Co-author Tiereney Bowman*

Texas courts continue to address the “fixed or floating” non-participating royalty interest question. The El Paso Court of Appeals’ answer in Bridges v. Uhl et al. was floating, based on the language in that particular reservation,

In 1940 the Klattenhoffs sold a 640-acre tract in Upton County to Virgil Powell, reserving, “an undivided one-half (1/2) of the usual one-eighth (1/8) royalty in, to and under the above-described land….” Over the following decades, Uhl collectively came to own 100% of the mineral estate after a series of conveyances. In 2007, Powell’s successors executed an oil and gas lease with Hanley Petroleum. Separately, in 2010, other of Powell’s successors executed a lease with Concho Operating. Both leases provided for a ¼ royalty.

The Klattenhoffs conveyed the reserved NPRI to their daughter, Ms. Bridges, granting an undivided “1/2 of the usual 1/8 royalty interests.” After Bridges learned of production from the land Concho acknowledged her right to royalties, which it calculated as a 1/16 “fixed” NPRI rather than ½ of ¼ of production. Bridges sued alleging several causes of action. The trial court entered a judgment granting Uhl’s motions for summary judgment and denying Bridges’.

On appeal Bridges argued that the trial court erred in interpreting the deed to reserve a fixed 1/16 NPRI, not a ½ floating. She also argued that granting Uhl’s motions was not supported by their affirmative defenses.

The 1940 Deed

In concluding that the deed reserved a floating ½ NPRI, not a 1/16 fixed, the Court applied Texas deed construction principles rather than a purely mathematical approach. According to the Court, “courts must holistically review the language to ascertain the intent of the parties from all of the language in the deed by a fundamental rule of construction known as the ‘four corners rule.’” (The court was reluctant to invoke the estate misconception rule.) A royalty interest may be conveyed or reserved in one of 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 granting language in the text and the deed’s overall structure confirmed the grantors’ intent to reserve a ½ floating royalty. Using the double fraction could demonstrate a grantor’s intent to give the grantee half of his entire royalty interest. When the deed was drafted, 1/8 was the standard royalty for oil and gas leases.

The deed had many recognized features of a floating royalty: (1) it included double fractions; (2) the fractions included multiples of 1/8; (3) repeatedly referenced the “usual 1/8 royalty”, which relates to the parties’ use of the then-standard 1/8 royalty as a proxy for the landowner’s royalty; and (4) the prospective contemplation of the royalty taking effect at a later time is reflected by the phrase, “if, as and when production is obtained.” The deed was not ambiguous, and reserved a floating ½ NPRI.

Among other unsuccessful affirmative defenses, Uhl argued quasi-estoppel and waiver, asserting that the Bridges was “on notice” about the nature of her royalty payments as a fixed 1/16, which constituted waiver. The Court disagreed. The fact that she previously accepted royalty payments was not dispositive because Uhl failed to show conclusive evidence of Bridges’ knowledge of what she was receiving and what she should have been receiving, and she changed her position. That affirmative defense could not support summary judgment for Uhl.

The Court reversed summary judgment for Uhl, rendered partial summary judgment for Bridges, declared that the deed reserved a floating ½ royalty interest, and remanded the cause for further proceedings.

Your musical interlude.

*Tiereney is in her third year at SMU Law School and an intern at Gray Reed.