Face Challenges Confidently

197 Garza v. Prolithic Energy Co., L.P.

Tuesday, September 1st, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
Garza v. Prolithic Energy Co., L.P., 195 S.W.3d 137 (Tex. App.—San Antonio 2006, pet. denied) analyzes two deeds raising the issues of (1) the mineral royalty distinction, and (2) conflicting fractions and the “two-grant theory”. The deed forms at issue were the three-paragraph forms commonly used in the 1930’s and 1940’s which included a granting clause, a “subject to” clause, and a “future lease” clause. One of the deeds was to Claypool and denominated as a “Royalty Contract,” and the second was to Lee and denominated a “Mineral Deed”. The text used in the two forms was very similar for purposes of the opinion. The name given to an instrument is not given controlling effect. The court disregarded the names in reaching its holding, reached the same result favoring the grantees as to both deeds, and found that the interests conveyed were mineral interests. The Royalty Contract included in pertinent part the following three clauses:

  1. In the granting clause, the Royalty Contract provided: “[A]n undivided one-half (1/2) interest inand to all the oil, gas, and other minerals in and under the [Property] . . . . Together with the rights of ingress and egrss at all times for the purpose of taking said minera”


  1. In the “subject to” clause, the Royalty Contract provided: “It is distinctly understood and herein stipulated that said land is under an Oil and Gas Lease made by Grantor providing for a royalty of 1/8th of the oil and certain royalties or rentals for gas and other minerals and that Grantor herein shall receive One-half (1/2) of the royalties and rentals provided for in said lease insofar only as said lease covers the land hereinabove described; but he shall have no part of the annual rentals paid to keep said lease in force until drilling has beg


  1. In the “future lease” clause, the Royalty Contract provided: “It is further agreed that Grantee shall have no interest in any bonus money received by the Grantor in any future lease or leases given on said land, and that it shall not be necessary for the grantee to join in any such lease or leases so made; That Grantee shall receive under such lease or leases one-sixteenth (1/16th) part of all oil, gas and other minerals taken and saved under such lease or leases, and he shall receive the same out of the royalty provided for in such lease or leases, but Grantee shall have no part in the annual rentals paid to keep such lease or leases in force until drilling is beg

The warranty clause in the Royalty Contract warranted “all and singular the said minerals
. . . .”     The controversy arose in the usual manner:   the existing 1/8 royalty lease terminated and a new 1/5 royalty lease replaced it.
The first issue was to resolve whether the interest conveyed was a mineral interest or a royalty. Grantee asserted that the interest conveyed was a mineral interest,  and  therefore Grantee was entitled to 1/2 of 1/5 of production.   Grantor asserted that the interest conveyed was a fixed royalty of 1/16 of production. Analysis determining the mineral/royalty distinction always begins with Altman v. Blake, which defines the five essential attributes of a severed mineral estate as: (1) the right to develop (the right of ingress and egress); (2) the right to lease (the executive right); (3) the right to receive bonus payments; (4) the right to receive delay rents; and (5) the right to receive royalty payments. Subsequent authority holds that the parties may choose whether to grant or reserve each of the attributes, and a “bare” mineral right striped of all attributes except the right to receive royalty, is, nevertheless, still a mineral interest. The reasoning is that carving off such rights is redundant and would be unnecessary, if the instrument in question was intended to be a royalty deed. The court reasoned that this “Royalty Contract” was a mineral deed because it reserved in grantors at least the 2d, 3d, and 4th attributes (and possibly the 1st) of a mineral interest. The court also gave weight to the use of the words, “in and under” in the granting clause, which usually refers to a mineral interest. The opinion found for the grantees, but is silent as to the reference in the warranty clause to “the said minerals,” which was one of the points urged by the Claypool/Lee grantees.
The Mineral Deed to Lee was similar, except that the interest conveyed was 15/32, rather than 1/2, and the “future lease” clause required a lease with a royalty of at least “the usual one-eighth” and “Grantee shall receive under such lease or leases 15/32 of 1/8 part . . . .” The court held that both deeds conveyed a mineral interest, and then turned to the second question, which was to resolve conflicting fractions.
The Claypool/Lee grantees claimed that they were entitled to 1/2 of 1/5 and 15/32 of 1/5, respectively. The successors to the grantor claimed that Claypool should get the “fixed royalty” of 1/16 and that Lee should get 15/32 of 1/8, respectively. The successors to the grantors conceded that the granting clause conveyed a mineral interest, but contended that upon execution of the new lease, a portion of the royalty effectively reverted back to them. The court went through a tortured analysis of the difficult cases in this area and determined to rule on the basis of a broad “four corners” analysis. It acknowledged the reasons behind the development of the three-grant form, the typical royalty of 1/8 at the time the Royalty Contract and Mineral Deed were executed, and noted that there was nothing in those two conveyances which made it evident that two differing estates were being conveyed. The conveyances could be harmonized by holding that the grantees were to consistently receive a 1/2 and 15/32 interest, respectively, of whatever amount of royalty was paid under the future lease clause. The court bolstered its conclusion by reference to the Mineral Deed, which clearly contemplated that future leases might have a royalty greater than 1/8, but Lee would share in 15/32 of 1/8 under leases containing the “usual one-eighth.”   Logically, a greater royalty would result in a greater interest to Lee.
It would be hard to say whether title examiners hate the words “two-grant theory” or “surface destruction test” more. The Garza court faced a difficult task in rationalizing cases construing these three-grant forms. The Garza result is probably a good one. When these forms were being used, royalties were almost always 1/8, and it would be a very unusual and very creative grantor who actually intended two separate grants of differing interests.