Canada: Vesting Off Interests In Land: The Latest Dianor Decision

Last Updated: July 29 2019
Article by Ashley Weldon and Natasha Wood

The Ontario Court of Appeal has released its much anticipated second decision in Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc. The issue squarely before the Court in this case was whether a vesting order granted in a receivership proceeding could extinguish a third party's interest in land in the nature of a gross overriding royalty (GOR). The Court concluded that it had the jurisdiction to do so. This appears to be the first case in Canada to reach this conclusion in the context of a GOR.

Background and prior decisions

Before reviewing the Court's analysis and findings, it is prudent to review the facts of this case as well as the prior Dianor decisions. In 2015, a receiver was appointed over the assets of Dianor, an insolvent exploration company focused on the acquisition and exploitation of mining properties in Canada. Dianor's main asset was a group of mining claims located in Ontario and Quebec. In acquiring certain mining claims in relation to its flagship project, Dianor agreed to the reservation and payment of certain GORs for diamonds and other metals and minerals in favour of 2350614 Ontario Inc. (235 Co.). After conducting a sales process, the receiver brought an application to the Court for approval of the sale of Dianor's Ontario assets to Third Eye Capital Corporation (Third Eye) and a vesting order extinguishing the GORs. The sale agreement with Third Eye contained a condition that the GORs in favour of 235 Co. be either terminated or reduced, with a cash payment of $250,000 to be paid as "fair and reasonable compensation" for the GORs. 235 Co. did not oppose the sale to Third Eye, but argued that the property was to be vested in Third Eye subject to its GORs. The motion judge found that the GORs did not amount to interests in land and held that he had jurisdiction under the Bankruptcy and Insolvency Act and Courts of Justice Act to order the property sold and on what terms. Notwithstanding his finding that the GORs did not amount to an interest in land, the motion judge went on to state: "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".

On appeal by 235 Co., the Ontario Court of Appeal disagreed with the motion judge's determination that the GORs did not amount to interest in land, relying on the two-part test established by the Supreme Court of Canada in the seminal Dynex decision. Among other legal errors, that Court concluded that the motion judge failed to examine the intentions of the parties as revealed in the royalty agreements as a whole, along with the surrounding circumstances. After concluding that the GORs were, in fact, an interest in land, the Court of Appeal then requested further submissions and argument from the parties on whether and under what circumstances and limitations a Superior Court judge has jurisdiction to extinguish a third party's interest in land, using a vesting order under s. 100 of the CJA and s. 243 of the BIA.

The "vesting issue" – The Ontario Court of Appeal's second decision

After a lengthy and comprehensive review of the insolvency process generally, as well as the relevant provisions of the BIA and CJA, the Court considered the scope of the approval and vesting order (which we note had been registered on title following the motion judge's decision) and whether 235 Co.'s GORs should have been extinguished from title. After reviewing case law touching on the scope of vesting orders vis-à-vis third party interests, the Court remarked that there did not appear to be "a consistently applied framework of analysis to determine whether a vesting order extinguishing interests ought to be granted". The Court also noted that outcomes in these cases have been determined by the particular circumstances of each case, accounting for certain factors such as the nature of the property interests, the dealings between the parties and the relative priority of the competing interests. The Court then went on to set out a framework for analysis to determine if a third party interest should in fact be extinguished, adopting a "rigorous cascade analysis". The Court set out a two-factor framework for considering whether an interest in land should be extinguished:

  1. consideration of the nature of the particular interest in land; and
  2. whether the interest holder has consented to the vesting out of their interest either in the insolvency process itself or in agreements reached prior to the insolvency.

On the first part of the inquiry, the Court concluded that the key consideration was "whether the interest in land is more akin to a fixed monetary interest that is attached to real or personal property subject to the sale (such as a mortgage or a lien for municipal taxes), or whether the interest is more akin to a fee simple that is in substance an ownership interest in some ascertainable feature of the property itself". For the latter, the reasonable expectation of the owner of such an interest would be that its interest was of a continuing nature, and, absent consent, could not be involuntarily extinguished in the ordinary course through a payment in lieu thereof.

The second part of the inquiry considers whether the parties have consented to the vesting off of the interest either at the time of sale or through a prior agreement. The Court noted that the more complex question arises when consent is given through a prior agreement, such as where a third party has subordinated its interest contractually. On this point the Court reviewed an earlier Ontario decision, R. Meridian, Ronspen, and Firm Capital Mortgage Funds Inc. v. 2012241 Ontario Ltd. where the court considered whether it was appropriate to grant a vesting order where a third party had subordinated its interest to the interest of the secured creditor. The Court noted that the priority of interests reflected in freely negotiated agreements is an important factor to consider in the analysis of whether an interest in land is capable of being vested out. Specifically "[s]uch an approach ensures that the express intention of the parties is given sufficient weight and allows parties to contractually negotiate and prioritize their interests in the event of an insolvency".

