Fixed or Floating Non-Participating Royalty: The World May Never Know - Part II

Welcome back for Part II in our series examining the fixed/floating distinction of non-participating royalty interests ("NPRI"). Part I presented a brief overview of what constitutes an NPRI, the difference between a fixed and floating NPRI, and how interpretation of these interests today is in flux under the four corners analysis as modified by two mistake doctrines called the “estate misconception theory” and the “legacy of the 1/8th royalty”. This time around, we'll take a detailed look at these mistake doctrines and examine how courts have increasingly relied upon them to interpret NPRIs. Before all that fun, please allow me to take advantage of my God-given talent of using a multitude of words to say so little and key you in on a bit of historical context so we can better understand what's happening to NPRI interpretation in the courts right now and how it has changed from the past.

Buckle up, Buckaroos!

A History of Non-Participating Royalties:
They've Always Sucked

About a century ago, in the wake of a court ruling that a conveyance of minerals under an existing lease would not also convey a proportionate share of rents and royalties payable under the lease unless the instrument explicitly granted such, a style of deed came into common use that had extra granting clauses—in addition to the standard initial granting clause, these deeds would also include a grant of a fractional interest of benefits under existing leases and a further grant of a fractional interest of benefits under future leases. Although the aforementioned ruling was overturned by the Texas Supreme Court in the 1940's, the use of multiple grant deed forms did not stop. Mineral owners across the state continued their attempts to convey or reserve their interests by multiple, often inconsistent grants or reservations in the same deed. When these deeds dealt in NPRIs, they were almost guaranteed to be internally inconsistent. Kind of like this blog.

Two things total, and one contradicts the other.

Despite contradictory grants and the potential for multiple interpretations (whatever you do, don't say ambiguous, don't say ambiguous! AHHH!), these troublesome deeds accumulated for many years in county courthouses across the state without much notable litigation over the type of NPRIs created.  The reason?  Well, really it’s two reasons: as we'll see below, there's generally no difference in the split of royalties if the NPRI is fixed or floating so long as the minerals are leased at a 1/8th royalty, and, for some unspecified length of time in the past, the 1/8th lease royalty predominated in Texas.  What reason did anybody have to fight over NPRI interpretation if it made no difference and the mailbox money kept rolling in?  So, for quite a long time, the issue lurked in the shadows and went largely unaddressed. 

Shown: NPRI owner lurking.

As time went on and lease royalties increased, the incentive to fight over NPRIs grew with them. As we saw in Part I of this series, for a lease with a royalty larger than 1/8th, the split of royalties between the NPRI owner and the burdened mineral owner can vary significantly based on whether the NPRI is treated as fixed versus floating. Naturally, those once-complacent mineral and NPRI owners started to sue each other more and more to make sure that they got their piece of the pie.

Shown: NPRI owner getting his piece of the pie.

Once everybody got litigation happy over NPRI interpretation, it quickly became clear that the courts would need to address the multiple grant issue and establish a clear protocol for interpreting NPRI. The first discernable swing at the problem came with the "repugnant to the grant" theory or rule, which can be likened to answering the first question on a multiple-choice test and then picking "C" for all remaining questions without looking at them. Under this theory, the initial granting clause reigns supreme. What it says is what is granted, and all the other bullshit that comes after it can be ignored if it is contradictory. This was a great way to deal with inconsistent deeds (it's easy and it arguably promotes certainty of title by simplifying things) as long as you were cool with ignoring varying amounts of the remaining deed language, which the Texas Supreme Court was totally cool with back in 1984.

Everything was cooler in the 80s.

The days of cutting corners in NPRI cases, however, didn't last long.  By the early 1990s, the Texas Supreme Court had matured.  The fun and prosperity of the 1980s had faded.  Recession had set in.  It was time to settle down and get serious.  Thus, in 1991, the Court overturned its 1984 ruling and decided that the beloved four corners analysis would apply when interpreting deeds creating or reserving NPRIs but left it at that.  For the next two decades, the interpretation of NPRIs under the four corners analysis would languish in the appellate courts without further guidance by the Texas Supreme Court.  These appellate courts tried to reason out shortcuts under the four corners analysis that would be as legendary as the repugnant to the grant regime of the 1980s.  Some found solace in two newfangled “holistic” mistake doctrines that would come to be known as the estate misconception theory and the legacy of the 1/8th royalty, while other courts clung to a tried-and-true “mechanical” analysis that attempted to logic-out the inconsistencies in definitely-not-ambiguous NPRI deeds. 

Good luck applying logic to the illogical!

