Fractional Royalty and Fraction Of Royalty – Graham v. Prochaska

A long-standing source of litigation has been whether a reserved royalty is a fixed or fractional royalty.  The Fourth District Court of Appeals, San Antonio, did not resolve the question, but rather further complicated the distinction between fixed and fractional royalties in Texas in Graham v. Prochaska, No. 04-12-00755-CV, 2013 Tex. App. LEXIS 15443 (4th Dist – San Antonio December 31, 2013).

The source of the dispute was a royalty reservation in a 1950 deed that provided:

“SAVE AND EXCEPT, however, there is reserved unto George Prochaska, his heirs and assigns, one-half (1/2) of the one-eighth (1/8) royalty to be provided in any and all leases for oil, gas and other minerals now upon or hereafter given on said land, or any part thereof, same being equal to one-sixteenth (1/16th) of all oil, gas and other minerals of any nature, free and clear of all costs of production, except taxes;

AND PROVIDED this reservation is burdened with paying the two outstanding mineral royalty reservations, each of One-Fourth (1/4) of one-eighth (1/8) royalty, one of which reservations is described in the deed from John Hancock Mutual Life Insurance Company to E.S. Joslin, now of record in Vol. 141, page 161, Deed Records of Karnes County, Texas, and the other reservation is described in the deed from E.S. Joslin, et ux to A.W. Powell, Jr., et al now of record in Vol. 165, page 80 of the Deed Records of Karnes County, Texas; And this reservation shall only be effective to the extent that one or both of said outstanding reservations become terminated.

It being the intent of the parties hereto that John W. Regmund and wife, Frances E. Regmund, as of the effective date hereof, shall be vested with and entitled to one-half (1/2) of the usual one-eighth (1/8) royalty in and to all oil, gas and other minerals in on and/or under the property herein conveyed, and the reservation herein above recited in favor of the grantor herein, shall relate to and cover only the one-half (1/2) of one-eighth (1/8) royalty interest previously reserved in favor of John Hancock Mutual Life Insurance Company and Ennis Joslin, if, as and when said interest in favor of said parties terminate.”

Graham, 2013 Tex. App. LEXIS 15443, at *1-2.

The dispute between the parties arose when the oil and gas lease in effect at the time of the 1950 deed, which provided for a one-eighth royalty, expired, and the Regmunds executed new oil and gas leases, which provided for a one-fifth royalty.  The Regmunds filed a declaratory judgment suit seeking a determination that the Prochaskas royalty reserved by the 1950 deed was a fixed one-half of one-eighth, being a one-sixteenth royalty interest regardless of the royalty interest provided by the new leases.  The Prochaskas counter-claimed arguing that the 1950 deed reserved a floating royalty and that they were entitled to one-half of the royalty under the newly executed oil and gas leases.

The Court explained that “[t]he fundamental distinction between the two kinds of nonparticipating royalty interests is the source of the royalty payments: fixed royalty interests are an unchanging fraction of total production obtained under a mineral lease, but floating royalty interests come out of the landowner’s royalty and vary in accordance with that fraction of production.”  Id., 2013 Tex. App. 15443, at *14-15.  Importantly, the Court noted that “courts generally construe simple grants or reservations of a ‘fraction of one-eighth’ or its variations as creating a fixed royalty interest, the size of which is determined by multiplying the two fractions together.  Id., 2013 Tex. App. 15443, at *17 (citations omitted).[1]

However, the Court reached the opposite conclusion and concluded that the royalty reservation in the 1950 deed was a floating and not a fixed royalty interest.  In reaching its conclusion, the Court focused on the language the “usual one-eighth” and explained that the presence of that language “reflects the common misconception of that period that the landowner’s royalty would always be one-eighth of production obtained under a lease.”  Id., 2013 Tex. App. 15443, at *22.  The Court, after examining the remaining language in the 1950 deed and other instruments referenced in the 1950 deed, concluded that the parties intended that royalty interest be a floating interest and be one-half of the royalty provided by any current or future lease and that the parties incorrectly assumed that the royalty provided in an oil and gas would always be one-eighth.  Id., 2013 Tex. App. 15443, at *25-26.

In conclusion, when evaluating whether a royalty reservation is a fixed or floating royalty of “one-eighth,” it is important not only to review all of the language of the instrument creating the reservation, but also any other instrument referenced in the instrument creating the reservation and recent decisions by the courts.

[1] The Court acknowledged that its decision was contrary to caselaw that would typically interpret the phrase one-half of the one-eighth royalty as a fixed royalty.  Graham, 2013 Tex. App. LEXIS 15443, at *23-24 (“We acknowledge that the truncated phrase “one-half of the one-eighth royalty” falls within the line of cases construing variations of a “fraction of one-eighth royalty” as fixed royalty interests. We agree the language in those cases did not sufficiently show the parties intended any technical meaning to be applied to “one-eighth royalty,” nor did it justify using the surrounding circumstances to deviate from the plain, mathematical meaning. And if that were the complete and unadorned language of the reservation before us, we would likely construe that as an objective expression of a fixed royalty interest.).