The Court went on to state that if the above factors from the two-part framework proved to be "ambiguous or inconclusive", a court may then engage in a consideration of the equities to determine if a vesting order is appropriate in the particular circumstances of the case. This equitable consideration would include the prejudice, if any, to the third party interest holder; whether the third party may be adequately compensated for its interest from the proceeds of the disposition or sale; whether based on evidence of value, there is any equity in the property; and whether the parties are acting in good faith. The Court expressed that this is not an exhaustive list and that there could be other factors to consider.

In the end, the Court of Appeal held that while the GORs in this case could not be said to be a fee simple interest, they were certainly more than a fixed monetary interest that attached to the property and did not exist simply to secure a fixed finite monetary obligation. 235 Co.'s GORs were in substance an interest in a continuing and an inherent feature of the property itself. Specifically, the Court stated that:

[...] While the GOR, like a fee simple interest, may be capable of being valued at some point in time, this does not transform the substance of the interest in to one that is concerned with a fixed monetary sum rather than an element of the property itself. The interest represented by the GOR is an ownership in the product of the mining claim, either payable by a share of the physical product or a share of revenues. It other words, the GOR carves out an overriding entitlement to an amount of the property interest held by the owner of the mining claims.

The Court found that given the nature of 235 Co.'s interest, and the absence of any agreement that allowed for any competing priority, there was no need to resort to a consideration of the equities, and the matter was disposed of under the aforementioned two-part framework. Despite the receiver's submission that the realities of commerce and business efficacy in this case were that the mining claims would be unsaleable without impairment of the GORs, the Court acknowledged "[t]hat may be, but the imperatives of the mining claim owner should not necessarily trump the interest of the owners of the GORs".

However, the practical outcome of the case was governed by the procedural issue before the Court, namely, whether or not the appeal period in the BIA or the CJA governed the appeal from the orders of the motion judge in this case. On that matter, the Court held that the appeal period was 10 days as prescribed by r. 31 of the BIA rules, and ran from the date of the motion judge's decision. Accordingly, 235 Co.'s appeal was out of time and the appeal was dismissed. The Court decided it would not exercise its discretion to grant any remedy to 235 Co. under any other statutory provision and that 235 Co. was entitled to the $250,000 payment it had already received and its counsel was holding in escrow.

Implications of the decision

While at first blush, the Court of Appeal appears to have widened the door for a court's authority to extinguish a third party interest using a vesting order in insolvency proceedings, from a practical point of view, it seems unlikely that many 'typical' GORs in the oil and gas context can be extinguished based on the framework and considerations developed by the Court. The Court acknowledged that where it is an element of the property itself, a GOR cannot be reduced to an interest concerned with a fixed monetary sum merely because it may be capable of being valued at a point in time. Similar to the GORs at issue in this case, standard oil and gas GORs (including those granted under the 2015 CAPL Overriding Royalty Procedure) would also likely be characterized in substance as an interest in a continuing and inherent feature of the property, and therefore fall closer to the fee simple end of the 'interest in land spectrum', safe from a court's exercise of its 'vesting off' jurisdiction.

The second part of the framework considers whether the owner of the interest in land might have consented to the vesting off of the interest or subordination of the interest. This again, would be unusual in the typical grant of a GOR in the oil and gas context. That being said, this is an important consideration for drafters of customized royalty agreements to be aware of as subordination of the GOR interest to the interest of existing secured lenders is frequently a negotiated point on significant royalty transactions. Put differently, it is clear from this decision that the priority of interests is paramount and GOR holders should be sure to ensure such priority is reflected in the royalty agreement, and that there is no subordination to other interests, such as that of a secured lender.

While it seems likely that many standard oil and gas GORs would be protected from extinguishment under a vesting order on the basis of this framework, if it is still "ambiguous or inconclusive" at the end of the analysis, the court is then to consider the equities, including the prejudice to the royalty holder, whether the royalty holder could be adequately compensated for their interest, whether there is any evidence of value in the property itself, etc. in deciding whether to grant the vesting order extinguishing the third party interest.

While the Court of Appeal expressly sought to provide a framework for courts to approach the analysis as to whether or not a vesting order extinguishing a third party's interest is appropriate, it is not entirely clear, aside from consenting to one's interest being vested off, what specifically a court should consider in determining whether it is appropriate to vest off a third party's interest in land. The parameters of the inquiry remain somewhat vague, but given the potentially sweeping implications for holders of interests in land, it will be interesting to see if: (i) Third Eye takes steps to advance the Supreme Court of Canada leave to appeal application initiated after the first Ontario Court of Appeal decision, or (ii) 235 Co. pursues leave to appeal from this most recent judgment. While the practical outcome here may lessen the motivation to seek leave to appeal, the door may still be open for the Supreme Court of Canada to weigh in on the interest in land and vesting issues at play in the Dianor decisions.

This article was first written for ABlawg.

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 Mondaq.com.

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

Authors
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
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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