In U.S. Shale Energy II, LLC v. Laborde Properties, L.P., the Texas Supreme Court grappled again with a royalty reservation. In a 1951 deed, the grantors reserved the following:
There is reserved and excepted from this conveyance unto the grantors herein, their heirs and assigns, an undivided one-half (1/2) interest in and to the Oil Royalty, Gas Royalty and Royalty in other Minerals in and under or that may be produced or mined from the above described premises, the same being equal to one-sixteenth (1/16) of the production. This reservation is what is generally termed a non-participating Royalty Reservation.
The Bryans, who owned the reserved royalty, sued Laborde Properties, which owned the minerals subject to the reserved royalty, to determine whether the clause reserved 1/2 of the royalty or a 1/16 royalty. The Court, in a 6-3 decision, held that the clause reserved 1/2 of the royalty – a “floating” royalty.
This is the first fraction-of-royalty case to reach the court since Hysaw v. Dawkins, decided in 2016. Both the majority and dissent cited Hysaw in support of their positions.
The Court had to reconcile to clauses in the reservation: “a 1/2 interest in the royalty,” “being equal to 1/16th of the production.” Obviously, if a lease provides for a larger royalty than 1/8th, the two are not equal. The majority opinion, by Justice Lehrman, started with the proposition that the first phrase expressed the parties’ intent to reserve a floating royalty. The dissent, by Justice Boyd, disagreed: “the first clause, standing alone, does not clearly indicate whether it reserves a floating or fixed royalty interest.” Remarkably, both opinions relied on the fact that, in 1951, 1/8th was the “standard” landowner’s royalty in oil and gas leases. The majority opinion relied on that fact to support its argument that the second clause, “being equal to 1/16th of production,” would be consistent with a reservation of 1/2 of the royalty because the parties assumed that the royalty would always be 1/8th. The dissent relied on that fact to conclude that the reservation of “1/2 of the royalty” could just as well indicate an intent to reserve only 1/16th of the royalty and the additional language served to clarify the first clause.
One might ask the dissent whether, if the deed did not contain the second clause, it would be considered ambiguous. In other words, could a reservation in 1951 of 1/2 of the royalty, without any further “clarifying” language, be either fixed or floating? And would the same deed executed in 2018 be construed differently, in light of the fact that 1/8th is no longer the “standard” landowner’s royalty?