Royalties Are Not Always King: Alberta Court Of Appeal Upholds Decision To Vest Off Gross Overriding Royalty

The Alberta Court of Appeal in Invico Diversified Income Limited Partnership v Newgrange Energy Inc, 2025 ABCA 392 ("Newgrange") recently upheld the decision of the lower court to vest a gross overriding royalty ("GOR") from the subject lands pursuant to a reverse vesting order granted in proceedings under the Companies' Creditors Arrangement Act, RSC 1985, c C-36 ("CCAA"). The Appellate Court affirmed that the construction of the GOR's underlying agreements and the surrounding circumstances did not create an interest in land to shield the GOR from being vested off in insolvency proceedings.

Background Facts

In 2018, the appellant, Newgrange Energy Inc. ("Newgrange"), sold an oil and gas asset to Free Rein Resources Ltd. ("Free Rein"), which sale included a 5% GOR granted by Free Rein in favour of Newgrange. The parties executed the royalty agreement two days before they executed the relevant asset purchase agreement with the transaction closing a month after execution. As part of Free Rein's CCAA proceedings, the respondent, Invico Diversified Income Limited Partnership ("Invico"), as the first secured creditor and stalking horse bidder sought approval of a corporate share transaction for Free Rein that utilized a reverse vesting order structure. The proposed transaction contemplated vesting out the Newgrange GOR.

The Lower Court's Decision

Justice Hollins identified the two-part Dynex test to be the applicable analysis to determine whether a GOR constitutes an interest in land:

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.

The lower court noted that the royalty agreement plainly stated that the GOR was intended to be an interest in the land. However, Hollins J. still found the GOR to only be a contractual right given, among other things, the royalty agreement contained an assignment clause that created ongoing liabilities for Free Rein and Free Rein did not have an interest in the land at the time of executing the royalty agreement given the staggered dates of the transaction documents. The lower court granted the reverse vesting order and vested the GOR from title.

A more in-depth discussion of Hollins J.'s decision can be found here.

The Court of Appeal's Decision

The questions on appeal were: i) whether an assignment clause that requires the assignor to remain liable for royalty payments rebuts an express intention that the GOR is to be an interest in land; and ii) whether a single transaction where the royalty agreement is executed prior to the execution and closing of the associated purchase agreement fails to satisfy the Dynex test.

The Court of Appeal reiterated that a high degree of deference is owed to discretionary decisions in insolvency proceedings and it could therefore only intervene if Hollins J. exercised her discretion unreasonably by vesting off the GOR. The Court found that it was not an error to interpret the assignment clause in the royalty agreement as being inconsistent with the granting language allegedly creating an interest in land. While previous lower court decisions had found that similar assignment provisions could not overcome clear granting language for GORs, contractual interpretation is an inherently fact specific exercise. It was open to Hollins J. to conclude that both the language of the royalty agreement and the relevant factual matrix were distinguishable from previous cases.

The Appellate Court further confirmed that the principle of nemo dat quod non habet (no one can give what they do not have) applies to the second branch of the Dynex test. Given the royalty agreement pre-dated the execution and closing of the asset purchase agreement, Free Rein itself did not have an interest in land to carve out the GOR for Newgrange at the time the royalty agreement took effect. It is well-accepted in insolvency law that a GOR vests at the time of its creation. The Court emphasized that the second step of Dynex does not require consideration of the objective intentions of the parties but only whether the grantor had an interest in land to give.

For these reasons, the Court dismissed the appeal.

Implications and Key Takeaways

The Court of Appeal's decision in Newgrange brings into sharp perspective the importance of ensuring that the entire royalty agreement and surrounding circumstances indicate an intention to create an interest in land. Simply including a contractual term that states a GOR is an interest in land is not sufficient to overcome other contrary indicators. Further, parties must ensure that the mechanics of any underlying transaction in respect of a GOR include careful timing as to the transfer of land interests to meet the second step of the Dynex test.

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