Caveat Emptor in Quebec NSRs
In Quebec, as elsewhere in Canada, net smelter return (NSR) and similar royalties are often granted, along with cash and/or share consideration, to sellers in mining property option transactions. Recently, the Quebec Court of Appeal provided a reminder in Anglo Pacific Group PLC v. Ernst & Young Inc. (“Anglo Pacific”) of the complexity of creating enforceable NSR royalties in Quebec.
In Anglo Pacific, the Court considered the nature of an NSR royalty granted by the holder of mining claims to a lender and the legal publicity regime applicable to such a royalty. The prevailing view in Quebec had been that such a royalty did not constitute an ownership or property right, but rather a personal right. This is an important distinction because a royalty holder with a personal right only has a recourse against the grantor of the royalty. As a personal right, the royalty could effectively be worthless if the underlying mining claim is transferred to a third party or if the grantor becomes insolvent.
In a notable development, the Court of Appeal held that it was possible for the holder of a mining claim to grant a property right, not only in the mining claim itself, but also in the minerals underlying the claim that the holder becomes entitled to extract upon the issuance of a mining lease with respect to the claim. In other words, it is possible for the holder of a Quebec mining claim to grant a royalty in minerals that is an ownership right, though the right would be subject to the issuance of a mining lease and would only become effective or “attach” to the minerals at the earliest when the mining lease is issued and, more likely, when the minerals have been extracted.
The Court of Appeal made it clear, however, that the creation of a property right requires more than just the intention of the parties to do so. The royalty holder must be granted a direct right in one or more of the ownership attributes of the property (the right to use, enjoy the products from or dispose of the property). To be a right of ownership, the royalty must grant rights that can be exercised directly over the property. While this is clear enough in principle, in practice royalty agreements are rarely drafted with a view to providing a royalty holder with such direct rights. Anglo Pacific underscores that particular attention needs to be paid to the drafting of NSR royalties relating to Quebec properties if the parties intend the royalty to constitute an ownership or property right.
Anglo Pacific is also helpful in its examination of the legal publicity regime applicable to mining royalties as property rights. The Court confirmed that the registration of a royalty in the public register of real and immovable mining rights maintained by the Ministère des Ressources naturelles et de la Faune does not render the royalty enforceable against third parties. In order to be enforceable against third parties, the royalty must be published in the register of real rights of State resource development of the Quebec land register (provided that the royalty has created rights susceptible of being registered in that register).
If it has never been a good idea to dust off an Ontario precedent royalty agreement in order to negotiate an enforceable royalty with respect to a Quebec mining claim, Anglo Pacific only helps to reinforce this point. In a property option transaction, the royalty often gets less attention than the cash and/or share consideration. In Quebec, sellers should focus a little more on the royalty to avoid being shortchanged.
Anglo Pacific mining claim net smelter return NSR NSR royalties State resource development of the Quebec land register