When Is An Interest In Land A Legal (As Opposed To An Equitable) Interest?

By: Nigel Bankes

Case Commented On: PrairieSky Roy2alty Ltd v Yangarra Resources Ltd, 2025 ABCA 240 (CanLII)

PDF Version: When Is An Interest In Land A Legal (As Opposed To An Equitable) Interest?

The principal issue in this case by the time the matter reached the Court of Appeal was the question of whether a gross overriding royalty (GORR) carved out of an Alberta Crown petroleum and natural gas (png) lease was a legal or an equitable interest in land. Justice Michel Bourque at trial (2023 ABQB 11) concluded that the GORR in question was an interest in land (applying Bank of Montreal v Dynex Petroleum Ltd, 2002 SCC 7 aff’g 1999 ABCA 363).  Furthermore, Justic Bourque went on to conclude that the GORR was a legal interest in land. The GORR was therefore binding on Yangarra as the successor in interest to the Crown png lease, even though Yangarra had no notice of PrairieSky’s GORR. As a result, Justice Bourque did not need to consider Yangarra’s alternative argument to the effect that if the GORR were only an equitable interest in land Yangarra was entitled to be treated as equity’s darling (i.e. the bona fide purchaser of the legal estate without notice (actual or constructive) of the prior outstanding equitable interest (i.e. the GORR)). The Crown png lease originally granted in 1979 was held by a number of parties in succession over the years until 2011, when Home Quarter Resources (HQR) granted the GORR to Range Royalty (the HQ GORR or the 2011 GORR). The lessee’s interest subsequently became vested in Yangarra, while Range Royalty’s interest became vested in PrairieSky. I commented extensively on the trial judgment here and I refer the reader to that comment for a more detailed summary of the facts.

Two additional facts I wish to emphasize here are that HQR purported to create the royalty interest on April 1, 2011, the same day that it entered into a purchase and sale agreement with Trarion Resources – the then registered lessee – to acquire the lease. HQ did not become the registered lessee until May 11, 2011 (trial judgment at paras 10 – 11). I explore the implication of these facts below.

By the time the case got to the Court of Appeal, Yangarra accepted the trial judge’s conclusion that HQ GORR was an interest in land. This is crucial. It means that this GORR does not exist simply as a matter of contract as between the original parties to the contract, but it also exists as a property interest. Once it is conceded that this GORR sounds in property (as well as contract) then, like other property interests, the GORR property interest binds the whole world unless it can be shown that a GORR generally, or this particular GORR, has a more limited proprietary status when it comes to third parties.

With this concession, the only substantial issue remaining was whether or not GORR was a legal interest or an equitable interest. In a Torrens jurisdiction, such as Alberta, we usually don’t need to concern ourselves with this question. All that we normally care about is whether the interest in land is registered in the Land Titles Office or otherwise protected on the register by way of a caveat. If the interest is registered or caveated it will bind the registered owner whether it is a legal interest or an equitable interest. If it is not registered or caveated the registered owner will be able to take and free and clear of that unregistered interest (whether legal or equitable), except in the case of fraud wherein the registered owner has participated: Land Titles Act, RSA 2000, c L-4 ss 53, 60, 62 and 203 (LTA). However, for all intents and purposes, Crown-owned minerals exist outside Alberta’s Torrens system (see LTA ss 134(2) and 202 and my comment on the trial judgment). As a result, the old common law rules pertaining to legal and equitable interests are still relevant and important when dealing with Crown mineral interests.

In a unanimous judgment the Court of Appeal (Justices William de Wit, April Grosse and Kevin Feth) confirmed Justice Bourque’s decision at trial to the effect that the GORR at issue in this case was a legal interest and not merely an equitable interest, with the result that Yangarra was bound by the GORR regardless of notice.

For me, and as I detail below, this conclusion is premature because neither level of court seems to have grappled with the fact that at the time the HQ GORR was created, the grantor of the GORR (HQR) could only claim to have an equitable interest in the lease. HQR was therefore not in a position to create a legal GORR (see statement of facts in the opening paragraphs of this post) since it was not the registered lessee.

