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Texas Law: The Fine Line Between Fixed Royalty Interest and Floating Royalty Interest

When parties enter into agreements concerning the conveyance of mineral royalty interests in Texas, it is extremely important that the language of the conveyance is clear and that the parties know exactly what they are agreeing to in terms of how the royalty interest is structured. The San Antonio Court of Appeals addressed the issue of fixed versus floating royalties in the case of Leal v. Cuanto Antes Mejor LLC.

The case involved forty acres of land in Karnes County, Texas. Phillips sold the land to the Leals, but reserved for himself all minerals and royalties, except for conveying a one fourth “non-participating royalty interest in and to all of the royalty paid on production,” which was conveyed to the Leals. Later, Phillips signed an oil and gas lease with Cuanto Antes Mejor LLC. The Leals and Cuanto Antes Mejor LLC got into a dispute over how the Leals’ royalties should be calculated. The Leals claimed that their royalty interest was a fixed royalty entitling them to royalties for one fourth of production. Cuanto Antes Mejor LLC contended that the Leals were only entitled to a floating royalty.

A Royalty Interest Can Be Conveyed in Two Ways

An undivided royalty interest in mineral rights can be conveyed in one of two ways:

  1. Fixed Royalties. A fixed royalty refers to a fixed fraction of the total production of the minerals, and that remains the same despite the percentage royalty in any subsequent negotiated oil and gas lease. The fixed royalty is set forth in the reservation of the landowner’s rights, and is not up for negotiation in future oil and gas leases. Fixed royalties are calculated by multiplying the fractional royalty interest by the total production of the mineral.
  2. Floating Royalties. A floating royalty is a fraction of the total royalty interest, and it depends on the royalty reserved under future leases. This type of undivided royalty interest floats, or is a fraction of whatever royalty interest is reserved by the grantor/lessor under an oil and gas lease. Under a floating royalty structure, the royalty can fluctuate based on the royalty rate reservations made in future oil and gas leases. A floating royalty is calculated by multiplying the fractional royalty by the royalty rate stated in the oil and gas lease.

Courts Look to the Specific Language For Clues To The Royalty’s Nature

When in doubt about whether the mineral royalty interest is a fixed or a floating royalty interest, the court carefully considers the specific language used in the conveyance of the royalty interest in order to make a determination one way or the other. In the Leal case, the language of the conveyance was “in and to all of the royalty” and the court believed that showed that the parties intended that the royalty interest be a floating royalty based upon a fraction of the royalty that was actually received on the mineral rights.

The exact language used in mineral right conveyances must be precise and clear as to what is being agreed to, and the parties must understand exactly what rights are being conveyed before signing an agreement. That is why it is so important to make sure that you have an experienced mineral rights lawyer review any oil and gas royalty agreements before you sign them. You need to ensure that you are getting exactly what you are bargaining for.

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