The Alberta Court of Appeal (the "Court") has confirmed that gross overriding royalties granted under a Crown petroleum and natural gas lease can constitute binding legal interests in land, even where no title is issued and registration is impossible under the Alberta Land Titles Act (the "Act"). In the recent case of PrairieSky Royalty Ltd. v. Yangarra Resources Ltd., 2025 ABCA 240, the Court upheld a trial ruling that strengthens the position of royalty holders and limits the ability of lease purchasers to avoid these interests using the bona fide purchaser for value without notice defence. This precedent has significant implications for oil and gas operators, investors, and drafters of royalty agreements, underscoring the importance of precise contract language and thorough due diligence in transactions involving unpatented Crown lands.
Procedural history: How an 8% gross overriding royalty sparked a Crown lease dispute in Alberta
In 2011, Range Royalty Limited Partnership ("Range Royalty") entered into a royalty agreement with Home Quarter Resources Ltd. ("Home Quarter"), granting Range Royalty an 8% gross overriding royalty (the "8% Royalty") carved out of Home Quarter's working interest in a Crown lease. Under the Crown lease, Home Quarter had exclusive rights to explore for and extract petroleum and natural gas from unpatented Crown lands in Alberta.
Range Royalty's interest was later assigned to PrairieSky Royalty Ltd. ("PrairieSky"). Home Quarter subsequently transferred its lease interest to Relentless Resources Ltd., which later sold it to Yangarra Resources Ltd. ("Yangarra") in 2016. The royalty agreement was never expressly assigned to Yangarra, nor was Yangarra provided with notice of it.
Upon discovering that Yangarra had commenced production without remitting royalties, PrairieSky sued, asserting that the 8% Royalty was an interest in land binding on Yangarra.
The Alberta Court of King's Bench found that the 8% Royalty was a legal interest in land and binding on Yangarra. The trial judge applied the two-part test set out in Bank of Montreal v. Dynex Petroleum Ltd., 2002 SCC 7 ("Dynex"), confirming that:1
- the language of the original royalty agreement was "sufficiently precise" to demonstrate the parties' intent to create an interest in land, as opposed to a simple contractual right between Range Royalty and Home Quarter; and
- the interest, out of which the 8% Royalty is carved, was itself an interest in land.
With respect to the first branch of the test, the trial judge accepted the testimony evidence from Range Royalty and Home Quarter regarding their intent to create an interest in land when entering into the original royalty agreement.2 This evidence was assessed in conjunction with the language of the royalty agreement as a whole, and in particular with the clause granting the 8% Royalty (the "Granting Clause"). The use of the words "granted to" and "owned by" in the Granting Clause was held to connote the conveyance of ownership in the 8% Royalty, rather than a mere contractual right to a portion of the minerals.3
With respect to the second branch of the test, the trial judge found that the 8% Royalty was unquestionably an interest in land, as it was carved out as a "working interest" or "profit à prendre,"4 citing the seminal case of Berkheiser v. Berkheiser and Glaister, [1957] SCR 387.
The trial judge noted that, for freehold mineral lands subject to the Act, whether an interest in land is legal or equitable generally does not matter because a royalty can be registered against the mineral title by caveat. Under the Act, a working interest holder typically acquires that interest subject to any registered royalty, but free and clear of any unregistered royalty. However, for lands not goverened by theAct, a legal interest is generally enforceable against the world, while an equitable interest can be defeated by a bona fide purchaser for value without notice.
This distinction is particularly significant for unpatented Crown lands, where the rules of priority under the Act do not apply because: (1) certificates of title are generally not issued for such lands; (2) the Act prohibits the registration of caveats against lands for which no certificate of title has been issued; and (3) the Act prohibits the registration of interests against Crown-owned minerals.5 Instead, the court must rely on common law and equitable priority rules, which distinguish between legal and equitable interests. As a result, the trial judge's first task was to determine whether PrairieSky's and Yangarra's interests were legal or equitable in nature.6
With the trial judge having found that PrairieSky's 8% Royalty was indeed a legal interest, Yangarra appealed. Yangarra argued that the royalty was instead an equitable interest and that it had acquired its leasehold free of encumbrance as a bona fide purchaser for value without notice.
Alberta Court of Appeal confirms gross overriding royalties as legal interests in Crown leases
The Court dismissed Yangarra's appeal, affirming that the trial judge was correct in finding the 8% Royalty satisfied both prongs of the Dynex test and constituted a legal interest in land.7
1. First, in response to Yangarra's argument that there is an "absolute prohibition on new categories of legal interests," the Court recognized that an overriding royalty as a legal interest in land is compatible with the limited exceptions permitted by the numerus clauses principle, an academic doctrine holding that categories of property interests are largely closed but may expand in rare exceptions.8
In other words, the Court rejected Yangarra's contention that overriding royalties must not be recognized as legal interests unless they pre-date the 1875 judicature reforms, confirming that modern common law can recognize evolving property interests in light of the realities of the oil and gas industry.9
2. Second, the Court noted that purchasers of mineral leases on unpatented Crown lands are generally sophisticated commercial actors capable of conducting the due diligence necessary to discover overriding royalties. Permitting a bona fide purchaser for value without notice to acquire mineral leases free and clear of an overriding royalty would inject uncertainty and increased risk into the royalty market, potentially destabilizing investments and undermining the industry goals endorsed in Dynex.10
3. Third, the Court confirmed that the language used in the 2011 royalty agreement demonstrated the contracting parties' objective intention to create an interest in land and to ensure that the 8% Royalty remained enforceable against the world. Compliance with the Dynex test, in essence, is simply an expression of the parties' intention. This was a factual finding dependent on the specific wording of this particular contract.11
Royalty interests: Key takeaways
- Use precise drafting. Ensure royalty agreements are properly structured and use clear ownership language if the intent is to create an interest in land that binds successors, in accordance with the Dynex test.
- Plan for non-registrable interests. Structure agreements to be enforceable at common law when registration under the Act is not possible.
- Due diligence is imperative. Purchasers of Crown leases must conduct thorough due diligence beyond the land titles system.
- Limitations to the "bona fide purchaser" defence. If a royalty is found to be a legal interest, parties acquiring leasehold interests in unpatented Crown lands cannot rely on the bona fide purchaser for value without notice defence.
Final thoughts
The Court's decision in PrairieSky v. Yangarra strengthens the position of royalty holders in Alberta's oil and gas sector. It affirms that well-drafted royalty agreements —properly worded to clearly create land interests — can bind successors even where public registration is unavailable. For acquirers of Crown lease interests, this ruling underscores the importance of due diligence and thorough title review. For drafters, the case provides a valuable blueprint for structuring enforceable royalty arrangements in an evolving legal and industrial landscape.
Footnotes
1. Prairiesky Royalty Ltd. v. Yangarra Resources Ltd., 2023 ABKB 11 (CanLII) at paras 71 and 120 [ABKB Decision].
2. Ibid at paras 73 and 79.
3. Ibid at paras 80-88.
4. Ibid at paras 29 and 67-72.
5. Ibid at para 122.
6. Ibid at para 128.
7. PrairieSky Royalty Ltd. v. Yangarra Resources Ltd., 2025 ABCA 240 (CanLII) at para 74.
8. Ibid at paras 28, 29 and 35.
9. Ibid at paras 40-41.
10. Ibid at paras 48-50.
11. Ibid at paras. 63-65.
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