I also think that some of the reasons offered in support of the conclusion that the GORR is a legal interest are unnecessary and potentially misleading once one accepts (as the parties and the Court claim to do) that this GORR is an interest in land. Once you begin with that assumption, the only relevant question is whether the instrument creating the royalty and any subsequent interest assigning that royalty complied with rules pertaining to the creation and assignment of legal interests in land as they may exist from time to time. The intention of the parties (except as revealed by compliance with any necessary formalities) is irrelevant to the characterization of whether the interest is legal or equitable.

In sum, in order to assess whether or not the GORR is a legal or only an equitable interest the Court needs to address one set of questions in relation to the lease, and a second set of questions in relation to the GORR.

The questions that we need to answer in relation to the lease are the following:

1. What are the requirements for ensuring that a Crown png lease is a legal lease and have these requirements been fulfilled?
2. What are the requirements for ensuring that an assignment of a Crown png lease is a legal assignment and have these requirements been fulfilled? Recall that in order to qualify as equity’s darling, Yangarra must, inter alia, be the purchaser of a legal estate (i.e. take a legal assignment).
3. At the time when the GORR was created was the grantor of the GORR the legal lessee (i.e. the original lessee or the registered assignee?) For example, if the GORR was granted by a farmee that had yet to earn an interest under the applicable farmout agreement, let alone register that interest, the farmee could not possibly be the holder of a legal interest or estate and thus could not grant a legal interest to another party.

And the questions relating to the GORR that we need answered are the following:

1. What are the requirements for ensuring that an interest carved out of a Crown png lease, specifically a GORR, is a legal GORR and have these requirements been fulfilled?
2. What are the requirements for ensuring that an assignment of a GORR constitutes a legal assignment and have these requirements been fulfilled? The chain of title needs to be complete in the sense that every link in the chain needs to be a legal assignment since it is not possible for an assignee of an equitable GORR to take a legal assignment of that interest.

Armed with this set of questions we can now turn to examine how the Court of Appeal decided the case before returning to these questions in the concluding summary of this post.

The Court’s judgment on the legal/equitable status of the GORR has two principal parts. The first part addresses the question of whether a GORR can be a legal interest as a matter of law. The second part considers whether this particular GORR is a legal or equitable interest.

Part One: Can a GORR be a Legal Interest?

The Court of Appeal begins this part of its judgment with a lengthy analysis of whether the Court would or could recognize a GORR as a legal interest (at paras 23 – 36). In other words, the Court treats this question as a recognition question of the same order as the initial question of whether a GORR can subsist at all as an interest in land at all. I am not sure that this was necessary, but I agree with the conclusion that the Court can recognize both legal and equitable interests (at para 36).

I concede that some categories of interests in land may only exist in equity.

Sometimes this may be because the interest is, by its very nature, so contingent that it does not come close to satisfying the legal requirements of a present legal interest (e.g. an agreement to grant something in the future, an option, or a right of first refusal). As Justice Bourque noted at trial, this is not the case for a GORR. A GORR is not by its very nature a contingent interest; it is vested from the time that it is created. The only contingent element is whether the property that the royalty encumbers will ever produce. But that is a factual contingency, not a legal contingency.

Sometimes an interest may only be equitable because the legislative recognition of an interest specifies that the recognition is only a recognition in equity and not in law. For example, s 63(1) of Alberta’s Law of Property Act, RSA 2000, c L-7 specifies that:

The following are equitable interests in land:

(a)  a right of first refusal to acquire an interest in land;

(b)  an assignment of rents payable pursuant to a lease of land,

And sometimes judicial recognition may sound only in equity because the interest in question falls short of actually being an interest in land. Such is the case, for example, for restrictive covenants which touch and concern land but for which there is no privity of estate. Such covenants run with the land and bind third parties in equity, but a restrictive covenant is not itself an interest in land: Keppell v Bailey (1834) 39 ER 193 and Tulk v Moxhay (1848) 41 ER 1143.

But these cases are the exceptions. The general rule is that interests in land may be legal or equitable depending upon the circumstances and formality of their creation. This is true, for example, for easements, leases, mortgages, charges and profits à prendre.

