Oil and Gas Royalty Trust Administration Canada’s largest, most experienced provider

Today’s Focus

› What makes a Superior trust and what makes an Inferior one? › What is the difference between an Inferior form of Royalty Trust and a Superior one? › What does Computershare do with the money they receive? How is this dependent upon whether the royalty is received for an Inferior or Superior trust? › Why is it important for lessees and, even more importantly, prospective lessees to recognize the importance of the trustee caveat and the implications that it brings?

Industry Consolidation History Central Guaranty Trust Company

Computershare

Northern Trust Company

Guaranty Trust Company

Central Trust Company

Prudential Trust Company

Crown Trust Company

Western Trust Company

Trusts & Guarantee Company

The Canada Permanent Company

Canada Trust Company

Osler & Nanton Trust Company

Montreal Trust Company of Canada

Yorkshire Trust Company

The Canada Permanent Toronto General Trust Company

Eastern & Chartered Trust Company

Chartered Trust Company

Eastern Trust Company

Toronto General Trust Company

Toole Peete Trust Company

Victoria and Grey Trust

North American Trust Company

First City Trust Company

City and Savings Trust Company

Eaton Bay Trust Company

Security Trust Company

Alberta Royalty Trusts

GRTAs GRTCs GRTs RTs

Royalty Trusts

› Royalty Trusts were initiated by freehold mineral owners who had entered into leases granting them a royalty › Represent an interest in land and most often has precedence on the title. › Most were set up in the early to mid-1950s › Royalty assigned was generally 12.5% › A caveat was registered against the title to warn all who might have an interest in the title that there was a trust that had an interest in land and that a portion of the royalty had been assigned to a trust. › Unit certificates (points) were issued to the settler of the trust or to the parties he indicated.

Benefits of a Royalty Trust for the Freehold Owner › A RT enabled a freehold mineral owner to: › Sell units to raise funds › Gift a portion of royalty to family members › Trade units with neighbours, friends and others to share in the chance of a discovery › Retain the mineral title making all leasing decisions and retaining lease bonus payments. **Note-these interests do not belong to Computershare – nor do we hold interests in these trusts. We are a service provider; we charge a fee for maintaining the registers and caveat, for disbursing royalty revenue and for preparing and filing the necessary tax forms.

Royalty Trust Administration

“The Good Old Days” › From 1950 through to the mid-1980s › Trustees received and distributed royalties to the holders of trusts › No questions about the validity of Royalty Trusts or whether the holders were entitled to the money

› And then – the great schism occurred!

Court Actions and Lots of Questions

It was a scary time! › From 1984 through to 1997, action after action proceeded through the courts in an effort to resolve the perplexing questions: › What are these things? › Are these things interests in land? › Are the trust holders entitled to the money? › When are they? › When are they not?

Inferior Forms of Royalty Trust Agreement › Inferior forms are known by a variety of names: › › › ›

Hetherington form (Prudential Trust – PTC1) PTC1 (Prudential Trust) CTC1 (Security Trust) Other Inferior form (Various odds and ends)

› These forms of agreement DO create an interest in land › A trust of Inferior form can still be binding: › If the original lease is still the operative lease › If a mineral owner has signed a Supplementary Trust Agreement or other agreement to validate the Trust › If there are circumstances in the individual file distinguishing the trust from the straight-up Inferior form.

Superior Forms of Royalty Trust Agreement

› There are far more Superior forms of agreement than there are Inferior: › › › › › ›

Kasha form (Montreal Trust) Duncan form (Montreal Trust) PTC3 (Prudential Trust) GTC1 (Guaranty Trust) CTC2 (Security Trust) Van Houck (Toronto General)

Superior vs. Inferior What is the difference? Conveyance/Assignment Clause Kasha form-Superior

Superior vs. Inferior What is the difference? Conveyance/Assignment Clause

Superior vs. Inferior What is the difference? Conveyance/Assignment Clause CTC2 form-Superior

Superior vs. Inferior What is the difference? Conveyance/Assignment Clause PTC1 – Hetherington-Inferior

Inferior Forms of Agreement

› Inferior Form of Trust › Pay the royalty into Court (Interpleader) › Search the mineral title › Send the “Choice Letter” to the Mineral Owners as mandated by the Courts (Includes a list of the holders of interest in the trust) › Terminate the Trust › Go to a lawyer who will follow the Court-established process › All mineral owners must agree to act together › Regular Court dates are set aside to hear these applications › Trust holders are provided with the opportunity to object or provide information from their files › Once the Order is granted and served with a standard service period, the trust is deemed to be expired, the royalties are paid to the Mineral Owners’ representative, and the caveat is discharge

OR

Inferior Forms of Agreement

› Validate the Trust › Computershare can provide a form of Agreement or Consent Order to do this › Upon signing of the form, the royalties are paid out to all of the holders of units in the trust › Other Choices › Partially terminate – removing their units from the trust and validate the remaining trust interest leaving the other holders whole › Add additional royalty (from the producing lease) to the trust and receive additional units › Purchase the outstanding units in the trust and collapse the trust under the terms of the trust agreement › Arrange a settlement with the holders

Inferior Forms of Agreement

› At the same time: › Computershare writes to the holders of units in the trust (which may be some of the same people) and… › Indicates that the royalty has been received › Provides detail of the royalty payment › Explains that the royalty is being paid into Court and not to the trust holders › Provides a copy of the holder list and “Choice Letter”

Superior Forms of Trust

› Active Trust › If the trust is already active, we include the new payment in the next distribution to the holders, advising them that there is new production and the details of the payment.

› Inactive Trust › If the trust has not received revenue before, we write to the holders and explain that payment is going to be made in 45 days. › We allow this time for holders to get any transfers of units that may be outstanding.

› In both cases, payment is made to the holders

Royalty Clause

› Some lessees are relying on this provision of the lease. › The Lessor agrees that the royalty reserved and payable hereunder in respect of the leased substances shall be inclusive of any prior disposition of any royalty or other interest in the lease substances and agrees to make all payments required by any such disposition out of the royalty received hereunder and to indemnify and save the Lessee harmless from its failure to do so.

Royalty Clause › We have reviewed this provision in association with the nature of the trusts themselves, and the interest conveyed to the trustee. › Practicality › Not a workable solution › Unrealistic expectation of most mineral owner/lessors › Puts the mineral owner in a difficult position if later claim is made › Legal Position › The Trustee has a valid, binding interest in land › This interest preceded the lease and was not extinguished by it › As such, becomes an “owner” of the minerals › For the lessee to disenfranchise one “owner” by making a deal with another is not fair or equitable, and is an infringement of the rights of the trust holders

Thank you. We appreciate your time and interest. Any additional questions Oil Royalties: 403 267 6502 [email protected]