In Five Star Royalty Partners Ltd v. Jack Mauldin Jr., et al., the court was tasked with interpreting a 1927 deed (the “Deed”) to determine whether the grantee received a mineral interest or a royalty interest in over 5,000 acres in West Texas. In doing so, the court focused on three provisions in the Deed.
Provision 1: In the granting clause, the grantor conveyed “a royalty interest of three-eighths (3/8) of all . . . minerals, hereafter produced and saved from together with an equivalent reversionary interest in and to all . . . minerals, in and under the [lands] . . . .”
Provision 2: In the next paragraph, the Deed states that the land is currently under an oil and gas lease and “the royalty interest hereby conveyed is a three-eighths (3/8) part of the royalty provided by said lease to be paid, but the royalty interest hereby conveyed shall be a covenant running with said land in perpetuity and shall be provided for in any future lease or sale of the . . . minerals in, on and under the land.”
Provision 3: The following paragraph states that “[i]t is understood that the three-eighths of one-eighth interest herein conveyed is a royalty interest only, and the grantee by reason of the possible reversionary interest in the . . . minerals in and under said land shall have no interest in any rentals, bonuses or other revenues or moneys other than royalties received or derived from the lease or sale of said land, and neither the grantee nor its successors or assigns shall have any control over the lease or sale of said lands for minerals or other purposes, and for the purpose of leasing, selling or making other contracts for the development and production of the minerals in said land, the original grantors are expressly made the agents of the grantee, and it shall not be necessary to consult the grantee in any way with respect thereto; but in case . . . minerals shall at any time hereafter be produced from said lands, then and in that event the grantee shall receive a three-eighths of one-eighth of the same so produced and saved, as royalty, which shall be delivered to the grantee, its successors, and assigns.”
Mineral Interest or Royalty Interest
First, the court distinguished two types of “royalty” interests: “(1) a ‘mineral interest’ that includes a right to receive a proportionate share of reserved royalties and (2) a free ‘royalty interest’ granting a right to a fixed fraction of gross production.”
Next, the court noted the five rights attributable to a mineral interest [(1) develop, (2) lease, (3) receive bonus payments, (4) receive delay rentals, and (5) receive royalty payments] and how one or more of the rights can be stripped from the interest without changing its character. For example, a mineral interest stripped of rights 1–4 is still a mineral interest even though it is entitled to only royalty payments.
The court acknowledged that throughout the Deed the interest is called a royalty interest. However, it ultimately held that the interest is a mineral interest stripped of all rights other than the right to receive royalty payments. In its analysis, the court focused on a number of things. First, the court attempted to reconcile the three provisions, which all utilize the term “royalty.” In doing so, the court found that the interests conveyed in Provisions 1 and 2 were basically “the same right to receive a share of royalties commensurate with a mineral interest” and the Deed did not state that the interest was free of production costs (which is an attribute of a fixed royalty interest). Second, in Provision 3, the Deed expressly states that the grantee does not have any rights to rentals or bonuses or to lease or develop the land, which would be redundant or unnecessary if the interest was a royalty interest.
Although the appellate court ultimately agreed with the trial court’s classification of the interest as a mineral interest, it did disagree with the holding that the grantee acquired the rights to develop and lease under the lease but that the grantee appointed the grantor as its agent to exercise those rights. The appellate court noted that the executive rights are addressed in Provision 3 (or the Reservations Clause where no interests are conveyed), which expressly states that the grantee would not have “any control over the lease or sale of [the] lands.” That provision is inconsistent with a principal-agent relationship, which requires the principal to retain some control over the agent. Instead, the court reasoned that the purpose of the agency language in the Deed was to protect the grantee and its royalty interest by implementing a fiduciary duty on the owner of the executive rights. At the time of the Deed, the law had not developed enough to provide guidance on the duties owed by the owner of the executive rights to the owner of a sole royalty interest. Therefore, this language was included in the Deed to give the grantee assurance that minerals (including his royalty interest) would be leased and developed in good faith.
Quantum of the Interest
After determining that the interest conveyed was a mineral interest, the court then turned its attention to the quantum of the interest. The court acknowledged that the Deed appears to contain conflicting provisions with respect to the amount of the interest conveyed. Provision 1 conveys “a royalty interest of three-eighths (3/8),” Provision 2 states that “the royalty interest hereby conveyed is a three-eighths (3/8) part of the royalty provided by the [operative] lease,” and Provision 3 calls the interest a “three-eighths of one-eighth interest.” The court looked to a 1957 Texas Supreme Court case, Garrett v. Dils Co., for guidance and held that the Deed conveyed a 3/8 mineral interest.
In reconciling the three provisions, the court held that the Deed conveyed 3/8 of the royalty in the lease in effect at that time, which provided for a 1/8 royalty. However, through the grantee’s “equivalent reversionary interest” provided for in Provision 1, when that lease terminates, Provision 2 states that the grantee would be entitled to “a three-eighths (3/8) part of the royalty . . . provided for in any future lease or sale of the . . . minerals in, on and under the land.”
Ultimately, the court held that the parties’ intent, as determined by reconciling the language in the Deed under the four corners’ rule, was to convey a 3/8 mineral interest stripped of all of its attributes other than the right to receive royalties.
This case is another example of how difficult it can be to reconcile conflicting provisions in a deed (especially older deeds) to determine the parties’ intent. Although Five Star Royalty Partners Ltd v. Jack Mauldin Jr., et al. provides additional guidance in interpreting such deeds, it is rare that any problematic deeds that you may encounter will contain the exact same terms as the deed in this case. Therefore, it is important to pay attention to the unique words utilized in your specific deed in attempting to determine the parties’ intent.