We All Float Down Here: New Texas Supreme Court Opinion Finds Floating, Not Fixed, Royalty

In U.S. Shale Energy II, LLC v. Laborde Properties, L.P.[1], the Texas Supreme Court resolved a dueling fraction construction issue to determine whether a 1951 deed reserved a fixed or floating royalty interest. Whether an interest is fixed at a set rate or “floats” with the royalty of a subject lease can be a valuable proposition as it can greatly change the value of the interest. In this case, the deed conveyed all right, title, and interest in a tract of land with the following reservation: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.[2]In ultimately determining that the deed reserved a floating interest, the Court noted that the first clause indicated the parties’ intent to reserve an amount that would float with the governing lease, that is, the “parties expressed their intent to tie the reservation to the royalty rate that was in effect at any given time.”[3] The Court further reasoned that because the typical royalty rate at the time the deed was drafted was 1/8, the language in the second clause—“the same being equal to one-sixteenth (1/16) of the production”—was easily explained as “an incidental factual matter” used to clarify what the 1/2 interest in the royalty amounted to at the time the deed was executed.[4]As support for its reading of the clause, the Court additionally pointed to the sentence’s grammatical structure, noting that the clause “the same being equal to one-sixteenth (1/16) of the production” was offset with a comma, which indicated a nonrestrictive dependent clause. Thus, the clause’s purpose was to give “additional description or information that is incidental to the central meaning of the sentence.”[5]By contrast, the dissent determined that the deed’s express terms revealed the grantors’ intent to reserve a royalty equal to 1/16 of production, noting that the first clause did not clearly indicate a reservation of a floating interest. The dissent disagreed with the majority’s approach of reading the first clause in isolation from the second. The dissent labeled the majority’s reasoning a “clause-by-clause approach” that “relegates the second clause to an afterthought, so that it ‘simply describes the effect of the first’ clause,” and ignores the Court’s prior approach in Hysaw v. Dawkins, 483 S.W.3d 1 (Tex. 2016).[6] Following Hysaw, the dissent noted “we cannot determine the first clause’s meaning without first considering any other language that provides guidance on that meaning.”[7] Thus, when read together, the first and second clause revealed an intent to reserve 1/2 of the then-standard 1/8 royalty. In response, the majority noted that the dissent’s construction “ignores the fact that the parties reserved 1/2 of the ‘[r]oyalty’ with no language indicating that the parties intended to limit the rate to the 1/8 that was commonly used at the time.”[8]This case provides helpful guidance for understanding the Texas Supreme Court’s harmonization approach when confronted with seemingly conflicting fractions and demonstrates that the “historical 1/8 royalty” will not prevent construction with present higher royalty rates.Conrad Hester and Alix AllisonThompson & Knight LLP [1] — S.W.3d —, No. 17-011, 2018 WL 3189552 (Tex. June 29, 2018).[2]Id. at *1.[3]Id. at *3.[4]Id.[5]Id. at *5.[6]Id. at *8.[7]Id.[8]Id. at *4.