Forgeron v. Nova Scotia Business Capital Corporation

Forgeron v. Nova Scotia Business Capital Corporation Court Court of Appeal Date 1994-10-21 Citation 1994 NSCA 156 Docket CA 100225 Judge/Registrar/Adjudicator Freeman, Gerald B. (Honourable Justice) (CA); Jones, Malachi C. (Honourable Justice) (CA); Matthews, Kenneth M., (Honourable Justice) Document Type Decision Decision Content C.A. No. 100225 NOVA SCOTIA COURT OF APPEAL Cite as: Forgeron v. Nova Scotia Business Capital Corporation, 1994 NSCA 156 Matthews, Jones and Freeman, JJ.A. BETWEEN: DENNIS FORGERON, WILFRED MOORE, ) R.A. Cluney, Q.C. WILLIAM FAULKNER and THOMAS ) for the appellants FAULKNER ) ) Appellant ) ) - and - ) ) David P.S. Farrar ) Claire E. Milton ) for the Respondent NOVA SCOTIA BUSINESS CAPITAL ) CORPORATION, a body corporate ) ) Respondent ) Appeal Heard: ) September 21, 1994 - and - ) ) Judgment Delivered: COXHEATH GOLD MINES LIMITED, a ) October 21, 1994 body corporate, and MICHAEL J. RIDDELL ) and DOANE RAYMOND LIMITED, Trustee ) under a Proposal in Bankruptcy made by ) COXHEATH GOLD HOLDINGS LIMITED ) ) Respondents ) ) ) ) ) THE COURT: Appeal dismissed with costs to the respondent, Nova Scotia Business Capital Corporation in the amount of $1500.00 per reasons for judgment of Jones, J.A.; Matthews and Freeman, JJ.A. concurring. JONES, J.A.: The main issue on this appeal is whether certain royalty interests claimed by the appellants, Wilfred Moore, William Faulkner and Thomas Faulkner affected the mineral rights of Coxheath Gold Mine Limited (Coxheath). The appellant, Dennis Forgeron, no longer holds any interest in the royalties. In 1986 Forgeron was the holder of four exploration licenses giving him the right to search and prospect for minerals under the Mineral Resources Act 1975, S.N.S. c. 12, in certain areas at Tangier and Mason Cove in Halifax County. By an agreement dated April 1, 1986, Forgeron assigned to Coxheath the right to earn a 100% working interest in the mineral claims represented by the licenses. Paragraphs 2,3 and 4 of the agreement provide: Forgeron shall grant to Coxheath the right to earn a One Hundred Percent (100%) interest in the Property in consideration of: (a) The completion of a preliminary drill program consisting of a minimum of 1000 feet of diamond drilling prior to June 25, 1986; (b) The expenditure of a minimum total of Two Hundred and Fifty Thousand Dollars ($250,000) by February 28, 1987 on exploration, development and other work on the Property; (c) The payment to Forgeron of a Five Percent (5%) Net Smelter Return Royalty on all production from the Property; (d) Subject to the approval of the appropriate regulatory authorities and the Alberta Stock Exchange, the payment to Forgeron of 200,000 common shares from treasury. Thereafter Coxheath shall have earned a One Hundred Percent (100%) undivided interest in the Property and the following clauses shall apply. 3. Forgeron may sell all or any part of his 5% Royalty on Net Smelter Return; however, such disposition is subject to a Thirty (30) day right of first refusal in favour of Coxheath on terms not less favourable than those offered by Forgeron to the third party and thereafter any third party purchaser must be bound by the terms of this Agreement. 4. Forgeron shall deliver transfers of the Mineral Claims to Coxheath, which transfers shall be ratified by the Nova Scotia Department of Mines and Energy and Coxheath shall hold the Mineral Claims subject to the terms of this agreement. Upon fulfilment of the terms under paragraph 2 of the agreement, Forgeron transferred the exploration licenses to Coxheath on November 12, 1986 subject to the reservation of the 5% royalty. The policy of the Department of Mines did not permit official transfers of exploration licenses to show any royalty or other partial interests in the lands subject to the licenses. The transfer document to Coxheath did not refer to the royalty reservations. On February 4, 1988, Forgeron and Coxheath amended the 1984 agreement to include an additional 22 mineral claims and to reduce the royalty from 5% on the original licenses to 2.5%. On or about August 18, 1989 Forgeron filed copies of the 1986 agreement and the 1988 amendment with the Registrar of Mineral Titles for the province. By agreement dated November 15, 1990 Forgeron transferred 1.0% of his royalty interest to Wilfred Moore. On or about September 9, 1991 he transferred the remaining 1.5% interest in the royalty to Mr. Moore. Subsequent transfers by Moore resulted in the royalty being owned as follows: Wilfred Moore 1.0% William Faulkner 1.0% Thomas Faulkner 0.5% The three claimants filed caveats with the Registrar of Mineral Rights pursuant to s. 88 of the Mineral Resources Act on September 20, 1991, October 19, 1991 and October 14, 1993. The financial statements of Coxheath dated September 30, 1988 recognized the obligation of Coxheath to pay the royalty. On January 16, 1989 Coxheath executed a debenture in favour of Nova Scotia Business Capital Corporation (B.C.C.) to secure a loan. The debenture created a charge on the property and assets of Coxheath. Clause 1.02C(a) of the debenture provided: 1.02C The Company hereby agrees to pay to BCC in reduction of the Principal Amount outstanding from time to time: (a) the net