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Fixed vs. Floating Royalty?

In Bridges v. Uhl, No. 08-21-00130-CV,  (Tex. App.—El Paso 2022, no pet. h.) the El Paso Court of Appeals added it’s decision to the already substantial volume of court decisions grappling with the question of whether the royalty language in a deed was a fixed or a floating royalty.

The distinction has substantial economic consequences. As the Court describes it: “(A royalty) interest may be conveyed or reserved in one of two ways: ‘as a fixed fraction of total production’ (fractional royalty interest) or ‘as a fraction of the total royalty interest’ (fraction of royalty interest) … A fractional royalty interest is referred to as a fixed royalty because it ‘remains constant’ and is untethered to the royalty amount in a particular oil and gas lease. A fraction of royalty interest is referred to as a floating royalty because it varies depending on the royalty in the oil and gas lease in effect at the time, such that it is calculated by multiplying the fraction in the royalty reservation by the royalty in the (current) lease. Based on interpretation principles, the language used in the conveying or reserving instrument determines whether an interest is fixed or floating.”

In this case, the Court was asked to interpret a 1940 royalty deed that reserved a non-participating royalty interest with this language:

(A)n undivided one-half (1/2) of the usual one-eighth (1/8) royalty … if, as and when production is obtained, grantors, their heirs and assigns, shall receive one-half (1/2) of the usual one-eighth (1/8)  royalty, or one-sixteenth (1/16) of the total production.

Then, in 1975, the holder of this interest conveyed their interest in a royalty deed that described the interest as:

(A)n undivided 1/2 of the usual 1/8 royalty interest, and being all of [the grantors’] royalty interest.

The Court decided that this was a floating, rather than a fixed, royalty, based primarily on these factors: (1) the use of double fractions, (2) the use of 1/8th within each double fraction, and (3) repeated reference to the “usual” 1/8th royalty, which the Court determined arose from an “estate misconception, )which is the use of the term “1/8 royalty” to mean the mineral owner’s entire royalty interest). The Court also determined that the reference to “1/16 of total production” should be ignored.

The issues of “fixed vs. floating” and the estate misconception arise primarily in older deeds, although no court in Texas has yet determined the period of time for which the fixed versus floating and the estate misconception analyses should apply. A cottage industry in Texas has grown up in which people search the deed records for these older deeds, purchase the mineral or royalty interest that they think is getting a fixed royalty but should be getting a floating royalty, and file suit against the oil company and current royalty owners to collect the difference between royalties calculated as fixed royalties and royalties calculated as floating royalties. In many cases this is a lot of money!