September 19, 2018
Author: Michael S. Browning
Organization: Burleson LLP
ROYALTY DEED INTERPRETATION
The interpretation of instruments conveying or reserving royalty fractional interests remains an area ripe with confusion, consternation, debate, and litigation for landmen, title examiners, and mineral/royalty owners.
While royalty fractional interests can be created by a plethora of linguistic variations, they can be classified into just two (2) types of fractional interests, a “royalty fraction” and a “fraction of royalty”.
A distinction between a “royalty fraction” and a “fraction of royalty” simply must be made. When dealing with the quantum of royalty to be conveyed or reserved, the word “of” has the same mathematical effect that fractions multiplied against each other have. Simply put, the interest is reduced. A “fraction of royalty” might be expressed as “1/2 of 1/8 royalty”, which equals a one-sixteenth (1/16) royalty. A “royalty fraction”, on the other hand, might be expressed in terms such as “an undivided one-thirty second (1/32) royalty.” Thus, an undivided one-sixty forth (1/64) royalty is simply that, a one-sixty forth (1/64) of production. Conversely, a “1/64 of royalty” is a fraction reduced by the royalty reserved in and oil and gas lease; i.e., 1/64 of 1/8 or a 1/512.
Why All the Confusion in the First Place?
Although the effects of a fractional royalty versus a fraction of royalty are quite different, it is often difficult to determine which interest is actually being conveyed or reserved. There has been a great deal of litigation on this subject, much of which has arisen out of conveyances/reservations drafted prior to the 1970s during a period when it was generally assumed that the royalty provided for in an oil and gas lease would never be anything different from one-eighth (1/8). A right to “1/4 of royalty” was essentially synonymous with a right to one fourth (1/4) of the one-eighth (1/8) royalty reserved in an oil and gas lease for conveyances/reservations drafted prior to the 1970s. Each clause would be construed to
cover a one-thirty second (1/32) royalty. For fifty or more years, a one-eighth (1/8) oil and gas lease royalty was the typical royalty, and few people probably ever contemplated that the one-eighth (1/8) oil and gas lease royalty would ever change. See Smith, Earnest E.,
“Conveyancing Problems”, State Bar of Texas Advanced Oil, Gas and Mineral Law Course, October, 1981. Fractional Royalty
The conveyance/reservation of a fractional royalty is the conveyance/reservation of a fraction or percentage of gross production as a free royalty. The owner of such an interest is entitled to a specific share of gross production, free of cost in an amount determined by the fractional size of his interest. The share of production to which such an owner is entitled will not “float” with royalties of differing amounts reserved in oil and gas leases. A fractional royalty interest can be created by a conveyance/reservation in a variety of terms and phrases, some examples of which are as follows:
(1) “an undivided 1/16 royalty interest of any oil, gas, or minerals that may hereafter be produced”. Masterson v. Gulf Oil Co., 301 S.W.2d 486 (Tex. Civ. App. — Galveston 1957, writ ref’d n.r.e.);
(2) “a fee royalty of 1/32 of the oil and gas”. Caraway v. Owens, 254 S.W.2d 425 (Tex. Civ. App. —Texarkana 1953, writ ref’d);
(3) “an undivided 1/24 of all the oil, gas, and other minerals produced, saved, and made available for
market”. Miller v. Speed, 248 S.W.2d 250 (Tex. Civ. App. —Eastland 1952, no writ);
(4) “a 1/4 royalty in all oil, gas, and other minerals in and under, and hereinafter produced”. Arnold v. Ashbel Smith Land Co., 307 S.W.2d 818 (Tex. Civ. App. — Houston 1957, writ ref’d n.r.e.);
(5) “1/8 of the usual 1/8 royalty interest”. Allen v. Creighton 131 S.W.2d 47 (Tex. Civ. App. —Beaumont
1939, error ref’d).
Fraction of Royalty
Unlike a fractional royalty interest, the quantum of production associated with a fraction of royalty will “float”, depending upon the royalty reserved in an oil and gas lease. A conveyance/reservation of a fraction of royalty creates a share in production in the amount of the fraction multiplied by the royalty reserved in an oil and gas lease. A royalty interest which is a fraction of royalty can be created by a variety of granting or reservation clauses, including but not limited to the following:
(A) “1/16 of all oil and gas royalty”;
(B) “an undivided one-half interest in and to all of the royalty”. State Natl. Bank of Corpus Christi v.
Morgan, 143 S.W.2d 757 (Tex. Com. App. 1940, opinion adopted);
(C) “1/2 of 1/8 of the oil, gas and other mineral royalty that may be produced”. Harriss v. Ritter, 279 S.W.2d 845 (1955).