proceeds from the sale of its sulfide concentrate inventory. For such purposes the net proceeds shall be after provision for all costs of producing and selling such inventory including shipment, insurance, supervision, smelting and related costs and charges and provincial and vendor royalty charges. Coxheath defaulted on the loan and Coopers & Lybrand Limited was appointed receiver. The receiver granted an option to Tangier Mining Incorporated to acquire all of the assets of Coxheath including Coxheath's interests in certain mineral licenses and leases in respect to its operations at Tangier. On November 19, 1993 B.C.C. applied in the Supreme Court for an order approving the granting of the option. The application also requested a determination of the priority of the royalty interests claimed by the appellants. The application was heard by Associate Chief Justice Palmeter. After reviewing the authorities in a written judgment he concluded that the royalty interests as evidenced by the caveats did not constitute interests in land but were contractual in nature and accordingly the receiver could dispose of the mining interests free of any rights claimed by the appellants. The appellants have appealed from that decision. The issues are set forth in the appellants' factum as follows: 1. Did the Learned Chambers Judge err in law in failing to find that the NSR Royalties held by the Appellants constitute an interest in land and are not mere contractual rights? 2. Have the Appellants lost their NSR Royalty rights due to registration deficiencies? 3. If required, will this Honourable Court order rectification of the agreement between Dennis Forgeron and Coxheath Gold Holdings Limited to make it clear that the NSR Royalties that he retained were interests in land and binding upon any subsequent owners of the subject exploration licences. With reference to the first issue the appellants in order to sustain their position that their rights constitute an interest in land rely on a number of Canadian cases and in particular the decision of the Supreme Court of Canada in Saskatchewan Minerals v. Keyes (1971), 23 D.L.R. (3d) 573. In that case the court had to consider two mineral leases each of 20 years duration. Other cases referred to by appellants' counsel also involved leases. It is apparent from the dissenting judgment of Laskin J., in Keyes that his conclusion as to whether royalty rights constituted interests in land depended on an interpretation of the agreements. The following is from his judgment at p. 583: I turn now to the question whether the royalty in respect of lease A-4010 gave Keyes an interest in land. The relevant language of the agreement of June 3, 1948, is as follows, as found in cl. 3(b): The consideration to be paid by Astral...shall be...a royalty of twenty-five cents (25) per ton on all anhydrous salt produced and sold from the said [lease A-4010]... This royalty as a burden on Astral's interest was to come out of Astral's right to "the naturally occurring accumulations of alkali, as defined in the Alkali Mining Regulations under the Mineral Resources Act, on or in [described land] together with the full and exclusive liberty, power and authority... to search for, dig, work, mine, procure and carry away the said accumulations of alkali wherever the same may be found within the limits of the said land". These quoted words are from the grant to Harvie of January 30, 1948, of the interest which Harvie assigned to Astral. An examination of that grant discloses a difference in the formulation of the interest thereby conveyed as compared with that conveyed by the earlier grant of January 31, 1944, covering lease A-163. Under this earlier grant the Crown as lessor granted and demised to Harvie as lessee "the sole and exclusive licence and authority to win and work all the deposits and accumulations of alkali ...together with the sole and exclusive licence and authority...to search for, dig, work, mine, procure and carry away the said alkali" for the renewable 20-year term mentioned earlier in these reasons. In addition to an annual acreage rental of 25 cents per acre, this indenture provided for a royalty in the following words: And Also Rendering and Paying therefor unto the lessor a royalty of twelve and one-half cents per ton of two thousand pounds on shipping weight as determined from transportation returns at the first point of shipment on all products raw or refined, taken from the demised lands, provided that when the said products are shipped in solution the royalty shall be two cents for each gallon shipped; which royalty shall be due and payable on the 31st day of March, the 30th day of June, the 30th day of September and the 31st day of December in each year; What was granted in respect of lease A-163 was a profit à prendre for a term of years only. There is no provision for continuation of the interest so long as production continues, but, of course, the transaction did not involve fugacious substances. I note also that the royalty was fixed not in respect of the mineral in place but as a sum which depended on its prior extraction from the soil and determinable on the basis of its chattel character. The grant in respect of lease A-4010 is by the Crown as lessor to Harvie as lessee, demising and