Second, the Court addressed Yangarra’s argument to the effect that even if the Court could have recognized new legal as well as new equitable interests prior to the fusion of the courts of equity and law in 1875, the Court has somehow lost that power. That argument, as the Court noted, defied logic (at para 37). After all, s 5 of Judicature Act, RSA 2000, c J-2 makes it clear that the Court of King’s Bench has all of the plenary powers of the High Court of Chancery and all of the common law courts as of the date of reception of English law (July 15, 1870). In sum, fusion could hardly be a reason for concluding that the Court’s power to recognize property interests was limited to recognition in equity (at paras 38 – 42).

The third element of this part of the judgment is titled “The reasoning in Dynex ABCA and Dynex [SCC] supports the availability of a legal interest”. The title is revealing since it suggests that the Court considers that the reasoning as to the question of whether an interest is capable of subsisting as an interest in land is equally applicable to the question of whether an interest, once so recognized, is legal or equitable. Indeed, sometimes in this section of the judgment one gets the impression that the Court is making a more general categorical ruling as to whether a GORR ought to be characterized be legal or equitable. Consider, for example, this assertion:

Characterizing the interest as legal better serves the stated objective underlying the change to the common law – broadly sheltering the holders of overriding royalties from third party rights. (at para 46)

And similarly:

The trial judge correctly observed at paragraph 148 of his Decision that the policy reasons identified in Dynex ABCA and Dynex for recognizing overriding royalties as interests in land also support characterizing the interest as legal rather than equitable … (at para 51).

In my opinion this discussion is misconceived. A GORR may be either legal or equitable; a court cannot categorize a type of interest as legal rather than equitable just because the court thinks that a characterization of a category of interest as legal rather than equitable increases certainty for owners of that category of interest (here GORRs) and enhances efficiency. By the same token a court cannot unilaterally convert a legal interest into an equitable interest: Chupryk (Re), 1980 CanLII 2482 (MBCA).

All that said, I acknowledge that despite the apparently generic and binary nature of the Court’s observations the Court did go on to consider (in what I refer to as part two of the analysis), whether this GORR was a legal or equitable interest.

Part Two: Is This GORR a Legal or an Equitable Interest?

The Court offers two main reasons for concluding that this particular GORR is a legal rather than an equitable interest in land.

The first reason that the Court gives for supporting that conclusion is that it is consistent with the objective intentions of the parties (at paras 58 – 65). While this approach preserves the parallelism with Dynex it is far from clear why that is important. The question of whether or not an interest in land is legal or equitable is a pure question of law in which the intentions of the parties are irrelevant. Just as the intentions of the parties are irrelevant in assessing whether an instrument transgresses the rule against perpetuities, so too are those intentions irrelevant in assessing whether or not the parties intended to bind the whole world or just the whole world minus equity’s darling. That’s the nature of property as revealed in so many different ways: e.g. the parties can call something a licence but if the party denoted as the licensee obtains exclusive possession, then the correct legal characterization is that of a lease: Street v Mountford, [1985] AC 809 at 827, [1985] UKHL 4 (BaiLII). Similarly, the parties can call something an oil and gas lease, but examination of the granting clause and the habendum may lead a court to conclude that the instrument is actually a profit à prendre for a term of uncertain duration: Berkheiser v. Berkheiser and Glaister, 1957 CanLII 56 (SCC), [1957] SCR 387 (per Justice Kellock at 399).In sum, and as my colleague Jonnnette Watson Hamilton reminded me on reviewing a draft of this post, while ascertaining objective intention is certainly important in interpreting a contract (see Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (CanLII), [2014] 2 SCR 633 ) it is less clear that the search for objective intention should carry over to the question of whether an interest in land is a legal or an equitable interest which prima facie a question of property – or a question law- and not a question of contract interpretation.

But even if I am wrong and the objective intentions of the parties are relevant when it comes to the legal/equitable choice, how can we possibly determine objective intention with respect to that particular question? Can we conceive of any situation in which it is possible to infer that the parties intended the GORR to be vulnerable to the bona fide purchaser of the legal estate for value without notice of the GORR? How else might we discern the intention to create a legal interest other than by concluding that the relevant objective intention is only revealed by evaluating whether the parties followed (or did not) the rules for creating a legal interest?

The second reason the Court of Appeal gives (not in the alternative but in addition to the intentions of the parties) is that the GORR in this case complied with all of the relevant legal statutory requirements.

