A Producing Royalty As An Interest In Land: The Alberta Court Of Queen's Bench Follows Dianor

Holders of royalties in oil and gas and other minerals should take note of the recent decision of the Alberta Court of Queen's Bench in Manitok Energy Inc. (Re), 2018 ABQB 488 [Manitok], in which the Alberta Court followed the Ontario Court of Appeal's decision in Third Eye Capital Corporation v Dianor Resources Inc., 2018 ONCA 253 [Dianor] and confirmed that a royalty in respect of a fixed quantity of produced substances may constitute an interest in land if the parties' intention to make it so is sufficiently clear.

The receiver of Manitok Energy Inc. ("Manitok"), which took the position that the royalty in question was not an interest in land, recently filed a notice of appeal to appeal the decision in Manitok to the Alberta Court of Appeal.

Dianor

As explained in our recent blog post on the Dianor decision, the Ontario Court of Appeal applied and interpreted the test established in Bank of Montreal v Dynex Resources Ltd., 2002 SCC 7 [Dynex], which is used to determine when a royalty interest constitutes an interest in land. In finding that gross overriding royalty interests in certain mining claims held by an insolvent company were interests in land, the Ontario Court of Appeal rejected two propositions: (i) that a royalty holder must have the right to enter the property to explore and extract resources for the royalty to qualify as an interest in land, and (ii) that the language in which the calculation of the royalty right is expressed affects its characterization as an interest in land.

Manitok

Manitok was engaged in the exploration and development of oil and gas properties. In June 2015, Manitok and Freehold Royalties Partnership ("Freehold") entered into a Production Volume Acquisition Agreement (the "Acquisition Agreement") and a Production Volume Royalty Agreement (the "Royalty Agreement"), under which Freehold provided $25,000,000 in cash consideration to Manitok for the grant of a producing royalty in certain oil and gas properties (the "Producing Royalty"). The Producing Royalty was paid by Manitok to Freehold in cash through to the end of August 2017. After that time, Freehold took the Producing Royalty in kind, until Manitok's assignment into bankruptcy and the appointment of a receiver on February 20, 2018.

The receiver took the position that the Producing Royalty was not an interest in land, and Freehold brought an application for an order declaring that the Producing Royalty was an interest in land and the property of...