Details matter: Court of Appeal of Alberta upholds decision that royalty was not an interest in land in Invico Diversified Income Limited Partnership v. Newgrange Energy Inc.

Structuring royalties as interests in land can provide significant protection in subsequent insolvency proceedings, but a recent decision from the Court of Appeal of Alberta underscores that technicalities may trump intentions. In Invico Diversified Income Limited Partnership v. Newgrange Energy Inc.¹, the Court upheld a chambers judge’s finding that a gross overriding royalty (GOR) was a mere contractual claim—not an interest in land—despite express language in the royalty agreement stating otherwise. As a result, it could be eliminated through a reverse vesting order granted in the course of an insolvency proceeding. The decision serves as a cautionary tale for practitioners and parties seeking to structure royalties as interests that run with the land: assertion is not enough; the necessary formalities must be observed.

What you need to know

• Express granting language may not be sufficient. Although the royalty agreement stated that the GOR was “intended to be an interest in land in the Royalty Lands, and to be a covenant running therewith”, this language did not save the royalty from being characterized as merely contractual.
• Timing is critical. The royalty agreement was dated October 30, 2018, but the asset purchase agreement through which the royalty grantor acquired its working interest was dated November 1, 2018, with a closing date of November 30, 2018. Because the royalty grantor did not yet own the underlying land when the royalty agreement was executed and the GOR created, the Court of Appeal found the second part of the Dynex test was not satisfied and an interest in land could not be created.
• Conflicting terms can undermine stated intentions. The assignment clause in the royalty agreement provided that if the royalty payor assigned its interest without consent, it would remain liable to the payee for royalty payments. The chambers judge and the Court of Appeal found this language inconsistent with a true interest in land, as the payment obligation would run with the land and bind any subsequent owner. That the assignor retained a payment obligation was indicative that its interest was merely contractual and not an interest in land.
• Outcome. The appeal was dismissed, and the gross overriding royalty was “vested out” to a residual trust with no funds to pay royalty holders as part of a sale transaction completed in the insolvency proceedings of the grantor.

Background and context

The appeal arose from restructuring proceedings involving Free Rein Resources Ltd., an Alberta oil and gas company. Newgrange Energy Inc. had sold an oil and gas asset to Free Rein in 2018 for $750,000 plus a 5% gross overriding royalty (GOR). The royalty was granted pursuant to an agreement dated October 30, 2018, which was scheduled to an asset purchase agreement dated November 1, 2018, with a defined closing date of November 30, 2018. Free Rein subsequently borrowed money from a secured lender, defaulted on its loan obligations, and in June 2023 filed a notice of intention to make a proposal under the Bankruptcy and Insolvency Act. When no viable third-party purchasers or investors emerged through a court-approved sale and investment solicitation process, the proceedings continued under the Companies’ Creditors Arrangement Act. The first-ranking secured creditor submitted a credit bid to acquire the company’s assets.

The proposed transaction contemplated that Newgrange’s GOR, along with another royalty granted by Free Rein, would be vested out to a residual trust to be administered by the monitor—a trust with insufficient funds to make any royalty payments. Newgrange did not oppose the use of a reverse vesting order generally, but objected to its GOR being transferred to the residual trust, arguing that it constituted an interest in land that could not be stripped from title to the land passing to the purchaser.

The Dynex test

The legal framework for determining whether a royalty is an interest in land was established by the Supreme Court of Canada in Bank of Montreal v. Dynex Petroleum Ltd². Under the Dynex test, a royalty interest can be an interest in land if: (i) 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; and (ii) the interest out of which the royalty is carved is itself an interest in land.

Dynex test, part one: intention

The royalty agreement’s granting clause expressly stated that the GOR was “intended to be an interest in land in the Royalty Lands, and to be a covenant running therewith”. However, the chambers judge—and the Court of Appeal on review—found that conflicting language in the assignment clause undermined this stated intention. The assignment clause contemplated that if Free Rein assigned its interest without Newgrange’s consent, Free Rein would remain liable for royalty payments even if it “may no longer have any interest in the Royalty Lands”. As the chambers judge observed, if the royalty truly ran with the land, this contractual protection would be unnecessary because any assignee would automatically take title subject to the royalty.

The Court of Appeal acknowledged that in cases such as Manitok Energy Inc. (Re)³ and PrairieSky Royalty Ltd. v. Yangarra Resources Ltd.⁴, similar assignment provisions had not defeated clear granting language. However, it found that those cases were distinguishable on their facts. The assignment clause in Newgrange’s royalty agreement did not require the assignor to find substitute land as in Manitok, nor did it contemplate a novation by a new working interest owner as in PrairieSky. Because contractual interpretation is inherently fact-specific, the Court of Appeal held it was open to the chambers judge to distinguish those precedents and conclude that the parties objectively intended only a contractual right.

Dynex test, part two: timing and nemo dat

Even if the chambers judge had found an objective intention to create an interest in land, the second part of the Dynex test posed an insurmountable obstacle. The royalty agreement was executed on October 30, 2018—before Free Rein had any interest in the asset to which the royalty related. The asset purchase agreement was not executed until November 1, 2018, with a closing date of November 30, 2018. Applying the principle of nemo dat quod non habet (no one can give what they do not have), the chambers judge concluded that Free Rein could not carve an interest in land out of an asset it did not yet own.

The Court of Appeal rejected Newgrange’s argument that the royalty agreement and asset purchase agreement should be treated as a “single transaction”. Although contracts between the same parties on related topics should be read harmoniously, this principle did not permit the chambers judge to overlook that the agreements were not contemporaneously executed and did not purport to convey interests at the same time. As the Court of Appeal noted, a GOR is vested from the time it is created, and whether it exists as an interest in land is determined at that moment. Because Free Rein had no interest in land to give when the royalty agreement took effect, the royalty could only sound in contract.

Implications

This decision reinforces a fundamental lesson for practitioners structuring royalties: while the law permits parties to create royalties as interests in land, and while such interests enjoy greater protection in insolvency proceedings than mere contractual claims, the creation of these interests must be executed with precision. Boilerplate language asserting that a royalty is “intended to be an interest in land” will not guarantee this result if other provisions in the agreement are inconsistent with that intention or if the grantor does not hold the necessary interest at the time of execution.

From a practical standpoint, parties seeking to create royalties as interests in land should ensure that: (i) granting language is unambiguous and not inconsistent with other provisions of the agreement; (ii) ancillary clauses—particularly assignment provisions—do not inadvertently suggest that the royalty is enforceable only as a contractual obligation against the grantor; and (iii) the timing of execution is carefully coordinated so that the grantor holds a valid interest in land out of which the royalty can be carved at the moment the royalty agreement becomes effective. Failure to observe these formalities may leave royalty holders with only a contractual claim—a claim that, as this case demonstrates, can be extinguished in insolvency proceedings with little or no recovery.