Bank of Montreal v. Enchant Resources Ltd. et al., 2002 SCC 7

• Judge: McLachlin, C.J.C., Gonthier, Iacobucci, Major, Bastarache, Binnie and LeBel, JJ.
• Court: Supreme Court (Canada)
• Case Date: November 09, 2001
• Jurisdiction: Canada (Federal)
• Citations: 2002 SCC 7;(2002), 281 N.R. 113 (SCC);299 AR 1;1 RPR (4th) 1;19 BLR (3d) 159;281 NR 113;208 DLR (4th) 155;30 CBR (4th) 168;[2001] SCJ No 70 (QL);[2002] 1 SCR 146

Bk. of Mtrl. v. Enchant Resources Ltd. (2002), 281 N.R. 113 (SCC)

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

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Temp. Cite: [2002] N.R. TBEd. JA.020

Bank of Montreal (appellant) v. Enchant Resources Ltd. and D.S. Willness (respondents)

(27766; 2002 SCC 7)

Indexed As: Bank of Montreal v. Enchant Resources Ltd. et al.

Supreme Court of Canada

McLachlin, C.J.C., Gonthier, Iacobucci, Major, Bastarache, Binnie and LeBel, JJ.

January 24, 2002.

Summary:

The Bank of Montreal was a secured credi­tor of Dynex Petroleum Ltd., a corporation in liquidation. The trustee in bankruptcy wanted to sell all of Dynex's oil and gas properties. The respondents, Enchant and Will­ness, held overriding royalties arising from Dynex's working interest. The respon­dents argued that their royal­ty rights com­prised inter­ests in land and claimed priority over the Bank because their interests, as protected by caveats, preceded the Bank's loans to Dynex and its prede­cessors. The Bank sub­mitted that at common law an interest in land could not arise from an incorporeal hereditament and therefore the respondents' overriding royalties (which arose from a working inter­est, an incorporeal heredita­ment) did not rank higher in priority than the Bank's security interest. The bank applied for a preliminary determination that the overriding royalty interests did not con­stitute interests in land.

The Alberta Court of Queen's Bench, in a decision reported at 39 Alta. L.R.(3d) 66, allowed the application, holding that a lessee of an oil and gas lease, which was a profit à prendre, which was in itself an interest in land, could not pass on an interest in land to a third party. An appeal was brought from the decision.

The Alberta Court of Appeal, in a decision reported at 255 A.R. 116; 220 W.A.C. 116; 74 Alta. L.R.(3d) 219, concluded that over­riding royalty interests could constitute interests in land if intended by the parties. The Bank appealed.

The Supreme Court of Canada dismissed the appeal, holding that overriding royalty interests could be interests in land if that was the intention of the parties.

Common Law - Topic 1201

Application - General - [See Mines and Minerals - Topic 4 ].

Mines and Minerals - Topic 4

Common law concepts - The Supreme Court of Canada stated that "[t]he oil and gas industry, which developed largely in the second half of the 20th century and continues to evolve, is governed by a combination of statute and common law. The application of common law concepts to a new or developing industry is useful as it provides the participants in the indus­try and the courts some framework for the legal structure of the industry. It should come as no surprise that some common law concepts, developed in different social, industrial and legal contexts, are inapplic­able in the unique context of the industry and its practices" - See paragraph 17.

Mines and Minerals - Topic 8166

Oil and gas - Royalty agreements - Whether royalty rights constitute interest in land - At issue was whether an overriding royalty issued from a working interest (an incorporeal hereditament) could be an interest in land - The Supreme Court of Canada held that the prohibition on the creation of an interest in land from an incorporeal hereditament was inapplicable and that a royalty which was an interest in land could be created from an incorporeal hereditament such as a working interest or a profit à prendre, if that was the intention of the parties.

Real Property - Topic 67

Definitions - Legal estate in land defined - [See Mines and Minerals - Topic 8166 ].

Cases Noticed:

Berkheiser v. Berkheiser, [1957] S.C.R. 387, refd to. [para. 9].

Saskatchewan Minerals v. Keyes, [1972] S.C.R. 703, refd to. [para. 10].

Scurry-Rainbow Oil Ltd. et al. v. Gallow­ay Estate, [1993] 4 W.W.R. 454; 138 A.R. 321 (Q.B.), affd. [1995] 1 W.W.R. 316; 157 A.R. 65; 77 W.A.C. 65 (C.A.), refd to. [para. 13].

Canco Oil and Gas Ltd. v. Saskatchewan (1991), 89 Sask.R. 37 (Q.B.), refd to. [para. 13].

St. Lawrence Petroleum Ltd. et al. v. Bailey Selburn Oil & Gas Ltd. et al., [1963] S.C.R. 482, refd to. [para. 14].

Vanguard Petroleums Ltd. v. Vermont Oil & Gas Ltd. et al., [1977] 2 W.W.R. 66; 4 A.R. 251 (T.D.), refd to. [para. 14].

Isaac v. Cook (1982), 44 C.B.R. 39 (N.W.T.S.C.), refd to. [para. 14].

Guaranty Trust Co. of Canada v. Hether­ington (1987), 77 A.R. 104; 50 Alta. L.R.(2d) 193 (Q.B.), varied [1989] 5 W.W.R. 340; 95 A.R. 261 (C.A.), refd to. [para. 14].

Vandergrift et al. v. Coseka Resources Ltd. et al. (1989), 95 A.R. 372; 67 Alta. L.R.(2d) 17 (Q.B.), refd to. [para. 14].

Nova Scotia Business Capital Corp. v. Coxheath Gold Holdings Ltd. et al. (1993), 128 N.S.R.(2d) 118; 359 A.P.R. 118 (S.C.), refd to. [para. 14].

Friedmann Equity Developments Inc. v. Final Note Ltd. et al., [2000] 1 S.C.R. 842; 255 N.R. 80; 134 O.A.C. 280, refd to. [para. 20].

Authors and Works Noticed:

Davies, G.J., The Legal Characterization of Overriding Royalty Interests in Oil and Gas (1972), 10 Alta. L. Rev. 232, p. 233 [para. 2].

Dukelow, Daphne A., and Nuse, Betsy, The Dictionary of Canadian Law (2nd Ed. 1995), generally [para. 8].

Ellis, W.H., Property Status of Royalties in Canadian Oil and Gas Law (1984), 22 Alta. L. Rev. 1, p. 10 [para. 15].

Newman, J.F., Can a Gross Overriding Royalty Be an Interest In Land?, in Oil and Gas Agreements Update (1989), generally [para. 16].

Counsel:

Richard B. Jones, for the appellant;

James C. Crawford, Q.C., Frank R. Dear­love and Scott H.D. Bower, for the re­spondents.

Solicitors of Record:

Jones, Rogers, Toronto, Ontario, for the appellant;

McDonald Crawford; Bennett Jones, Calgary, Alberta, for the respondent.

This appeal was heard on November 9, 2001, before McLachlin, C.J.C., Gonthier, Iacobucci, Major, Bastarache, Binnie and LeBel, JJ.A., of the Supreme Court of Canada. The judgment of the Supreme Court was delivered in both official languages by Major, J., on January 24, 2002.