Executive Summary: Key Legal and Evidentiary Issues

• Court upheld that an overriding royalty can be a legal interest in land, not just an equitable one.

• The 8% royalty was enforceable against Yangarra despite lack of registration and notice.

• Bona fide purchaser for value without notice defense was ruled inapplicable between legal interests.

• Trial judge correctly applied the Dynex test and statutory formalities to validate the royalty's legal status.

• No error found in the damages award; however, prejudgment interest was recalculated.

• Appeal was dismissed except for reducing interest, setting the final award at $190,697.39.

Background and origin of dispute

PrairieSky Royalty Ltd. held an 8% overriding royalty interest over production from Crown mineral lands under a petroleum and natural gas lease. This interest originated from a 2011 Royalty Agreement between Home Quarter Resources Ltd. and Range Royalty Limited Partnership. PrairieSky later acquired Range Royalty’s interest through an assignment in 2014.

The Crown lease was initially issued in 1979 and was eventually assigned to Relentless Resources Ltd. in 2013, and then to Yangarra Resources Ltd. in 2016. However, during its acquisition, Yangarra was not informed about the 8% royalty. Relentless Resources failed to disclose the Royalty Agreement in the due diligence process, and the agreement itself was never assigned to Yangarra.

Because the lands were unpatented Crown lands, registration of the royalty interest was prohibited under the Land Titles Act. In 2016, PrairieSky discovered that royalties were not being paid and issued demands to Relentless and Yangarra. Relentless made partial payments totaling $113,084.79 in 2018, but Yangarra made none. PrairieSky sued Yangarra, seeking full recovery of royalties due and interest.

Policy clauses and legal nature of the royalty

The court examined the 2011 Royalty Agreement and concluded that the parties clearly intended the 8% Royalty to be a legal interest in land. The agreement specified that the royalty would continue for the duration of the underlying Crown lease and would bind successors in interest.

Applying the Supreme Court’s test from Bank of Montreal v Dynex Petroleum Ltd, the trial judge determined that:

1. The agreement's language was sufficiently precise to show an intention to grant an interest in land, and

2. The interest out of which the royalty was carved—a working interest in a Crown lease—was itself an interest in land.

The Alberta Court of Appeal upheld this analysis, emphasizing that the recognition of overriding royalties as legal interests serves the stability and investment expectations of the oil and gas industry. The court further ruled that the royalty agreement met the legal requirements for creating and conveying such an interest, including being in writing and signed by the parties. It rejected Yangarra’s argument that the agreement was invalid for not being executed under seal.

Appeal decision and key legal findings

Yangarra appealed, arguing that the royalty should be considered only an equitable interest and that it was a bona fide purchaser without notice. It also contested the damages and interest calculations. The Alberta Court of Appeal found no error in the trial judge’s conclusions.

The court affirmed that:

• Overriding royalties can constitute legal interests in land, even without registration, if intended as such by the parties.

• The bona fide purchaser for value without notice doctrine does not apply between two legal interests.

• Recognizing overriding royalties as legal interests supports commercial certainty and investment in the oil and gas sector.

• The agreement complied with all necessary legal and statutory requirements.

• PrairieSky’s entitlement to damages from Yangarra was valid and enforceable.

The court did, however, find that prejudgment interest was improperly calculated. It ruled that PrairieSky should not receive interest on amounts already paid by Relentless Resources. Therefore, prejudgment interest was reduced from $33,876.82 to $11,176.91.

Final outcome

The appeal was dismissed except for the adjustment in prejudgment interest. The judgment against Yangarra was revised to $190,697.39, inclusive of damages and interest. The order also clarified that PrairieSky may not recover more than that amount in total from Yangarra and Relentless Resources (now Sugarbud Craft Growers Corp). PrairieSky was awarded costs of the appeal.