In assessing this part of the judgment I begin by considering Justice Bourque’s reasons at trial for concluding that the GORR was a legal interest. Justice Bourque seems to have given two reasons. The first was that since the GORR was an interest in land and thus a proprietary interest, it must also be a legal interest:

As previously discussed, the 8% Royalty is no mere contractual, in personam right — it is a proprietary interest in land (see paragraph [88]) that is legally recognizable by virtue of satisfying the common law Dynex test for a royalty that constitutes an interest in land. The 8% Royalty is therefore a legal interest, or an in rem right, that runs with the lands and is enforceable against the underlying interest in land. (trial judgment at para 133)

I think that I have said enough to this point to suggest that this is not sufficiently convincing; a proprietary interest may be legal or equitable. Classifying something as an interest in land does not, in and of itself, establish that such an interest is a legal interest in the sense that it binds the whole world regardless of notice.

Justice Bourque’s second reason is potentially more convincing, namely that the parties “complied with all formal common law requirements for a valid conveyance of an interest in land when they entered into the 2011 Royalty Agreement” (trial judgment at para 134). What were those requirements? According to Justice Bourque the requirements were that the agreement be in writing and constitute a valid contract (i.e. offer, acceptance and consideration). And as authority for that Justice Bourque cited s 4 of the Statute of Frauds (1677) 29 Charles II c 3. But as I pointed out in my post on the trial judgment, and as the Court of Appeal acknowledges, s 4 is the wrong section of the Statute. Compliance with s 4 alone (a written note or memorandum of an agreement signed by the person against whom it is to be enforced) will not create a legal interest, although it will serve to make the agreement enforceable in equity. For the Court of Appeal this mistake was immaterial: “While the trial judge referred to the wrong section of the statute, whether by typographical error or otherwise, the error was immaterial to the analysis.” (at para 68) The incorrect reference was immaterial because the “requirement for the agreement to be in writing and signed by the parties … is common to sections 1, 3 and 4”. (ibid) While this is not quite accurate since s 4 does not require either that the agreement be in writing nor signed by both parties, I agree that the GORR in this case satisfied the relevant sections of the statute (s 1 for the creation of the GORR and s 3 for any assignment of the GORR) and that it was not necessary that the instrument creating the GORR or any subsequent assignment also be under seal. (In my post on Justice Bourque’s decision I had suggested that s 3 of the Imperial Law of Property Act (LPA) of 1845 might require sealing, but I agree with the Court of Appeal’s detailed analysis which confirms that that s 3 of the Imperial LPA only applies to certain types of transactions and that list does not include a GORR. My earlier suggestion was incorrect.)

Part Three: What Neither Level Of Court Addressed

That was enough to decide the case in favour of PrairieSky but it is important to note that neither Justice Bourque nor the Court of Appeal grapple with the question of whether the party creating the GORR (HQ) had a legal interest at the relevant time (question # 3 in my methodology above). The facts as summarized by Justice Bourque, and as emphasised in the introductory paragraphs of this post suggest that this was not the case. On the day on which the GORR was created the lease was registered to Trarion Resources (i.e. Trarion was the legal lessee) but the GORR was created by Home Quarter. HQ’s only interest in the lease at that time was by virtue of an agreement of purchase and sale executed on the same date. It must follow from this that HQ’s interest in the lease was at most an equitable interest. A party that has only an equitable interest cannot pass a legal interest in that property to another party (an application of nemo dat quod non habet – no person can give that which they do not have, and implicit as well in the two-step Dynex analysis which entails, at the second step, consideration of whether the interest out of which the GORR is carved is itself an interest in land (here, a legal interest in land)).

It remains for me to apply my methodological approach to the facts as I understand them from the two judgments.

1. What are the requirements for ensuring that a Crown png lease is a legal lease? Have these requirements been fulfilled?

The lease must be issued in accordance with the terms of the Mines and Minerals Act, RSA 2000, c M-17  (MMA) (see especially s 16 and Part 4) and the Mines and Minerals Administration Regulation, Alta Reg 262/1997. At one time, Crown png leases were issued under seal and signed by both parties. The current standard lease form only provides for execution by the Minister. Neither the trial judge nor the Court of Appeal examines the lease form and so we proceed on the assumption that a legal lease was created under the MMA rules as they stood at the relevant time. I take it that the requirements of the MMA must prevail over anything in the Statute of Frauds since the MMA is the more specific and recent statute.

