Texas Supreme Court May Provide Guidance on the Debate Regarding Fractional Royalty v. Fraction of Royalty
On October 9th the Texas Supreme Court granted the petition for review the case Dawkins v. Hysaw. In Dawkins, the Court was once again presented with the common issue regarding whether an interest is considered a fraction of royalty or a fractional royalty.
A fractional royalty transfers a fixed fraction of production of the minerals produced from the land irrespective of the percentage royalty in any subsequent lease; it remains constant regardless of the amount of royalty contained in a subsequently negotiated oil and gas lease. On the other hand, a fraction of royalty conveyance is “floating,” in that it transfers a fraction of whatever royalty interest is reserved in a mineral lease.
Historically, leases were taken at a 1/8th royalty as opposed to the current common levels of 1/4th or 1/5th. It is important to determine whether a reservation or conveyance is fixed or floating because that reservation could potentially changed significantly if it is dependent on future lease royalty agreements. When an interest was reserved or conveyed there was usually language regarding “1/2 of 1/8.” The extensive history and case law on the subject interpretation is beyond the scope of this article. However for example, if “1/2 of 1/8” is fixed then that person(s) has a 1/16th interest regardless if a new lease is signed at a rate of 1/4th. On the other hand, if “1/2 of 1/8” is floating based on other language in the deed, then that person(s) has a 1/8th interest if a new lease is signed with a royalty rate of 1/4th. Mineral deed interpretations have the ability to significantly change royalty payments under the terms of a more modern oil and gas lease.
Of course Texas case law is not as clear as the above example. Litigation involving deed interpretation has been prevalent the past several decades without real clarity on the subject. In Dawkins v. Hysaw, a will contained royalty provisions conveying portions of the surface estate and the mineral estate to the decedent’s children. The language in the will provided each child all her rights in the surface estate and the accompanying mineral estate, subject to the reservation of a fractional royalty—a fixed fraction production –for each of the other two children. As is usually the case, one of the children’s heirs signed a lease for 1/5th while another one of the children’s heirs signed a lease for greater than 1/8th and this lawsuit ensued regarding the will interpretation.
The Texas Supreme Court has scheduled oral arguments for December 8, 2015. The full cite of the case is: Dawkins v. Hysaw, 450 S.W.3d 147, 155 (Tex. App.—San Antonio 2014), review granted (Oct. 9, 2015). Hopefully the Court will provide some clarity to a cloudy subject.