There are several differences between a fractional royalty and a fraction of royalty. A small variation in the words of conveyance/reservation can cause a dramatic effect as to what the owner is entitled. In the examples set forth above, the share of production to which each respective owner is entitled, will depend upon the actual royalty reserved in the oil and gas lease. If we assume an oil and gas lease providing for a one-fourth (1/4) royalty, examples (A) and (C) will entitle the owner to one (1) out
of every sixty-four (64) barrels produced, and example (B) will entitle the owner to one (1) out of every eight (8) barrels produced. However, if we assume a royalty of one eighth (1/8) in the underlying oil and gas lease, the owners of the interests described in examples (A) and (C) will be entitled to only one (1) out of every one hundred twenty-eight (128) barrels of production, and the owner of the interest set forth in example (B) will be entitled to one (1) out of every sixteen barrels of production.
To further illustrate this point, the following examples assume that the underlying oil and gas lease provides for a one-eighth (1/8) Lessor’s royalty:
1. “An undivided 1/16 royalty interest” entitles the owner to one (1) out of every sixteen (1/16) barrels of production;
2. “An undivided 1/16 interest in and to royalty” entitles the owner to one (1) out of every one hundred and twenty-eight (128) barrels produced;
3. “An undivided 1/2 interest in and to royalty” entitles he owner to one (1) out of every sixteen (16) barrels of production. Williams & Meyers, Oil and Gas Law, Section 327.2.
Can There Be a Hybrid of a Fraction of Royalty and a
One of the few instances where the share of production attributable to a fractional royalty interest would “float” with the royalty reserved in an oil and gas lease occurs where a mineral interest owner first executes an oil and gas lease providing for a royalty, such as one-eighth (1/8), and then subsequently conveys a larger fractional interest such as a perpetual undivided one-fourth (1/4) royalty in all oil and gas and other minerals thereafter produced. There, the grantee of the fractional royalty would only be entitled to the proceeds from production up to the royalty provided in the current oil and gas lease since the lease was granted prior to the creation of his fractional royalty interest.
The fractional royalty interest owner in this example would probably have a claim for breach of warranty against the grantor, and once the underlying lease expired, the fractional royalty interest owner would be entitled to the full 1/4 of gross production. Generally, however, the quantum of production received by a fractional royalty interest owner is independent of any royalty provided in an oil and gas lease.
The granting or reserving of a fraction of royalty becomes even more complex when double fractions are utilized, i.e. “1/4 of 1/8 of all royalty…”. Texas cases are generally uniform in holding that such instruments are not ambiguous and convey exactly the quantity of production described.
Indeed, most courts follow the “multiplication approach” when interpreting instruments with double fractions, to wit:
A. Tiller v. Tiller, 685 S.W.2d 456 (Tex. App. –Austin 1985, no writ) (holding that an instrument with the double fraction, 1/9 of 1/8, conveyed a 1/72 interest);
B. Helms v. Guthrie, 573 S.W.2d 855 (Tex. Civ. App. -- Fort Worth 1978, writ ref'd n.r.e.) (holding that an instrument, which recited an interest as “1/2 of a 1/8 royalty”, is the same as 1/16 of the total production);
C. Harriss v. Ritter, 279 S.W.2d 845 (1955) (holding that a reservation of “1/2 of 1/8 of the oil, gas and other mineral royalty” reserved a 1/16 “of the royalty,” rather than a 1/2 “of royalty”);
D. Allen v. Creighton, 131 S.W.2d 47 (Tex. Civ. App. -- Beaumont 1939, error ref'd) (holding that a conveyance of “1/8 of the usual 1/8 royalty” conveyed a right to 1/64 of production);
E. Richardson v. Hart, 185 S.W.2d 563 (1945), (holding the grant of “1/16 of 1/8 of all of the oil royalty” created a fraction of royalty equal to 1/128 “of the royalty”).
In nearly all the cases in which double fractions are encountered, the second fraction is one-eighth (1/8), leading one to believe that the use of double fractions in conveyances which have been interpreted by the courts leads to a result which was not intended by the parties. For instance, the oil and gas lease in Richardson v. Hart provided for a one-eight (1/8) royalty resulting in the grantees receiving an undivided 1/1024 interest in gross production. This strict doctrine of construction was relied upon and expanded further in Harriss v. Ritter, in which an instrument reserving: (i) 1/2 of 1/8 of the oil, gas, and other mineral royalty; and (ii) 1/2 of bonus and rentals, was held to reserve a royalty of 1/16 of royalty, together with 1/2 of bonus and rentals. It is doubtful that in the Harriss case that the parties intended to distinguish the various lease benefits by reserving different fractional interests in each.