2. What are the requirements for ensuring that an assignment of a Crown png lease is a legal assignment? Have these requirements been fulfilled?

The assignment must be in writing and conform to the requirements of s 91(1) of the MMA and Crown Minerals Registration Regulation, Alta Reg 264/1997, and, once registered in accordance with s 91 of the MMA, it must be a legal assignment. Justice Bourque confirms that that the transfer of the lease to Home Quarter (the party that carved the GORR out of Crown lease) was subsequently registered in the Department’s register.

3. At the time when the GORR was created, was the grantor of the GORR the legal lessee (i.e. the original lessee or the registered assignee?)

The facts suggest that the grantor of the HQ GORR did not have a legal interest in the lease at the time the grantor (HQ) executed the GORR. It follows from this that the HQ GORR can only be an equitable interest. The owner of an equitable interest is not in a position to grant a third party a legal interest in an equitable interest because a legal interest would be “bigger” interest (binds the whole world) than its own equitable interest.

4. What are the requirements for ensuring that an interest carved out of a Crown png lease, specifically a GORR, is a legal GORR? Have these requirements been fulfilled?

The GORR can only be a legal interest if the party creating the GORR had a legal interest in the lease at the time the GORR was created (see # 3 above). In addition, the GORR should be in writing and signed by both parties (Statute of Frauds, s 1). This latter requirement seems to have been met but this is not enough to make the GORR a legal interest. There are no relevant additional requirements in the MMA or regulations since a GORR is not a registerable interest under the MMA.

5. What are the requirements for ensuring that an assignment of a GORR constitutes a legal assignment and have these requirements been fulfilled?

The GORR must be assigned by way of a deed or note in writing signed by the assignor or agent of the assignor (Statute of Frauds, s 3). So far as we know, this requirement appears to have been met. There are no relevant additional requirements in the MMA or regulations since a GORR is not a registerable interest under the MMA.

Conclusion

If my reasoning is persuasive, then it follows that the Court’s conclusion in favour of PrairieSky was premature. If PrairieSky’s GORR is not a legal interest, PrairieSky may still be entitled to succeed, but Yangarra must be given the opportunity to persuade the Court that it is equity’s darling i.e. the bona fide purchaser of a legal estate (the registered interest in the png lease) without notice of the outstanding equitable interest (the HQ GORR). It seems pretty clear that Yangarra did not have actual notice of the HQ GORR, but notice in this context means actual or constructive notice (i.e. the notice that Yangarra would have obtained had it conducted its acquisition of the png lease in accordance with the due diligence standards prevailing in the industry). This requires an assessment of the evidence of Yangarra’s conduct in light of that standard. Relevant evidence was adduced at trial by both parties. Justice Bourque did not reach a final conclusion on the point because of his conclusion as to the legal characterization of the HQ GORR, but he did offer the provisional opinion that Yangarra’s expert “evidence would [not] have assisted the Court in assessing whether Yangarra had made out the defence of BFPV.” (trial judgment at para 155) Unfortunately, we have no account of the actual evidence of either party on this point.

Neither did the Court of Appeal directly engage with this argument, although it did reject an alternative argument from Yangarra to the effect that if the Court were to recognize what Yangarra considered to be a “new” legal interest, then the Court should subject that “new” legal interest to the bona fide purchaser defence. Given the far-reaching nature of such an approach (effectively demoting a legal interest to the same status as an equitable interest, see Re Chupryk above) the Court had little difficulty rejecting it, especially since Yangarra had “not identified any appellate authority or dissenting opinion supporting its position, academic criticism of the existing case law, the adoption of a contrary rule in other jurisdictions, or doctrinal criticism of the current case law and its foundations.” (at para 81) As a result, neither level of court definitively enaged with the available evidence to assess whether Yangarra could claim to be equity’s darling in the event that PrairieSky’s interest were characterized as equitable rather than legal.

Thanks to Jonnette Watson Hamilton for comments on an earlier draft of this post.

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This post may be cited as: Nigel Bankes, “When Is An Interest In Land A Legal (As Opposed To An Equitable) Interest?” (1 August 2025), online: ABlawg, http://ablawg.ca/wp-content/uploads/2025/08/ Blog_NB_LandInterest.pdf

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