Co-author Ethan Wood
Coke or Pepsi? Elvis or the Beatles? Should there be a designated hitter? Fixed or floating royalty? Among the great debates of recent decades, few have proven quite as frustrating as the great “Fixed v. Floating” royalty debate in Texas jurisprudence.
A royalty can be conveyed or reserved in two ways: as a fixed fraction of total production (fractional royalty interest) or as a fraction of the total royalty interest (fraction of royalty interest). The fractional interest is “fixed” because it is untethered to the royalty in a particular oil and gas lease. A fraction of royalty is “floating” because it varies depending on the royalty in the lease.
Disputes arise when a deed contains multiple fractions, referring to the “usual royalty provided in mineral leases”. That language embodies the parties’ expectation that future leases would always provide a 1/8th landowner’s royalty.
In US Shale Energy II LLC et al v. Laborde Properties LP, the Texas Supreme Court weighed in on yet another fixed/floating question.
An NPRI reserved to the grantors in a deed was:
“an undivided one-half (1/2) interest in and to [the royalty] … in and under … the above described premises, the same being equal to 1/16th of the production.”
EOG, lessee under a lease with a 1/5th lessor’s royalty, credited Roush (successors to the reserving party) with 1/2 of the 1/5th. LaBorde (successor to the deed grantee) objected.
Harmonizing the provisions
In its analysis, the court began by noting that the first clause, when read independently (“1/2 interest in the royalty”), clearly reserved a floating royalty. The issue was what effect—if any—the second clause (“the same being equal to 1/16th of the production”) had on the first clause. At the time of the deed in question, 1/8th royalties in leases were the norm. If a lease had a 1/8th royalty rate, there would be no conflict between the two clauses.
But there was no evidence in the record that any such lease was in effect at the time. The deed had no language suggesting that the parties intended to tie a reservation to something that did not exist. The “1/2” reservation must have referred to a royalty that could come into being at some point in the future.
The court held that second clause did not modify the plain meaning of the first clause. Neither clause was rendered meaningless because both were given effect in the face of leases departing from what was once a ubiquitous 1/8th royalty. The “1/16th” reference clarified as an incidental factual matter what a 1/2 interest in the royalty amounted to when the deed was executed. By contrast, if the royalty were fixed the Roushes would be entitled only to 1/16th of the production, which is not half of the royalty when the royalty is above 1/8th.
A comma with meaning
According to the court, the grammatical structure of the sentence bolstered this interpretation. “the same being able to 1/16th” was offset by a comma, indicating a nonrestrictive dependent clause. Such a clause gives additional description or information that is incidental to the central meaning of the sentence.
The three-justice dissent opined from the same deed language that the parties intended to limit the reservation to 1/8th because that was the rate commonly used at the time. This was because the first clause standing alone did not clearly indicate whether it reserved a floating or fixed rate. Second, the majority construed the first clause in isolation without considering the second clause, which provided insight into the first clause’s meaning. This analysis, according to the dissent, does not render either clause meaningless.
This ruling is consistent with other recent decisions on the fixed/floating debate. Courts seem to be finding floating royalties more and more. Nevertheless, unless the exact words in your instrument have been ruled on by the Texas Supreme Court, caution is warranted when making fixed/floating calls. Don’t be angry with your title examiner who tells you that the royalty is probably [fixed/floating], but you need a declaratory judgment to be certain (which you aren’t likely to do).
And now, in the spirit of the Texas Supreme Court and early-00’s indie rockers Modest Mouse, we encourage you to “Float On”.