It appears that in these cases, the policy considerations of certainty of title have won out over more liberal rules of construction which would give more weight to the probable intent of the parties. As a practical matter, there is little explanation, other than mistake, for the use of double fractions, especially when the second fraction is one-eighth (1/8). If the use of double fractions was a mistake, it is likely that the parties’ only remedy will be that of reformation, since, as a matter of construction, the instrument will likely be deemed to be unambiguous. Of course, the likelihood of deed reformation or of obtaining a Stipulation of Interest between the parties may be minimal.
Although this portion of the paper is titled and dedicated to Royalty Deed Interpretation, it would be remiss not to discuss some interpretive issues surrounding whether an interest is “mineral” in nature or “royalty” in nature.
The rights and appurtenances comprising the mineral estate are listed in, Altman v. Blake 712 S.W.2d 117 (Tex. 1986), holding that a mineral estate consists of the following five rights: (1) the right to develop (the right of ingress and egress); (2) the right to lease (the executive right); (3) the right to receive bonus payments; (4) the right to receive delay rentals; and (5) the right to receive royalty payments. While each right is distinct in and of itself, the nature of the mineral estate changes when the five (5) Altman attributes are variously combined.
Interpretive problems have arisen in the construction of instruments that convey or reserve a specified fraction of the oil, gas and minerals in and under a tract in a fashion consistent with a “mineral conveyance” but subsequently include limiting language or reservations to strip the mineral interest of some or all of the usual attributes of the mineral estate; usually the right to execute oil and gas leases (the executive right) as well as the right to receive bonus payments and delay rentals.
This raises the question of whether a mineral interest denuded of most or all of bundle of sticks comprising the mineral estate, except the right to receive royalty, remains mineral in nature so that the owner’s royalty is calculated as a fraction of royalty, or has this mineral interest been transformed to a “royalty” interest so that the owner’s royalty is calculated as a royalty fraction?
A look at the historical treatment of this phenomenon is helpful but by no means conclusive. Some examples include the following:
1. In Watkins v. Slaughter, 189 S.W.2d 699 (1945), the instrument in question reserved to the grantor a 1/16 interest in and to all of the oil, gas and other minerals in and under and that may be produced from the land but provided that the grantee would have the right to execute leases and to receive all bonus and delay rentals. However, the grantor would, “receive the royalty retained herein only from actual
production.” [emphasis added]. The Watkins Court held the retained interest was a 1/16 royalty fraction.
2. In Grissom v. Guetersloh, 391 S.W.2d 167 (Tex. Civ. App. —Amarillo 1965, writ ref'd n.r.e.) the instrument in question reserved to the grantor an undivided 1/16 of all the oil, gas and minerals in and under “…But the grantors waive all interest in and to all rentals or other consideration which may be paid to grantees for any oil and gas lease on the land or any part thereof hereby conveyed.” The Grissom Court held that the reserved interest was stripped of the executive right, the right to bonus, and the right to delay rentals. However, the Court declined to interpret the reserved interest as a royalty fraction but held same to be a fraction of royalty.
3. In Altman v. Blake, 712 S.W.2d 117 (Tex. 1986) the Court construed a grant of, “An undivided onesixteenth (1/16) interest in and to all of the oil, gas and other minerals in and under and that may be
produced…But does not participate in any rentals or leases…” The Altman Court held that a mineral interest shorn of the executive right and the right to receive delay rentals remains an interest in the mineral fee. Thus the grantee would be entitled to a 1/16 fraction of royalty.
4. In French v. Chevron U.S.A. Inc., 896 S.W.2d 795 (Tex. 1995) the granting clause created a mineral interest but subsequent language indicated the mineral grantee would have no executive rights, would receive no bonus, would receive no delay rentals and that “this conveyance is a royalty interest only.” The French Court held that the mineral nature of the granting clause was not transformed by the subsequent stripping away of other mineral attributes except for royalty.
Further, the French Court reasoned that if the parties had intended a royalty conveyance, mentioning leasing, bonus, and delay rentals would have been redundant. Moreover, the identification of the conveyed interest as a “royalty interest only” was not persuasive to the Court, which mentioned that the Court of Appeals distinguished Watkins v. Slaughter on the basis that the French Deed did not provide for the grantee to receive the interest out of “actual production.” French at 797. The result was that the grantee received a fraction of royalty.
5. In Temple-Inland Forest Products Corp. v. Henderson Family Partnership, Ltd, 958 S.W.2d 183 (Tex. 1997) the two (2) instruments at issue each granted an undivided 15/16 interest in the oil, gas and minerals in and under and that may be produced from the tracts covered. However, the instruments further provided that the undivided one-sixteenth (1/16th) interest in the oil, gas and other minerals retained and reserved by the Grantor: shall always be a royalty interest; would not bear any of the cost of exploration, development and production; and that Grantor’s onesixteenth (1/16) royalty interest shall be delivered free of cost. Considering the language of the instrument in its entirety, particularly the number of times the instrument referred to the reserved interest as a royalty as well as the fact that the retained interest was free of cost, the Temple-Inland Court held that the reserved royalty interest was a 1/16 royalty fraction.