leasing for a 20-year renewable term "the naturally occurring accumulations of alkali...together with full and exclusive liberty, power and authority for the lessee...to search for, dig, work, mine, procure and carry away the said accumulations of alkali wherever the same may be found within the limits of the [defined] land". The grant does not here, as it did not in respect of lease A-163, stipulate for any extension of the term according to continuing production. As previously stated, there is an annual rental of 25 cents per acre, and the royalty is flexibly described as such as may from time to time be prescribed by or pursuant to the Mineral Resources Act or the Regulations thereunder. This grant appears to be more than one of a profit à prendre for a term of years; it is couched in language of a leasehold of the mineral in place, with a right of extraction. In Berkheiser v. Berkheiser and Glaister (1957), 7 D.L.R. (2d) 721, [1957] S.C.R. 387, a so-called lease of all petroleum and natural gas within, upon or under certain land for a ten-year term, "and so long thereafter as the leased substances or any of them are produced", was held to be, in the light of all the provisions thereof, a profit à prendre only. This Court reversed the Court below which had held that, having regard to the form of the lease, a sale of a portion of the land had been effected, with liberty to enter, search for and carry away the substances mentioned. There is, of course, a difference between the fugacious subject-matter in the Berkheiser case and the solid mineral involved in respect of lease A-4010, but the present case does not compel a decision on whether the interest of the appellant is a leasehold or a profit à prendre for a term. Being in either case an interest in land, I see no reason to differentiate on this ground the characterization of a royalty whether mounted by the holder of the interest upon assigning it to another or imposed by such holder upon his interest in favour of a third person. Martland J. in delivering the judgment for the majority held that the option was invalid in the absence of a written consent of the Minister of Mineral Resources as required by the alkali mining regulations. He doubted that the option in question created an interest in land. The problem is considered in the text Canadian Law of Mining 1993, 3rd ed. at p. 466: Among the oil and gas cases, there has been some disregard of important differences between the lessor's royalty, landowner's royalty, and gross overriding royalty. This is a serious concern where an authority holding against an interest in land is relied upon out of context. The first of these is the lessor's royalty, paid by the lessee under a lease of freehold minerals. Being an incident of a reversion, it is generally comprehended as a rent and an interest in land. It is uncommon in mining. The second, not seen in mining at all, is the landowner's royalty, paid by a freehold owner of minerals to another party out of production that may occur from those minerals. This has often been held not to be an interest in land. Each of these two royalties concerns privately-owned minerals and is therefore less relevant to the hardrock mining situation. The third is the overriding royalty, which is very relevant to hardrock mining. It is a royalty paid by a lessee out of his or her interest in the property to a third party. Typically, the Crown holds the fee simple ownership of minerals and grants lesser interests as claims and mining leases. Overriding royalties tend to appear as offshoots of subleases, options, transfers of undivided interests, or the like. Many cases acknowledge the importance of the intention of the parties to the original instrument and suggest that all that is required is sufficiently precise language, but give little consideration to what intention is being sought, what language indicates it, or what language in the particular agreement justifies the conclusion that no interest in land is intended. A number of cases assume that where the royalty is measured as a percentage or money payment on minerals produced, there can be no intention to create an interest in land because once produced or severed, the minerals lose their character as real property. There are deficiencies in that reasoning: it overemphasizes the means of measurement; it presumes that the royalty interest does not exist until production is obtained; and it ignores that the right is to minerals, or proceeds of sale of minerals, that are to come from particular land, and the right is necessarily connected to that particular land. Guaranty Trust v. Hetherington and others seem to suggest that the only kind of royalty that can be an interest in land is one that grants an undivided interest in the minerals in place, following Bensette v. Reece. Along the same lines, some ask whether the royalty-holder has the right to enter and produce minerals if the owner of the property does not produce. In posing this requirement, they fail to consider how unlikely it is that an owner of mineral rights would wish to hamper his or her ownership by admitting the royalty owner to co-ownership or by allowing the royalty owner to conduct operations. However one perceives the reasoning in these cases, it must be recognized