Face Challenges Confidently

217 Hamilton v. Morris Res., Ltd.

Monday, August 31st, 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.

Hamilton v. Morris Resources, Ltd., 225 S.W.3d 336 (Tex. App.—San Antonio 2007, pet. filed), is a mineral/royalty deed-construction case. The case examines a series of original deeds, leases, and a correction deed, which can be simplified for purposes of review as: (1) an Original Deed subject to an existing lease providing for a 1/8 royalty; (2) a Correction Deed, and (3) a new lease providing for a 1/4 royalty.  In the 1926 Original Deed, Richardson granted to Coates the following:

. . . 1/4th interest in and to all the oil, gas, and other minerals in and under and that may be produced from the following described lands . . . together with the right of ingress and egress at all times for the purpose of mining, drilling, and exploring said lands for oil, gas, and other minerals, and removing the same therefrom. And said described lands being now under an oil and gas lease . . ., it is understood and agreed that this sale is made subject to said lease, but covers and includes 1/4th of all the oil royalty and gas rental or royalty due and to be paid under the terms of said lease. It is agreed and understood that 1/32 of the money rentals which may be paid to extend the term within which a well may be begun under the terms of said lease is to be paid to the said [Coates] and in the event that the said above described lease for any reason becomes cancelled or forfeited, then and in that event, the lease interests and all future rentals on said land, for oil, gas, and mineral privileges shall be owned jointly by the undersigned [Richardson] owning 31/32 and [Coates] owning 1/32 interest . . . in all oil, gas, and other minerals in and upon said land together with their interest in all future rentals.

The 1932 Correction Deed provided:

. . . the mineral deeds in favor of [Coates] executed by [Richardson] are hereby amended such that said mineral deeds cover and include an undivided one-fourth (1/4th) interest in the minerals under the above described property, being one- thirty-second (1/32nd) of the gross production for a perpetual term, which interest, however, shall not be participating as to delay rentals payable under the outstanding lease nor as to delay rentals or cash bonuses payable under the future leases . . . . It is further . . . agreed . . . that the joinder of [Coates] shall not be necessary in future leases, provided, however, that . . . [Richardson] shall execute no oil, gas and mineral leases on the above described land providing for a royalty of less than one-eight (1/8th) . . . .

In 1999, the property was leased for a 1/4 royalty. Richardson claimed Coates was entitled to receive 1/4 of any royalty payments under the leases in effect at the time of the Original Deed, but that Coates had a lesser interest in future leases. Richardson interpreted the deeds as conveying to Coates: (1) a 1/4 royalty interest and 1/32 of all delay rentals under the leases in effect at the time of the original grant and (2) a 1/32 possibility of reverter. Richardson also claimed that because Coates was not expressly granted the right to receive royalties under future leases, Coates royalty interest must be commensurate with his mineral interest, 1/32. Thus, Richardson maintained that under the most recent lease, Coates owned a 1/32 mineral interest (1/128 of production), or, alternatively, a fixed 1/32 nonparticipating royalty (1/32 of production). Coates claimed a 1/4 mineral interest (1/16 of production).

The court gave weight to the language in the Original Deed that the interest conveyed was a 1/4 interest “in and under and that may be produced.” The “in and under” language usually refers to a mineral interest. The Correction Deed recited that the intention of the parties was to convey a 1/4 interest “in the minerals.”

The court held that “no language in any of the deeds divest[ed] Coates of his 1/4 mineral interest.” Further, the provision in the Correction Deed prohibiting Richardson from entering into any lease for less than a 1/8 royalty ensured Coates that his interest would never fall below a minimum of 1/32 of gross production. The court said that interpreting Coates’ interest as a fixed 1/32 of production would render the restriction placed on Richardson meaningless.

Richardson also argued that the Correction Deed transformed Coates’ mineral interest into a royalty interest. Coates had the right to receive delay rentals under the Original Deed, but the Correction Deed provided for no delay rentals or bonuses. Richardson claimed that this change transformed Coates’ present possessory interest into a non-participating royalty interest. The court concluded, however, that if Richardson had intended to transform Coates’ mineral interest into a fixed royalty interest, it would have been unnecessary for Richardson to reserve the right to receive delay rentals and bonuses. The grant of a fixed royalty interest does not convey an interest in delay rentals, bonus payments, or executive rights. Thus, the court held that Richardson conveyed to Coates a 1/4 mineral interest, not a fixed royalty interest.

The significance of the case is the continuing trend to reject the “two-grant theory” in favor of a “four corners” construction harmonizing instruments in which multiple fractions are used. While any particular case may be difficult to harmonize, the reality is that only rarely would any party to these kinds of deeds intend anything other than a simple, single grant. That is, while rights to delay rentals, bonus, access, and to lease have been frequently negotiated, the quantum of interest is generally not expressed as a present interest and as a future interest of a different magnitude.