As to what guidance the above line of cases provides, it can reasonably be said that:
I. A conveyance/reservation of a mineral interest stripped of all of its components other than the right to receive royalty remains mineral in nature resulting the grantor/grantee receiving a fraction of royalty instead of a royalty fraction; and;
II. Stripping away all of the components of the mineral estate in a conveyance/reservation coupled with some additional distinguishing factor (multiple reference to the word “royalty”, reference to “actual production”, reference to the interest being “free of cost”) can result in the transformation of a conveyance/reservation from being mineral in nature to that of a royalty fraction.
However, as a practical matter, the cautious examiner will not presume to know which kind of interest an instrument creates unless the language is unequivocal or nearly identical to one of the instruments decided in the above cases.
Is It Possible To Have The Hybrid Characteristics of a Fractional Royalty Coupled With Some Mineral Fee Attributes?
Courts have shown a willingness to interpret an instrument as having hybrid characteristics containing a conveyance/reservation of a fractional royalty interest along with some other attributes of the mineral estate. As such, it is possible to attach such mineral rights to a fractional royalty without transforming such fractional royalty into a fraction of royalty.
In Elick v. Champlin Petroleum Co., 697 S.W.2d 1 (Tex. App. —Houston [14th Dist.] 1985, writ ref’d n.r.e.) the Court addressed an instrument with the following reservation:
“SAVE AND EXCEPT an undivided 1/32 royalty interest in and to all of the oil, gas and other minerals in, to and under and that may be produced from the land herein conveyed to be paid or delivered unto said J.J. Elick, his heirs, or assigns, as his own property free of cost… It is further expressly agreed and understood that the said J.J. Elick, his heirs or assigns shall participate in one-half of the bonus paid for any oil, gas or other mineral lease covering said land and shall participate in one-half of the money rentals which may be paid to extend the time within which a well may be begun under the terms of any lease covering said land and said J.J. Elick, his heirs or assigns shall join in the execution of any future oil, gas or mineral lease.” [emphasis added].
The Elick Court concluded that the interest reserved was simply a combination of diverse components of the mineral estate, resulting in ownership of a one-thirty second (1/32) royalty fraction, coupled with a right to receive one-half (1/2) of all bonuses and rentals, together with the power to join in execution of leases in order to protect the grantor’s interest in bonus and rents which might be paid thereunder.
More recently, the Corpus Christi Court of Appeals in Wynne/Jackson Development v. PAC Capitol Holdings, Ltd., No. 13-12-00449-CV, 2013 WL 2470898 (Tex. Civ. App. —Corpus Christi, 2013, pet. denied) construed an instrument to have reserved a royalty fraction, coupled with the right to receive one-half (1/2) of the bonus and other payments, containing the following reservation, to wit:
“There is excepted herefrom and reserved unto Grantor a non-participating royalty of one-half
(1/2) of the usual one-eighth (1/8) royalty in and to all oil, gas, and other materials produced, saved and sold from the above-described property, provided, however, that although said reserved royalty is non-participating and Grantee shall own and possess all leasing rights in and to all oil, gas and other minerals, Grantor shall, nevertheless, have the right to receive one-half (1/2) of any bonus, overriding royalty interest, or other payments, similar or dissimilar, payable under the terms of any oil, gas and mineral lease covering the above described property.” [emphasis added].
While the interpretation of the instrument in the Wynne/Jackson Development case appears consistent with relevant case law, the analysis utilized by the Court is troubling. The Court appears to rely on Harriss v. Ritter, 279 S.W.2d 845 (1955) when it found:
“[T]he reservation is susceptible of but one interpretation.\" Id. The court held, “as a matter of law that the term ‘one-half of one-eighth of the oil, gas and other mineral royalty’ could have but one meaning and that is 1/16th of the royalty on all the oil, gas and other minerals that may be produced from said land.” Id. Again, this is consistent with the interest being a fractional royalty. Here, the only difference in the relevant language is that the words “the usual” are used to qualify the oneeighth royalty.” (Emphasis added) Wynne/Jackson Development at page 3.
The Texas Supreme Court in Harriss v. Ritter held that the reservation of one-half of one-eighth (1/2 of 1/8) of the oil, gas and other mineral royalty yielded a one-sixteenth (1/16) fraction of royalty as opposed to a fractional royalty. As such, it appears that the Court in the Wynne/Jackson Development case may have either misconstrued the holding in Harriss v. Ritter or was attempting to