Contains GORRy Content – Strategic Discretion Is Advised: Alberta Court Of King's Bench Assesses When A GORR Constitutes An Interest In Land

In Durham Creek Energy Ltd v Chimera Management Group Ltd, 2025 ABKB 246, the Alberta Court of King's Bench considered whether a gross overriding royalty (GORR) was an interest in land or simply a contractual right. This concise decision provides a useful overview of how courts assess this issue and will be of interest to parties negotiating, or already holding, GORRs, particularly Alberta.

Background

Durham Creek Energy Ltd. ("Durham Creek") sought a declaration that a GORR in an oil and gas lease held by Chimera Management Group Ltd. ("Chimera") and Wtrshed Resources Ltd., ("Wtrshed") does not constitute an interest in land.

The GORR originated in a 1975 Letter Agreement between two parties whose interests have since passed to the present litigants. Hudson's Bay Oil and Gas ("HBOG") first leased oil and gas rights in the relevant lands from the fee simple owners; HBOG then farmed out its working interest in that lease to Pacific Petroleums Ltd., subject to a GORR in favour of HBOG. The Applicant, Durham Creek, is the current working interest holder, and the Respondents Chimera and Wtrshed are the current owners of the GORR.

Before Chimera and Wtrshed, the GORR had been held by Sequoia Resources Corporation, which subsequently made an assignment into bankruptcy. As part of the Sequoia bankruptcy proceedings, the GORR was sold to Chimera and Wtrshed. Durham Creek argued it could reject the GORR assignment if it is merely a contractual right, but concurred that it is bound by the assignment if the GORR is an interest in the land.

Historical Treatment of GORRs

Courts have historically struggled with applying a consistent framework in determining whether a GORR can be an interest in land. Earlier decisions used a "magic words" approach, looking for specific language in the underlying agreement to decide if a GORR was an interest in land. This was rejected in the Alberta Court of Appeal's decision in Bank of Montreal v Enchant Resources Ltd ("Dynex CA"),¹ in favour of a contextual approach, which laid out three non-exhaustive indicia pointing towards an interest in land, specifically whether:²

1. the underlying interest is an interest in land (corporeal or incorporeal);
2. the intentions of the parties, as evidenced by the language of the grant and any admissible evidence of the surrounding circumstances or behaviour, indicate that it was understood that an interest in land was created/conveyed;
3. the interest is capable of lasting for the duration of the underlying estate.

The Supreme Court of Canada upheld Dynex CA ("Dynex SCC"),³ confirming that a GORR can be an interest in land. The Court in Dynex SCC did not explicitly endorse the three-indicia test outlined in Dynex CA, but did highlight the importance of the intentions of the parties as a determining factor. Dynex SCC also cited (with apparent approval) an earlier decision, namely Vandergrift v Coseka Resources Ltd ("Vandergrift"), a case that followed a strict textual interpretation. Canadian courts and scholars have since struggled with how to interpret Dynex SCC consistently.

Court of King's Bench Decision

In this case, the Court rejected the narrower textual approach from Vandergrift, finding it inconsistent with modern principles of contract interpretation. Instead, the Court adopted the approach articulated in Dynex CA and concluded that all three indicia were met:

1. The parties agreed for the purposes of the application that the underlying interest was an interest in land.
2. Although there was no evidence of the circumstances in which the GORR was originally drafted, the Court found that the original parties had intended to create an interest in land, as inferred from the Letter Agreement:
   1. the GORR originated in the same paragraph as the working interest, suggesting it is of the same nature;
   2. the working interest was set out "subject to" the GORR, which the Court found could support either interpretation, though the phrasing was "more suggestive of an interest in land than a contractual right" (para 19);
   3. the economic structure of the transaction further supported the conclusion that the GORR was intended to run with the land to protect HBOG's deferred and contingent consideration (i.e. the original holder of the GORR had to account for the fact that it would only be paid later, if at all). The Court gave this point considerable weight, noting that "[c]ommon sense and business efficacy suggest that the GORR in issue in the present case should be interpreted to be an interest in land if the language used permits such an interpretation" (para 23).
3. The GORR was capable of lasting the full term of the lease (evidently the GORR seems to have been amended since inception, such that the original GORR did not last the full term of the lease, but at the time it was made, it was capable of lasting the full term).

Accordingly, the Court dismissed Durham Creek's application, holding that the GORR at issue is an interest in land.

Conclusion

This case provides useful guidance on how Courts assess the nature of GORRs, and confirms the value of the Dynex CA approach, which the Court found to be consistent with the modern approach to contractual interpretation articulated in Creston Moly Corp v Sattva Capital Corp, 2014 SCC 53. The result is largely consistent with that in Third Eye Capital Corporation v Dianor Resources Inc., a post-Dynex SCC case from the Ontario Court of Appeal, which considered a similar issue (a blog post on that case can be found here).

Contractual parties have always been well advised to draft agreements that clearly set out their intentions, and this case provides guidance on how parties negotiating GORRs (or dealing with existing GORRs) should approach such instruments to ensure their interests will be treated as intended. This is especially true for parties who do not wish for a GORR to create an interest in land, as the Court has suggested that such an interest could be presumed on the basis of business efficacy and commercial common sense, at least in the absence of evidence to the contrary.

Footnotes

1 Bank of Montreal v Enchant Resources Ltd, 1999 ABCA 363 ("Dynex CA")

2 Durham Creek Energy Ltd v Chimera Management Group Ltd, 2025 ABKB 246 at para 11, citing Dynex CA at para 73.

3 Bank of Montreal v Dynex Petroleum Ltd, 2002 SCC 7.

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