that most of the decisions have held that royalties of different kinds, especially overriding royalties carved out of working interest, are not interests in land. In practical terms, a royalty-holder can attempt to secure itself against assignments or insolvencies affecting its property by using a trust a floating charge security, or a provision for a chain of direct covenants from successive assignees. The royalty-holder should also do what it can to give notice of its interest, especially through recording. A royalty agreement may be drawn so as to include a covenant not to transfer the property unless the transferee agrees to assume the royalty and to confirm the assumption of the royalty by a contract with the royalty-holder. A purchaser with notice of the covenant but who is in breach of it may be bound by it, although a trustee in bankruptcy may not. For its part, a mineral owner will use whatever negotiating position it has to resist such restrictions on its freedom to deal with its property. c. Alternatives A more viable analysis is likely to come, it is suggested, from concentration on a more focused set of questions. The first is whether the royalty is carved out of an interest in land, that is, whether the grantor of the royalty himself or herself holds an interest in minerals that is an interest in land. Plainly, the grantor must hold such an interest, but it may be of different kinds: fee simple ownership, a Crown mining lease, a mining claim, or an option. 45 * * 45 If the interest in the claim, option, or lease is not an interest in land (see Chapter 16), obviously there can be no possibility of a royalty from it being an interest in land. The appellants in this case wish to equate a simple interest in a license to a proprietary interest in a lease. It is important therefore to determine the interests granted by the exploration licenses under the Mineral Resources Act 1975, S.N.S. c. 12. Section 2 of the Act contained the following definitions: 2 In this Act unless the context otherwise requires, (e) "exploration license" means a license by which the holder thereof is granted the right to search and prospect for minerals on a designated area for a period of one year; (h) "lease" means a mining lease by which the holder thereof is granted the right to mine on a designated area for a period of twenty years; (p) "prospect" means to search for valuable mineral and includes any mode of working whereby soil or rock is disturbed, removed, washed or otherwise tested for the purpose of finding, identifying or determining the extent of any mineral therein; Under sections 3 and 4 of the Act all mineral rights in the province subject to certain exceptions, were vested in the Crown. Sections 38 and 39 of the Act provided as follows: 38 A license shall constitute authority to search, prospect and mine all or specified minerals found in the area, claim, or tract for purposes of investigation, examination or test only. 39 A license shall be for a term of one year from the date thereof and may be renewed each year for four consecutive years if the holder thereof carries on mineral investigation and work as prescribed in this Act. Sections 47 to 49 provided for the issuance of leases: 47 Subject to Section 83, a holder of any license may apply for and obtain a lease, including such areas as are contained within one or more claim not exceeding eighty in number according to the terms and subject to the conditions, as herein contained, upon proof that the following conditions have been complied with: (a) that each of the said claims is in full force and effect; (b) that the licensee has paid the prescribed rental; and (c) that the licensee has deposited with the Registrar a return of survey of the lands to be taken under lease, duly executed by a land surveyor, and that the said return has been accepted by the Registrar. 48(1) A mining lease in the prescribed form shall be made in duplicate; one duplicate, to be known as the counterpart, shall be issued to the lessee, and the other shall be filed and registered in the office of the Registrar. (2) A certificate of such registry, with the day and year thereof, shall be endorsed on the counterpart delivered to the lessee. (3) A lease shall be executed by the lessee under seal, and on the part of the Crown by the Minister and under seal. (4) A lease shall give authority to mine, quarry or extract all or specific minerals for commercial or industrial purposes. 49(1) A lease shall be for a term of twenty years. (2) A lessee, upon application to the Minister made within six months immediately preceding the expiration of any lease period, shall be entitled to a renewal thereof for a further period of twenty years from such expiration, providing the lessee is bona fide working the lease and has complied with the terms and conditions in the lease contained, within the true intent and meaning of this Act. Section 59 dealt with the transfer of licenses as follows: 59(1) No licensee or lessee shall at any time during the term of the license or lease, assign, set over, transfer or otherwise part with such license or lease or any rights thereunder without the consent of the Minister, in writing, first had and obtained. (2) Where the Minister has refused to consent to or ratify