LAW Some Ins and Outs of Royalties

Royalties, which have been a part of Canada’s mining industry since it began, come in all shapes and sizes. Their one common factor is that they require the grantor to pay money to the royalty-holder. Rarely does a royalty require “payment” of product in kind. A royalty should be looked upon as a contractual right which exists between the grantor and the holder. There is, however, within the mining industry, the widely-held view that a royalty may be an interest in the real property to which it extends. To a large extent, whether or not a royalty can be construed as a property interest will depend upon an interpretation of the document which creates it.

In many ways the difference between a royalty being or not being a property interest is of no significance to either the grantor or the holder. To a lawyer involved in litigation, it may well be quite significant; but that is “the law” and it is beyond the scope of this article to give, or attempt to give, a learned discussion of the subject. For practical purposes it is best to think of a royalty as something created by an agreement. The most important thing is that the agreement which creates the royalty must be complete, clear and, insofar as is possible, unambiguous. In this connection it is essential to remember that it will be you as the grantor or holder who will be dealing with the agreement on a day-to-day basis — not the lawyers or accountants. Accordingly when you sign a royalty agreement (or any agreement, for that matter), be satisfied in your own mind that you understand its provisions and can live with them. If you cannot, get them re-done.

When drafting or considering royalty provisions, the primary objective should be to have clear and complete provisions which set forth the rights and obligations of both the royalty- holder and the property-owner and which are understood and accepted by both of them. The following are some things to consider:

* Provide specifically that the royalty is to be considered as a contractual, and not as a property, right. This may be redundant, but it will clearly set the stage if, in the future, there are arguments as to the nature of the royalty interest.

* Construct the fact situation to fit the desired result. For example, for a property-owner to “retain” a royalty interest is more in keeping with the royalty being a real property interest than if the owner’s entire interest is transferred and a royalty is “granted” back by the transferror.

* If there are specific restrictions to be imposed upon either the holder or the owner, set them out in detail. These should be carefully considered and should probably contain the provision that the holder has no right to be involved with decisions concerning the project — provided, of course, that the owner does not attempt to take actions which would jeopardize the royalty.

* It is often a good idea to provide that the owner may mortgage or charge the property in order to secure borrowings made to finance operations relating to the property. The holder should not object to this so long as the lender acknowledges the rights of the holder.

* Require that the holder will sign such documents related to the financing of the project and the granting of security as may be reasonably required by a lender. The holder may, quite justifiably, be concerned with such a provision and it may be necessary to build in protections. A normal protection is to provide that reasonableness will be as determined by counsel for either the lender or the owner. This is suggested on the basis that lawyers will be objective and reasonable (some readers may question this, but at least such a provision introduces a third party into the situation to mediate).

* If the underlying agreement which creates the royalty interest contains a mutual right of first refusal which was inserted for a “leadup” relationship of, say, a joint venture, it may be desirable to terminate the first right or make it applicable to the royalty, but not the property. If the first right is left applicable, it could seriously inhibit the ability of the holder to develop the property.

* The royalty-holder may protect his/her interest by registering a caution if the property is under the Land Titles system. This is certainly fair game, but the property-owner will want to vet any registration against title to make certain that it accurately describes the royalty interest and is not too general or broad. If the property is registered under the registry system, it may be more difficult to get notice against title that is notice to the public at large, as is the case with a caution. If registration by way of deposit on title is used, it is notice to a party only if that party has read the deposit.

* The ultimate protection for the royalty-holder is for the royalty to be specifically reserved in the deed of transfer that is registered. This is not a common procedure, but it may be used. If it is used, care should be taken that all of the rights of the holder are set forth in the transfer (this could easily be done by way of a schedule). Such a procedure is not possible in some jurisdictions or with respect to unpatented mining claims in jurisdictions in Canada.

Many of the foregoing comments are concerned with putting a potential purchaser of the property on notice of the existence of the royalty. Why is this of concern? Quite simply, and without going into the law on the subject (which is extensive), if a purchaser acquires the property without actual notice of the existence of the royalty, then he/she may acquire it free of the royalty interest. Remember that proper registration under the Land Titles Act constitutes notice to all.

As with any agreement, the most important thing is that the document creating and governing the royalty must be clear and as complete as is possible. If this is done, the question of whether or not a royalty interest can be construed as an interest in the land will never come to issue. It will, however, continue to be one of those questions which lawyers enjoy discussing, usually at great length. Karl J. C. Harries is a partner with the Toronto law firm Faskin & Calvin. The information in this article is summary and general in nature and is not intended to be taken or acted upon as legal advice.