In a decision that combines jurisprudence, industry practice and principles of contract interpretation, the Alberta Court of King's Bench (ABKB) confronted a longstanding legal challenge: determining whether a gross overriding royalty (GORR) constitutes an interest in land or merely a contractual right. More specifically, the Court provided guidance on how to interpret whether parties intended to create an interest in land when establishing a GORR. This decision has material implications for the energy industry, as it clarifies the legal framework governing royalty interests by incorporation of modern principles of contract interpretation, and provides greater certainty in structuring, assigning and enforcing such rights.
Background
In Durham Creek Energy Ltd. v. Chimera Management Group Ltd (Durham), the Court was asked to determine the legal nature of a GORR created by a letter agreement (the Letter Agreement) dated October 10, 1975, between Hudson's Bay Oil and Gas Company Limited (HBOG) and Pacific Petroleums Ltd. (Pacific). The key paragraph from the Letter Agreement stated:
Upon completion of the test well, Farmee shall earn a 100% working interest to all rights in the farmout lands to the base of the Cretaceous formation subject to a gross overriding royalty to Hudson's Bay Oil and Gas Company Limited of 1/150 sliding scale (5-15%) on oil and 15% on gas.1
Durham Creek Energy Ltd. (Durham Creek) became the working interest owner as the successor to Pacific. Chimera Management Ltd. (Chimera) and Wtrshed Resources Ltd. (Wtrshed) acquired the GORR from Sequoia Resources Corporation (Sequoia).
Durham Creek initially argued that the GORR was extinguished during the bankruptcy of Sequoia. However, the GORR was determined to be an asset, not a liability, and was sold validly to the parties by the trustee managing Sequoia's estate. An Approval and Vesting Order confirming the sale was issued on December 2, 2024, and the GORR remained unaffected by Sequoia's bankruptcy proceedings.
Durham Creek commenced this action by originating notice, seeking a declaration that the GORR was merely a contractual right and not an interest in land. The parties agreed that Durham Creek would be bound if the GORR was an interest in land. However, Chimera and Wtrshed disputed Durham Creek's claim that it would have no obligation to honour the GORR if it were determined to be a contractual right rather than an interest in land.
Previous judicial treatment
In determining whether a GORR is an interest in land, courts have fluctuated between a formalistic, text-based approach and a contextual, purpose-driven analysis. Much of the uncertainty can be traced back to the Supreme Court of Canada, which affirmed that a GORR can constitute an interest in land if that was the intention of the parties, as established in Bank of Montreal v. Dynex Petroleum Ltd. (Dynex SCC).2
Prior to Dynex SCC, courts looked for specific words that indicated whether an instrument created an interest in land as illustrated in Vandergrift v. Coseka Resources Ltd. (Vandergrift).3 However, the Alberta Court of Appeal rejected this approach in Bank of Montreal v. Enchant Resources Ltd. (Dynex CA), and provided three non-exhaustive indicia that could be used to determine whether a GORR created an interest in land:4
- The underlying interest is an interest in land (corporeal or incorporeal);
- 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; and
- The interest is capable of lasting for the duration of the underlying estate.
In Dynex SCC, the Supreme Court endorsed the indicia from Dynex CA, but Justice Major quoted a more restrictive passage from Vandergrift, focusing on whether "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."5
Academic interpretation
Justice Major's citation to Vandergrift left scholars and judges debating whether Dynex SCC supported a return to textual formalism or upheld the more flexible, contextual approach outlined in Dynex CA. This lack of clarity prompted academic scrutiny.
Commentators noted that while Dynex SCC affirmed that GORRs may constitute an interest in land where the parties intended such an outcome, the Supreme Court provided limited practical guidance on how to determine that intention. As a result, lower courts reportedly struggled to apply Dynex SCC consistently, lacking a clear and principled framework for assessing parties' intent.6
Whether or not this confusion prevented judicial fairness is not certain. The issue of interpreting intent was, however, addressed by the ABKB in Durham.
