Why this decision matters

Whether a royalty interest constitutes an interest in land has significant implications for a royalty holder, including the grantor of the royalty. This is especially true when the grantor of the royalty is facing insolvency proceedings.

This issue was considered by the Supreme Court of British Columbia in 2016, and analyzed on our blog in the post Mineral Royalties: When Do They "Run With the Land?".

Recently, a similar situation arose in an Ontario proceeding, Third Eye Capital Corporation v. Resources Dianor Inc., which made its way up to the Ontario Court of Appeal. Parties to royalty agreements or that are considering entering into a royalty agreement should take heed of the Court of Appeal’s recent consideration and clarification of this issue.

Overview of the case

Dianor’s main assets were a group of mining claims. These mining claims were subject to a Gross Overriding Royalty (the “Royalty”), which were held by 2350614 Ontario Inc. (“235”). Dianor then became insolvent.

As part of the insolvency proceedings, the Court granted the sale of the mining claims to Third Eye Capital. The court determined that the sale extinguished the Royalty. This is because the Court concluded that the Royalty did not run with the land or constitute an interest in the lands over which Dianor held the mineral rights. 235 appealed that decision to the Court of Appeal.

The Court of Appeal overturned that decision. In doing so, it relied on the Supreme Court of Canada decision in Bank of Montreal v. Dynex Petroleum Ltd. The Court of Appeal also sought to clarify years of muddled common law decisions.

The Court of Appeal clarifies how to apply the Dynex test

The test from Dynex is well known, but the Court of Appeal saw fit to clarify how to apply it. When determining whether an royalty interest constitutes an interest in land, the Court must assess whether:

  1. The language used in describing the interest is sufficiently precise to show that the parties intended the royalty to grant an interest in land, rather than a contractual right to a portion to the mineral or resource substances recovered from the land; and
  2. The interest, out of which the royalty is carved, is itself an interest in land.

The motion judge in Dianor made the determination that because 235 had no right to enter the property to explore and extract diamonds or other minerals, and that its agreement was for a share in the revenues produced by the diamonds, the Royalty was not an interest in land.

The Court of Appeal disagreed with the court’s conclusion for a number of reasons.

First, in this instance, the agreement that created the Royalty expressly set out that the Royalty constitutes a covenant and an interest in land.

Second, the Supreme Court in Dynex established that a royalty right holder does not need to have a right to enter the property to explore and extract minerals to have an interest in land. In fact, the commercial realties of the mining industry dictate that neither a grantor of a royalty nor a royalty holder would want that right. A royalty holder typically has no interest in working the land, and the producer (typically the grantor of the royalty), would not want to be subject to the working-rights of a royalty holder.

Third, in order to satisfy the second branch of Dynex, all that is required is for the royalty interest to be granted out of the interest of the party that has the right to explore and extract minerals from the land. As long as the grantor has of the royalty has the right to enter and extract minerals, that is sufficient for the royalty to be an interest in the land.

Finally, the Court of Appeal was express in its determination that the way in which the royalty is calculated (i.e., a portion of the revenues, profits, etc. of a mine) does not mean that the royalty interest is not an interest in the land. In short, the fact that the royalty is a monetary interest does not impact or otherwise dissolve the parties’ intention that the royalty interest is to run with the land.

Conclusion

The Court of Appeal has attempted to clarify the common law analysis of when a royalty interest is an interest in land following the Dynex decision.

As with all matters of contractual interpretation, the court’s role is to determine what the intention of the parties was at the time that the agreement was struck. If it is clear and ambiguous that a royalty interest grants an interest in land, the manner of the calculation of the royalty will not displace that intention.