Face Challenges Confidently

103 Horizon Resources, Inc. v. Putnam,

Tuesday, September 1st, 2015

Richard F. Brown

Horizon Resources, Inc. v. Putnam, 976 S.W.2d 268 (Tex. App.—Corpus Christi 1998, n.w.h.) determines whether an overriding royalty payable to the Lessor and included in an attached addendum to a printed lease form is subject to the proportionate reduction clause found in the printed lease form. In the Putnam case, the printed lease form included a typical royalty clause, and it also included a proportionate reduction clause which provided:

[I]t is agreed that if this lease covers a less interest in the oil, gas, sulphur, or other minerals in all or any part of said land than the entire and undivided fee simple estate . . . then the royalties, delay rental and other monies accruing from any part as to which this lease covers less than such full interest, shall be paid only in the proportion which the interest therein, if any, covered by this lease, bears to the whole and undivided fee simple estate therein.

The clause adding an overriding royalty in the addendum provided:

As additional bonus for the making of this lease, LESSOR shall receive an overriding two-thirty fifths (2/35) royalty in all oil, gas, liquid hydrocarbon and sulphur associated with their production, produced from these leased premises.

A portion of the leased premises in which Lessor owned a 50% interest was pooled into a producing unit. Lessor signed division orders in which the overriding royalty was proportionately reduced, and Lessor accepted reduced payments for more than two years. Lessor then filed suit to recover the “underpaid” overriding royalty.
The overriding royalty was subject to proportionate reduction based upon the rulings in McMahon v. Christmann, 157 Tex. 403, 303 S.W.2d 341 (1957), and Newport Oil Co. v. Lamb, 352 S.W.2d 861 (Tex. Civ. App. – Eastland 1962, no writ). Both cases had similar facts. In McMahon, the overriding royalty was held to be free from reduction, primarily because the language in the addendum creating the overriding royalty recited that it was to be “without reduction.” In Newport, there was no similar “without reduction” language in the addendum, and the court held that, absent express language to the contrary, the proportionate reduction clause, although found in the printed portion of the lease, was applicable to the overriding royalty provision in the addendum. The opinion in the Putnam case ignored the division orders in reaching its decision.
The significance of this case is that an overriding royalty added to a lease or addendum to a lease will be subject to the printed form proportionate reduction clause, unless the draftsman adds “without reduction” language.