Feb 21, 2019

What is an interest in land and why does it matter ?

Third Eye Capital Corporation v. Ressources Dianor Inc., 2018 ONCA 253 (CanLII)

January 2019

In essence, an interest in land is a right (or a "bundle" of rights) that someone has in, against, under or over - or with respect to - a parcel of land. If the person holding the interest in land is the current owner of the land itself, then the "interest" means "simply" ownership of that land. There are many interests in land which do not rise to the level of "ownership", but which give meaningful - and often valuable - rights or entitlements to the holder thereof. Common examples are:

  1. if I have a right to possess / occupy your land, my interest is a lease;
  2. if I have a right to pass over and upon your land to have access to some portion of your land or some other land near or adjacent to your land, my interest is an easement;
  3. if I have a charge on your land to secure a debt you owe me, thereby entitling me to sell (or acquire ownership of) your land if you don't repay your debt to me, my interest is a mortgage; and
  4. if I have a right to enter your land and remove resources therefrom, for example, minerals, hydrocarbons, stone and gravel, soil, non-domestic wildlife (and vegetation), my interest is a profit a prendre.

What is particularly significant about these rights and interests is that, where ownership of your land changes hands, I will continue to be legally entitled to - and be able to continue to use or exploit - my interest in your land, notwithstanding that you are no longer the owner thereof. In most cases, my interest in the land will continue to exist indefinitely, notwithstanding multiple changes in the ownership thereof.

The concept of an interest in land and its being of indefinite length, notwithstanding changes of ownership of the land from which the interest is derived, was developed in the English common law system over many hundreds of years. However, an interest in land is to be contrasted with a "mere" contractual right existing between the holder of the right and the other party who grants the right in relation to the other party's land. If you grant me permission to come onto your land for a limited purpose, and in particular, expressly or impliedly, for a limited period of time, my right is not categorized as an interest in land, but rather is considered to be a "license". Or a mere contractual right which exists between me and you, but which is not capable of being enforced by me against a subsequent owner of your land. Licenses may also be held to exist - as opposed to interests in land - where there is some failure to meet all of the particular legal requirements required by law to constitute an interest - or a particular type of interest - in land. So, for example, were you purport to grant me an easement for access to or over your land, but for whatever reason, an easement is not considered to have been legally created, your grant to me may be held to be a license which binds you, but which would not bind your successors in the ownership of your land.

Under modern systems of land ownership (in Manitoba, primarily constituted under/by the Real Property Act (Manitoba)), in order to effectively bind successive owners of land burdened with an interest in land, the holder of that interest must register a notice (typically, although not always a "caveat") against the title to the burdened land. Failure to register such notice may result in the holder of the interest losing it, insofar as subsequent owners are concerned. So, for example, where you give me a land interest with respect to your land, but I fail to record notice of it against your title, I may* not be able to enforce that interest against someone to whom you sell the land and who acquires it without any knowledge (or "notice") of the existence of my easement.

Traditionally, the common law has held that:

  1. rights that entitle the holder to own, possess, occupy, pass over or upon land or to take or remove something therefrom, or to restrict / prohibit the use of land, or to sell land to recoup debt claims - in other words, rights that give the holder a direct, physical "connection" to the land - are interests in land; and
  2. rights which entitle the holder to ("merely") obtain value (usually monies) from the holder of an interest in land are not themselves interests in land. Examples would be an entitlement of a landlord to the payment of rent owed by a lessee of land to it and the right to payment of a royalty (or a portion thereof) which is owed by the holder of a profit a prendre who undertakes to pay monies to the royalty holder.

Thus while the holder of a right to payment of the types referred to in paragraph (ii) immediately hereinabove ("Payment Right") could enforce that right against the party that contractually granted it, it could not treat its Payment Right as a land interest, record notice of it against the title to the underlying land or enforce it against any subsequent owner. Or if it succeeded in recording notice on title, a court would in most cases, subsequently hold that the registration was void (in effect, meaningless) and the registration would not bind a successor in title to the holder of the profit a prendre itself. In so holding, the common law Courts have on occasion additionally pointed out that just because the parties to the creation of a Payment Right agreed between themselves that the Payment Right is or is to be treated as a land interest, does not make it so.

This approach of the common law was - in this writer's opinion, radically - changed by The Supreme Court of Canada in Bank of Montreal v. Dynex Petroleum Ltd. (2002 SCC 7, 1 S.C.R. 146, (hereinafter, the "Dynex Case"), and more recently, in the Ontario Court of Appeal case Third Eye Capital Corporation v. Ressources Dianor Inc. / Dianor Resources Inc., 2018 ONCA 253 (hereinafter, the "Third Eye Case").