The ABKB's decision
The Court held that the interpretation of GORRs must align with contemporary principles of contract interpretation and should consider not just the language of the GORR, but also the purpose and surrounding circumstances.7 As a result, the Court departed from the strict language-based approach set out in Vandergrift and instead applied the Dynex CA indicia to assess whether the GORR constituted an interest in land.
- Was the underlying interest an interest in land?
Yes, the first requirement was satisfied because the parties agreed for the purpose of the application that the underlying interest was an interest in land.
2. Did the intention of the parties indicate that an interest in land was created/conveyed?
Yes, the Court found that the intention of the parties, as reflected in the language and structure of the Letter Agreement, supported the conclusion that the GORR was intended to be an interest in land for the following reasons:
- Both the working interest and the GORR were created in the same paragraph, suggesting they were the same type of interest. There was also no language in the Letter Agreement distinguishing the GORR as a lesser or contractual right.
- The phrase "subject to," used in relation to the working interest and the GORR, suggested a legal ordering of rights that supported the existence of a property interest. Although these words were not dispositive, the Court determined that they were more suggestive of an interest in land than a contractual right.9
- Most importantly, the economic structure of the agreement demonstrated a clear intention for the GORR to run with the land and remain enforceable against successors in title. HBOG, as the original leaseholder, accepted a deferred and contingent return in the form of a GORR. The Court noted that parties who may be denied future consideration would want the GORR to run with the underlying leasehold interest to protect against that risk.10 The Court also concluded, based on common sense and business efficacy, that the GORR should be interpreted as an interest in land, provided the wording allowed for such an interpretation.11
3. Was the interest capable of lasting for the duration of the underlying interest?
Yes, the Court emphasized that the relevant inquiry is whether the interest was capable of lasting for the duration of the underlying estate at the time it was granted, not whether it ultimately did so. Subsequent events were not determinative and in this case, the GORR structured in the original grant was capable of lasting the duration of the underlying leasehold interest.12
As all three indicia were satisfied, the Court dismissed Durham Creek's application and held that the GORR constituted an interest in land in favour of Chimera and Wtrshed.
Key conclusions
This decision offers guidance on the legal treatment of GORRs in Alberta. The Court applied a modern, contextual approach, rather than a rigid, text-focused method, to govern the determination of whether a GORR constitutes an interest in land. This aligns with the interpretive principles established in Sattva Capital Corp. v. Creston Moly Corp. (Sattva),13 which emphasized analyzing contracts based on their commercial purpose and the parties' true intentions.
By applying the Dynex CA indicia alongside Sattva's purposive framework, the ABKB departed from a formalistic interpretation. Instead, it prioritized the substance of the agreement by considering the language used, the structure of the agreement, and its economic rationale in order to determine the legal nature of the GORR.
For stakeholders in Alberta's energy sector, Durham highlights the importance of precision in drafting royalty agreements. In the context of asset sales, insolvency proceedings, and long-term oil and gas development, the ABKB has signalled that clearly defining whether a GORR is intended to create an interest is crucial to ensuring its enforceability.
Footnotes
1. Durham Creek Energy Ltd v Chimera Management Group Ltd, 2025 ABKB 246 [Durham] at para 3.↩
2. Bank of Montreal v. Dynex Petroelum Ltd., 2002 SCC 7 [Dynex SCC].↩
3. Vandergrift v. Coseka Resources Ltd., 1989 CanLII 3163 (ABKB) [Vandergrift].↩
4. Durham, supra note 1 at para 11, citing Bank of Montreal v. Enchant Resources Ltd., 1999 ABCA 363 [Dynex CA] at para 84.↩
5. Durham, supra note 1 at para 12, citing Dynex SCC, supra note 2 at para 22.↩
6. Nigel Bankes, "The Legal Status of a Gross Overriding Royalty Carved out of a Crown Lease" (11 January 2023), online (blog): https://ablawg.ca/2023/01/11/the-legal-status-of-a-gross-overriding-royalty-carved-out-of-a-crown-lease/.↩
7. Durham, supra note 1 at para 2.↩
8. Ibid at para 16.↩
9. Ibid at para 19.↩
10. Ibid at para 21.↩
11. Ibid at para 23.↩
12. Ibid at para 16.↩
13. Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53.↩
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