The Neverending Story: "Fixed" vs. "Floating" Royalties in Texas
The Texas Supreme Court and our Courts of Appeals have now been struggling for years with the elusive distinction between "fixed" and "floating" royalties. In application, the difference between the two can have drastic and—depending on your position in a mineral title dispute—potentially catastrophic consequences. The case law has by no means been a model of clarity or consistency, and few hard-and-fast rules have emerged at the appellate level to give practitioners any legitimate comfort when drafting or interpreting conveyances.
At a purely definitional level, it is easy to differentiate between these two types of royalties:
- A "fixed" royalty is set in stone, for all posterity. It is an unchanging fraction of total production.
- A "floating" royalty, by contrast, is dynamic. It is a fraction of the royalty under the active mineral lease.
So when the lease royalty increases, so does the "floating" royalty. Not so with the "fixed" royalty; it is what it is, regardless of the terms of whatever lease happens to be in effect at the time.
Sounds simple, right? In theory, yes. In practice, not so much.
The Texas Supreme Court's recent decision in U.S. Shale Energy II, LLC v. Laborde Properties, L.P. represents the latest chapter in this ongoing jurisprudential saga.
In Laborde, the grantors had reserved to themselves an NPRI (a non-participating royalty interest), defined as follows (emphasis added):
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. This reservation is what is genaerally [sic] termed a nonparticipating Royalty Reservation.
The operator under a lease with a 1/5th royalty credited the successors to the reserving parties with 1/2 of the 1/5th lease royalty—i.e., 1/10th of total production. But the successor to the grantee cried foul, arguing that the reservation expressly limited the NPRI to 1/16th of total production. The Texas Supreme Court sided with the operator's intepretation.
Notably, nothing in the record indicated that a mineral lease was in effect at the time of the NPRI's reservation. The majority in Laborde accounted for this omission with the oft-repeated refrain that, for a decades-long period in the history of our State, it was widely assumed that the royalty in mineral leases could only be—and would always be—1/8th.
Finally, punctuation also matters, or at least so it would seem. In particular, a comma can apparently make all the difference in the world. On this score, according to the majority opinion, because “the same being equal to ... 1/16th” was set off by a comma, it constituted "a nonrestrictive dependent clause." In other words, wrote Justice Lehrmann for the Court, the phrase could be "taken out of the sentence without changing its essential meaning." (While the present author considers this a bit of a stretch, he simultaneously admits that he has little trust in people who don't use the Oxford comma.)
