walter Energy turned directly on whether the GORR was an interest in land that ran with the Wolverine coal licences or merely a contractual royalty. The Court examined the jurisprudence, analyzing the text of the Royalty Agreement against numerous indicia indicating an interest in land. One clause in the Royalty Agreement provided that the GORR was based on the price bracket of the product produced from the coal properties, strongly factored against characterizing the GORR as an interest in land. The payment of a royalty on substances produced indicates an obligation to pay money, in contrast with a royalty in all the minerals within, under or upon the lands which indicates conveyance of an interest in the minerals in situ. This clause also lacked any granting or conveyancing language. The Court highlighted the fact that, as a director, James controlled WCC at the time it entered into the Royalty Agreement. If it had been the intention of the parties, James could have easily incorporated clear language indicating that the GORR ran with the land. Further, the Royalty Agreement could have been drafted to grant a security interest to James and to restrict the sale of the properties subject to the purchaser assuming the GORR obligations.

The Court concluded that James' GORR was a mere contractual royalty. As a result, the nature of the Royalty Agreement was executory — where performance is ongoing or not yet completed.6 This characterization granted the debtor in possession the ability to terminate the executory Royalty Agreement to enhance the prospects of restructuring7.

The Implications of Walter Energy

In non-distressed circumstances, if a particular royalty obligation was excluded from a sale and the corresponding royalty agreement was not assigned to the purchaser, the vendor/royalty payor would be in a difficult position, burdened with royalty obligations after selling its interest. The insolvency context shifts the risk and puts a contractual royalty owner in a far more precarious position. The Court's recognition of the potential future disclaimer of the Royalty Agreement sets a precedent for future debtors to attempt to disclaim royalty payor obligations where the agreement does not clearly establish an interest in land. If a debtor company is successful, the holder of the contractual royalty interest assumes the position of an unsecured creditor with recourse only through the formal claims process.

The Decision in Dianor Resources

In a recent Ontario case, a receiver was appointed over the assets of Dianor Resources Inc. (Dianor) which included mining interests. The receiver brought an application for an approval of the sale of the Ontario assets to Third Eye Capital Corporation. The sale contained a condition that a 15.4% GORR on diamonds and a 1.5% GORR on metals and other minerals be either terminated or reduced and included a cash payment of $250,000 to be paid as "fair and reasonable compensation" for the GORRs. 2350614 Ontario Inc. (the Royalty Owner) argued that the approval order needed to vest the assets in the purchaser subject to the two GORRs. The resulting decision in Third Eye Capital Corp. v Dianor Resources Inc.8 (Dianor) has raised some alarm bells for royalty holders due to a statement of the Court made in passing after deciding the central issue of the case — whether the diamond and mineral GORRs were interests in land. On the interest in land question, the Court applied the test from Dynex and held that despite the clear statement that the interests were intended to be interests in land, the lack of granting or conveying language and the royalty being paid on the products once recovered from the properties, meant the GORRs did not run with the lands.9

Concerning Statements in Dianor Resources

In a standard approval and vesting order application, a debtor in possession or monitor (under CCAA) or a receiver or trustee (under the Bankruptcy and Insolvency Act) seeks the court's approval of an asset transaction. The standard form order allows for the discharge of all encumbrances and claims from the assets except for any permitted encumbrances, and vest the assets in the purchaser. Those encumbrances and claims that are "vested off" title to the purchased assets then attach to the purchase proceeds, which stand in place of the sold assets. The order contemplates encumbrances such as personal property security interests and other financial or monetary claims whether or not registered or perfected against the sale assets. In Dianor, the purchaser argued that the GORRs could be vested off by the Court whether or not they were interests in land, so long as fair value was paid to the Royalty Holder.

In finding that this claim did not have to be considered, given the finding that the GORRs did not amount to an interest in land, the Court nonetheless went on to state as follows: "I see no reason in logic however why the jurisdiction would not be the same whether the royalty rights were or were not an interest in land".10 While this statement is troubling, the authors suggest that its relevance is questionable given the established judicial treatment of interests in land and the fact that the statement was not part of the Court's finding. This would render it "obiter dicta" or non-binding on other courts. Under a receivership order, a receiver takes possession of a particular debtor's property; however, royalties that are interests in land are separate property interests outside the scope of such an order. Further, converting an interest in land to an unsecured claim is, in effect, expropriation of the royalty owner's property interest for the benefit of the debtor's creditors. Selling the debtor's property free and clear of a royalty interest running with the land is effectively disclaimer, which is limited to executory contracts.

No Formula for Determining an Interest in Land

It is essential that parties signal their intent to create an interest in land, rather than merely a contractual obligation owed by the royalty payor to the royalty owner. Unfortunately there is no "magical incantation" required to create an interest in land; however, the language used in an agreement will aid the court in assessing the parties' intentions.11 Each case will depend on the particular agreement and circumstances and no particular indicia will be determinative of the outcome.12

Protecting Your Interest in Land

Royalties that are an interest in land can be protected through registration of a caveat which gives notice to the world of the interest claimed. Registrations in respect of royalties granted on freehold mineral interests are governed by the Land Titles Act [LTA] and registered at the Alberta Land Titles Office. The LTA awards priority to the first party to register its interest.

The current law in Alberta is unclear as to the proper forum for registration in circumstances where the overriding royalty interest is granted by the lessee of Crown-owned mines and minerals. Section 202(a) of the LTA prohibits registration of a caveat or encumbrance affecting Crown mineral interests. The Mines and Minerals Act [MMA] provides for a limited exception applicable generally only to financial institutions. Per section 4(g), security interests registered under the Alberta Personal Property Security Act cannot be used to protect an interest in land. What is clear is that overriding royalty interests in Crown mineral tenure do not obviously fit within the standard legislative schemes in place to aid in protection of an interest by registration.

It is possible that the definition of a "charge on land" under the Law of Property Act encompasses this type of interest. Land charges are defined as interests in the real property of a corporation to secure payment or performance of an obligation and are registered in the Alberta Personal Property Registry. Land charges are often used by financial institutions to register floating charges against corporate debtors until taking steps to register against specific interests in a situation of default. While a royalty owner would not be able to register against specific interests under the MMA, registration of a land charge will, at minimum, provide notice to third parties and potential creditors of the royalty payor (and, if applicable, subsequently appointed insolvency professionals) that the royalty owner has an interest.


1  2002 SCC 7 [Dynex].

2 Dynex, at para 18.

Dynex, at para 22, citing Virtue J. in Vandergrift v Coseka Resources Ltd. (1989), 67 Alta LR (2d) 17, 95 AR 372 (Alta QB) at para 26.

4  Strathcona (County) v Half Moon Lake Resort Ltd, 2013 ABQB 236 at para 61.

5  2016 BCSC 1746 [Walter Energy].

6 Barron's Canadian Law Dictionary, 6th ed, sub verbo "executory" (QL).

7  Section 32 of the CCAA.

8  Third Eye Capital Corp. v Dianor Resources Inc., 2016 ONSC 6086 [Dianor].

9  Dianor, at paras 22-30.

10  Dianor, at para 40.

11  Walter Energy, at para 100.

12  James H Meek Trust v San Juan Resources Inc, 2003 ABQB 1053, at para 37.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions