Face Challenges Confidently

667 Reed v. Maltsberger/Storey Ranch, LLC, 534 S.W.3d 51 (Tex. App.—San Antonio 2017, pet. denied)

Wednesday, August 1st, 2018

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

Reed v. Maltsberger/Storey Ranch, LLC, 534 S.W.3d 51 (Tex. App.—San Antonio 2017, pet. denied) is a deed construction case, which held that a deed conveyed a mineral interest, rather than a royalty interest. The parties aligned as successors in interest to Grantor and Grantee under a 1942 deed. In 1942, through an instrument titled “Royalty Deed,” Grantor conveyed to Grantee “an undivided one-fourth (1/4) interest in and to all of the oil, gas and other minerals in and under and that may be produced from” the described lands. In 1942 the land was subject to an existing oil and gas lease providing for a 1/8 royalty, and the existing lease clause in the deed recited that it “covers and includes one-fourth (1/4) of all the oil royalty and gas rental or royalty due and to be paid under the terms of said lease. . . .” The 1942 deed then strips from the grant executive rights, bonus and delay rentals (rights normally given to mineral-interest owners) and concludes with:

[I]t being the purpose and intent hereof to grant and convey an undivided one-fourth (1/4) of the one-eighth (1/8) royalty . . . under said existing lease and an equivalent royalty interest under any future mineral leases thereon by [Grantor].

A new lease providing for a royalty of 22.5% was executed. The amount of royalty payments owed to Grantee was in dispute. Grantee contended that Grantee owned a 1/4 mineral interest and thus Grantee was owed 1/4 of the 22.5% royalty. Grantor contended that Grantee owned a mere royalty interest and thus was owed a 1/32 (1/4 X 1/8 = 1/32) fixed royalty. The issue was whether the 1942 deed conveyed a mineral interest or royalty interest.

The court began by examining Texas Supreme Court precedents to determine whether the interest conveyed was a mineral or royalty interest. The Supreme Court has held that a mineral estate consists of five essential interests: (1) the right to develop, (2) the right to lease (the executive right), (3) the right to receive bonus payments, (4) the right to receive delay rentals, and (5) the right to receive royalty payments. However, “[a] conveyance of a mineral estate need not dispose of all interests; individual interests can be held back, or reserved, in the grantor.” The court noted that the Supreme Court precedents are not definitive on whether a mineral estate stripped of its right to lease, receive bonus payments and receive delay rentals is still a mineral estate. However, the Supreme Court “has been clear that there is no bright line rule in determining when a mineral interest remains a mineral interest.” Instead, courts must use a holistic and harmonizing approach to determine the intent of the parties.

The court held that the title “Royalty Deed” is not determinative on its own because the court must look at the instrument as a whole and harmonize its provisions to construe the parties’ intent. Examining the 1942 deed as a whole, the court reasoned that if Grantor had intended to convey only a royalty interest, the language in the 1942 deed “stripping the grantee of rights would be redundant because a royalty interest owner has no such rights.” Furthermore, the court found that the last provision regarding future royalties “makes clear that under future leases, which may provide for an amount different from a 1/8 royalty, the grantees will be entitled to ‘an equivalent royalty interest’—that is, 1/4 of any future royalty negotiated”; thus, not a 1/32 fixed royalty on all future leases. The court held that the 1942 deed conveyed a mineral interest.

This case is significant as another case in a long line of cases construing deeds to determine if the disputed interest is a mineral interest or a royalty interest. Given that the right to develop is a correlative right and passes with the executive rights, this mineral interest was a naked mineral interest shorn of all rights except the right to share in royalty.