a transfer for which application has been made in proper form and with the information required to be furnished, the Minister, if the applicant so requests in writing, shall hear representations to determine the right of the applicant to receive the consent or ratification. Section 38 of the Mineral Resources Act 1990, S.N.S. c. 18 provides as follows: 38 Subject to Sections 39,40 and 101, the rights conferred by an exploration licence are, and are limited to, prospecting and searching for minerals, extracting minerals for test purposes and applying for a mining lease for all or a part of the area held under the exploration licence. The license is for one year and may be renewed. Under s. 56 the holder of an exploration license is entitled to obtain a mining lease on fulfilling certain conditions. Section 85(1) of the Act provides as follows: 85(1) A licence shall not be transferred without the written consent of the Registrar. The original licenses issued to Forgeron gave him the right "to search for and prospect" for minerals in the specified areas for a period of twelve months. The Minister of Natural Resources did not consent to the transfer of the royalty interests to the appellants. In fact the appellants were advised that the Department did not recognize the transfer of partial interests in licenses. The transfers of the licenses from Forgeron to Coxheath made no reference to the royalty interests. No authority has been cited to establish that a license issued in Nova Scotia conferred an interest in land. In Re Milner's appeal, 11 N.S.R. 522 the Court of Appeal decided that a license to search for minerals granted under c. 9, R.S. 4th Series, was assignable. Young, C.J. stated at p. 525: Conferred by statute, it is a possession or right, whether it be accounted an interest in lands or not, plainly distinguishable from the numerous classes of licenses and easements, whether of pleasure or otherwise, to be found in the books. The rights conferred on Forgeron by the licenses issued under the Mineral Resources Act, 1975 are entirely dependent on the wording of the statute. In my view there is nothing in that Act which indicates that the Legislature intended to confer a proprietary right in the lands or minerals covered by the license. In the words of s. 38 of the Act the license was "authority to search, prospect and mine all or specified minerals in the area, claim or tract for purposes of investigation, examination or test only". Under s. 47 a license holder may apply for and obtain a lease. That provision was not mandatory as opposed to s. 49. The language was changed by s. 56 1990 S.N.S., c. 18. It is not necessary in this case to decide whether a mining lease confers an interest in land. As Mr. Forgeron did not hold an interest in land under the licenses he could not confer such interests in assigning the royalty rights to the appellants. Counsel argued that the license was an option because it conferred a right to obtain a lease. No option was conferred by the licenses. The right to obtain a lease was purely statutory. The mining lease is the document which confers further rights on the licensee not the license. The second issue is answered by the reasoning relating to the first issue. However, the appellants never obtained the Minister's consent to the transfer of the royalty interests under s. 59(1) of the 1975 Act. I see no difference in substance between that provision and the Regulation referred to in the Keyes decision, supra. In that case the majority held that failure to obtain the consent was fatal to the transfer. I would apply that reasoning in this case. With respect the appellants fail on the first two grounds of appeal. The appellants also seek rectification of the agreement between Forgeron and Coxheath. In my opinion it cannot be said that the wording of the 1986 agreement is such that it should be rectified to establish a NSR Royalty interest in land. Rectification should not be granted lightly. See Federal Business Development Bank v. Elcon Petroleum Maritime Ltd. (1983), 58 N.S.R. (2d) at p. 259 and Friedman, The Law of Contract in Canada, 2nd ed. pp. 741 and 742. There is a heavy onus upon the party requesting rectification. Here, the appellants desire to rewrite the terms of the original agreement which would in effect reserve for Forgeron an interest greater than that which he conveyed. He could not, and did not, convey an interest in the land. In addition, and importantly, the appellants did not place this issue before the chambers judge. No evidence was produced specifically on point, no argument was made and there was no adjudication. In consequence this issue should be dismissed. In summary I would dismiss the appeal on all three issues. I would award costs to the respondent, Nova Scotia Business Capital Corporation in the amount of $1500.00. The other named respondents did not participate on the appeal. J.A. Concurred in: Matthews, J.A. Freeman, J.A. C.A. No.100225 NOVA SCOTIA COURT OF APPEAL BETWEEN: DENNIS FORGERON, WILFRED MOORE, WILLIAM FAULKNER and THOMAS FAULKNER ) Appellants ) - and - ) REASONS FOR ) JUDGMENT BY: NOVA SCOTIA BUSINESS CAPITAL ) Corporation, a body corporate ) ) JONES, J.A. - and - ) ) COXHEATH GOLD MINES LIMITED, ) et al ) ) , ) Respondent ) ) ) ) ) ) )