El Paso Court of Appeals Grapples with Deed Interpretation Issue and Applies the Estate Misconception Theory – Petition for Review Timely Filed

May 5, 2020 In WTX Fund, LLC v. Brown, 595 S.W.3d 285 (Tex. App.—El Paso 2020, pet. filed), the Eighth District Court of Appeals (the “Appellate Court”) addressed the question of whether a 1951 mineral deed reserved any incident of mineral ownership, and specifically a nonparticipating royalty interest.  In reversing the trial court’s judgment, the Appellate Court held that where a deed specifically conveyed leasing rights, bonuses, delay rentals and development rights, the inclusion of the “shall not affect” clause was a clear and specific reservation or exception of not only a nonparticipating royalty interest, but the entireright to receive royalties. The court’s analysis turned largely upon the mineral attributes specifically conveyed in the deed, and use of the phrase “shall not affect” and the term “benefits.”

In 1951, Hamilton Roach and his wife, Billie Roach, as “Grantors,” executed a Mineral Conveyance that conveyed to J.F. Holt and his heirs and assigns, as “Grantee,” their right, title, and interest to oil, gas, and other minerals in the land described therein in Reagan County (the “1951 Deed”).  The 1951 Deed contained the following provisions, in relevant part:

[Grantors do] by these presents bargain, sell, release, transfer, assign and quitclaim unto [grantee] … all of grantors’ right, title, interest and estate in and to the leasing rights, bonuses and delay rentals in and to all the oil, gas and other minerals in and under the following described land in Reagan County[.] It is intended by this conveyance to give to the grantee, his heirs and assigns, the right to control and execute all oil and gas leases now on said property or which may be made thereon in the future without the necessity of grantors, heirs or assigns, joining in the execution of the same[.]

[I]t being intended hereby to convey to grantee, his heirs and assigns, all of grantors’ right, title, interest and estate in and to the 7/8 leasing rights or working interest in the oil, gas and minerals in and under said land together with all bonuses, delay rentals, oil payments and all other rights and benefits which may be provided for in any oil and gas leases which grantee, heirs and assigns, have or may hereafter execute upon the above mentioned property, together with the right of ingress and egress at all times for the purpose of enforcing his rights thereunder.

It is understood and agreed, however, that this conveyance shall not affect any interest which any grantors, heirs or assigns, have or may have in the future to the non-participating 1/8th royalty in and under said land, but it shall never be necessary for grantors, heirs or assigns, to join in the execution of any instrument pertaining to any past or future oil and gas leases and the grantors, heirs or assigns, shall have no right to any bonuses, delay rentals, oil payments or other benefits under any oil, gas and mineral leases which have been made or which may hereafter be made by grantee, his heirs or assigns, upon said property. (Emphasis added).

In 2015, through a series of transactions dating back to the 1951 Deed, WTX Fund, LLC (“WTX”) became a successor-in-interest to the Grantors.  That same year, Pioneer Natural Resources, USA (“Pioneer”), as well operator and current holder of a lease on the subject land, paid proceeds to royalty owners on production from the subject land and other lands situated in Reagan County.  The royalty owners included WTX and the heirs of J.F. Holt (the “Holt heirs”).

WTX contested Pioneer’s payment of royalties concerning the subject land.  As a result, Pioneer filed an interpleader action in the 112th District Court of Reagan County against WTX and the Holt heirs as both were asserting competing royalty interest claims.  WTX claimed that Pioneer had incorrectly credited the Holt heirs with owning title to the royalty interest on the subject land.  In response, the Holt heirs asserted that the 1951 Deed conveyed all mineral rights in the subject land to J.F. Holt and his heirs and assigns.  The trial court concluded that the language in the 1951 Deed conveyed the Grantors’ royalty interest to the Grantee and thus, the Holt heirs had not been divested of said royalty interest.