In the Third Eye Case, the landowner granted certain mineral / mining claim entitlements to "X". "X" entered into one or more agreements with "Y", promising "Y" that "Y" would be entitled to the payment of certain amounts ("Gross Overiding Royalties", hereinafter, "GORs") which were based upon revenues generated by "Y" in exercising its mining claims, rights and entitlements. "X" and "Y" acknowledged and agreed in their agreements that the GORs were and were to be considered as interests in land, and "Y" recorded notice of its rights under its GORs against the title(s) to landowner's lands**. "X" obtained credit from Third Eye Capital (the "Lender") and to secure its obligations to the Lender, granted the Lender a security interest in its mining claims. Subsequently, "X" became insolvent, and "X"''s receiver sold "X"'s assets - including its mining claims - to a purchaser. In connection therewith, the purchaser obtained a Court order approving the sale and vesting the assets - including the mining claims - in the purchaser free and clear of "Y"'s GORs. "Y" appealed the earlier Court decision and the Court of Appeal agreed with "Y"'s positions. In doing so, the appeal Court cited the Dynax Case which had held that, contrary to prior common law conceptualization, contractually created rights to payments of value derived from or out of, or based upon the grantor's ownership and exploitation of an interest in land, were to be considered themselves, interests in land. Thus the lower Court's issuance of a vesting order extinguishing the GORs was wrong. The GORs were land interests, and as such, bound successive owners of the mining claims from which they had been derived. Stated another way, "Y"'s rights and entitlements under its GORs were not "merely" personal and contractual rights existing solely between "X" and "Y", rather they were land interests which gave "Y" rights in the mining claims themselves, and thus rights enforceable against not just "X" as the original contracting party with "Y", but also against all successive owners of the mining claims subsequent to "X".

Given the Supreme Court's and the Ontario Court of Appeal's holdings in the Dynax Case and the Third Eye Case, it is interesting to consider the meaning and application of Section 4(f) of the Manitoba Personal Property Security Act (the "MPPSA"). Section 4(f) provides that: "Except as otherwise provided in this Act, this Act does not apply to…(f) the creation or transfer of a right to payment that arises in connection with an interest in or a lease of land". It is reasonable to assume that a Court called upon to interpret the meaning of Section 4(f) in relation to the rights and entitlements comprising a GOR or a similar entitlement to value based on/derived from a profit a prendre would conclude that such rights / entitlements are firstly, not governed by the PPSA and secondly, that they are land interests? The writer appreciates that one could argue that just because a payment right derived from a profit a prendre is not governed by the PPSA doesn't necessarily mean that such right is not personal property; conceivably, it is a species of personal property which just happens not to be affected by the PPSA. But if it is personal property and is not governed by the PPSA, then what is it governed by? The answer would appear to be that it is governed by the laws pertaining to real property, including where required and applicable, the Manitoba Real Property Act.

Given the gist of the Courts' holdings in the Dynax Case and the Third Eye Case, one can only speculate upon what future Court decisions might be with respect to certain types of contractually created rights which relate to land and / or land usage, but which so far have been treated as "mere" personal (contractual) rights, and not as land interests (which bind successive owners). Consider the following:

  1. a first right of refusal of land;
  2. a right to require the sale (transfer) of a real estate interest which is subject to certain yet to be fulfilled conditions precedent;
  3. a right to require someone to whom you have sold land to reconvey it to you consequent upon the buyer defaulting in the performance of certain obligations owed to you (where your right is not structured as a defeasible fee simple); and
  4. a right you have against your neighbor to require your neighbor's land to be dealt with in a certain manner which requires your neighbor to conduct certain activities and / or expend certain monies***.

In any event, we know that a legislative body's statutory intervention into the common law has occurred - and continues to occur - repeatedly in manners which modify, and sometimes completely reverse, long-standing common law principles. Stay tuned for future developments!


*I have used the word "may" here because a peculiarity of Manitoba's land ownership regime is that an unrecorded / unregistered easement will - in most cases - bind successive ownerships without registration of notice thereof against the title to the burdened land. However, the need for registration of interests in land against titles is required in the case of most other land interests.

**The judgment is unclear as to whether or not "Y" recorded notice of its GORs against the ownership records for the mining claims themselves, but for the purpose of this review and analysis, it can be assumed that if such recording was possible, it was or would have been done

***There may be other "policy concerns" regarding the transformation of this type of right into a land interest which binds successors; it has always been considered unreasonable to impose positive obligations on successive landowners without their (contractual) consent to be so bound.