On appeal, WTX claimed that the 1951 Deed did not convey all of the Grantors’ mineral interest in the subject land, but instead reserved to the Grantors’ the full royalty interest as a non-participating royalty.  In interpreting the 1951 Deed, the Appellate Court focused on the deed’s structure.  The Appellate Court noted that the deed listed the various attributes of mineral ownership separately and included the phrase “shall not affect” and the term “benefits.”  In accordance with Concord Oil Co. v. Pennzoil Expl. & Prod. Co., 966 S.W.2d 451, 457 (Tex. 1998), the Appellate Court determined that by naming certain attributes of a mineral estate individually (i.e., leasing rights, bonuses, and delay rentals), the Grantors specifically conveyed each of those interests to the Grantee.  The Appellate Court then construed all of the provisions in the deed together to fully determine the parties’ intent.  Accordingly, the Appellate Court focused on the meaning of the phrase “shall not affect” and the term “benefits.”

The Appellate Court explained that the Grantors’ use of the “shall not affect” clause mandated that the conveyance of the leasing rights, bonuses, and delay rentals did not alter the Grantors’ reservation of a non-participating royalty interest.  Moreover, the phrase, “this conveyance shall not affect,” constituted a reservation or exception of any interest in which the Grantors, or their heirs or assigns, have in a one-eighth non-participating royalty interest in the subject land.  Thus, the Grantors’ one-eighth non-participating royalty interest was not affected by the conveyance in the 1951 Deed.

Additionally, the Appellate Court found that the phrase “have or may have in the future” constituted a reservation of a non-participating royalty interest by the Grantors and not for a third party as language in a reservation must always be construed in favor of the grantor.  Thus, the Appellate Court held that the phrase “nonparticipating 1/8th royalty in and under said land” provided a clear and specific reservation of a non-participating royalty interest.

The Holt heirs argued that the use of “benefits” should be viewed as a conveyance of the royalty interest because royalties are a benefit under oil and gas leases.  The Appellate Court disagreed and held that the use of the word “benefits” throughout the 1951 Deed served as a catch-all term representative of the economic benefits of mineral leases.  However, the Appellate Court explained that those economic benefits stood apart from the non-participating royalty interest expressly reserved by other language in the deed.  Therefore, the use of the term “benefits” did not serve as language conveying a royalty interest to the Grantee.

The Appellate Court concluded that the Grantors not only reserved or excepted “the non-participating 1/8th royalty in and under said land,” but also clarified how the reserved interest was distinguishable from the other interests.  By the use of the description “non-participating royalty,” the deed language confirmed that the original Grantors reserved or excepted, as a free royalty, their entire royalty interest in the gross production of oil, gas, and other minerals of the mineral fee estate.

In an additional victory for the Appellant, the El Paso Court of Appeals held that not only was WTX entitled to all royalties payable under its current leases, but its payment was not relegated to a static 1/8 royalty.  Instead, the court applied the “estate misconception theory” and found that the 1951 Deed created a “floating” nonparticipating royalty interest.  In Texas, a nonparticipating royalty interest can be a fixed fraction of total production (a “fixed” or “fractional” royalty) or it can vary in accordance with the size of the landowner’s royalty in a mineral lease (a “fraction of” or “floating” royalty).  The once ubiquitous 1/8 landowner royalty in oil and gas leases historically led landowners to presume that a lease could only ever provide for such 1/8 royalty.  This “estate misconception” has led Texas courts to hold that 1/8 in some instruments “undoubtedly embodies the parties’ expectation that a future lease will provide the typical 1/8th landowners’ royalty with no intent to convey a fixed fraction of gross production.”

Here, the court held that the use of “7/8 leasing rights” in the intent clause followed by “1/8 non-participatory royalty rights” show that the parties were operating under the presumption of the 1/8 royalty and estate misconception.  The fractional descriptor of 1/8 was not used to describe a fractional share of 1/8 but rather “as a proxy for the usual and customary royalty of the deed’s era.” Thus, pursuant to the court’s holding, WTX is entitled to the entire 1/6 landowner royalty provided for in the 2015 Pioneer lease.

This case is yet another milestone in Texas courts’ departure from canonical deed construction and mechanical bright-line interpretation rules.  Courts will instead apply a holistic, four-corners approach to deed interpretation and attempt to ascertain the parties’ intent by harmonizing all provision of the instrument.  Further, Texas courts eschew “magic words” to reflect intent, such that the phrase “shall not affect” can create a reservation.  It remains to be seen whether the Supreme Court will weigh in on this decision.

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