Courts that went all hippy-dippy with their holistic analysis predominantly found NPRIs to be floating, while courts that refused to experiment with recreational legal theories almost invariably held NPRIs to be fixed.  In 2016 and 2018, the Texas Supreme Court formally integrated the two mistake doctrines into the four corners analysis that it had established in 1991.  This has led to a massive shift in how NPRIs should be interpreted.  Like them or not, the estate misconception theory and the legacy of the 1/8th royalty are here to stay for now, so let’s take a deeper look at how each one works.

Estate Misconception Theory:
Apparently Nobody Understood How Leasing Works

As current Texas cases tell it, in the olden days, people thought that they were conveying all of their minerals in fee by an oil and gas lease for the term of the lease except for a small fraction retained (a/k/a not conveyed) on which royalties were derived and paid.  In their minds, if a lease provided for a 1/8 royalty, the lessor would mistakenly believe that only 7/8ths of their minerals were being conveyed by the lease.  Their 1/8 royalty payment under the lease, as they saw it, was based on their retained 1/8 mineral interest in the leased lands.  Think of it as a cotenant relationship, where the producing cotenant must account for the non-producing cotenant.  But don't really think of it that way because that's wrong.

You should probably assume anything and everything in this blog is wrong. And I say that not just to legally cover my own ass. I mean it!

What really happens when a lessor executes a lease is that 100% of the lessor's minerals are conveyed to the lessee as a fee simple determinable (that is, the lessee has a possessory fee interest in the minerals for the life of the lease), subject to the non-possessory royalty fraction provided for in the lease.  You might be wondering: Why the heck does the distinction even matter if the lessor is going to get paid the same royalty amount regardless of whether the lessor is afflicted by the estate misconception?  Firstly, let me say, calm down.  Secondly, let me point out that it matters because the story doesn't stop there.  You see, people of the olden days didn't just love leasing their minerals—no, no, no—they also loved to carve up the mineral estate through convoluted conveyances, reservations, and bequests as if the county courthouse was the place to flex on their neighbors and extended family and show everyone just how literate and sophisticated they were.

I come from a long line of morons myself.
Unrelated: Look how literate and sophisticated I am!

If the minerals were leased at the time the NPRI was created and the party drafting the deed was operating under the estate misconception, a confusing situation often arose where the language in the deed only carved up the fraction of minerals thought not to be covered by the lease despite the parties having intended for a fraction of the overall minerals to be conveyed/reserved (e.g., mineral deed conveys 1/2 of 1/8, but the parties intended for the conveyance to be 1/2 of all minerals).  This misconception was compounded by the multiple grants that were ever-present in deeds for decades.  In those deeds, 1/8th may be used for currently leased minerals, but the full 8/8ths mineral interest might be referred to for future leases.  This could also occur if an NPRI was conveyed or reserved.  For example, a deed may grant “1/16th of the royalty” out of minerals then under lease at a 1/8th royalty (i.e., 1/2 x 1/8), but the parties bargained for and intended for 1/2 of the royalty to be conveyed (i.e., 1/2 x 8/8).  Whatever the particulars may have been, the result was often a deed that was internally inconsistent on its face. But, as we’ve noted, Texas courts will be damned to find a deed ambiguous. Instead, they have reconciled the ostensibly irreconcilable by handwaving away these types of contradictions on the basis of the alleged thoughtcrime of the estate misconception

Legacy of the 1/8th Royalty:
Apparently Everyone Thought Lease Royalties Would Never Change

The other mistake doctrine used by the courts, the legacy of the 1/8th royalty, is pretty much just like it sounds: mineral owners of the past mistakenly believed that lease royalties would always be 1/8th. 

About as historically accurate as the “ubiquity” of the 1/8th royalty.

The Texas Supreme Court has asserted that the 1/8th royalty was "so pervasive" and "so standard" in the past that Texas courts took judicial notice of it.  The "near ubiquitous nature" of the 1/8th royalty, as the courts tell it, "no doubt influenced the language used to describe the quantum of royalty in conveyances of a certain vintage" such that parties to a deed may have mistakenly used "1/8th" when they really meant more generally any royalty amount provided for in any present or future lease, whether 1/8th or otherwise.  Thus, a court applying this mistake doctrine could interpret an NPRI described as "1/4 of 1/8th royalty" to mean 1/4 of the lease royalty (i.e., a floating NPRI) instead of a 1/32 fixed NPRI (1/4 x 1/8), despite no explicit language in the deed indicating any such an intent of the parties. Since 2016, courts have wielded this mistake doctrine less like a scalpel and more like a cudgel, demonstrating an arguable lean towards finding NPRIs as floating over fixed.  While it’s relatively easy to explain the legacy of the 1/8th royalty, soundly justifying its use proves quite difficult.

Here we go!

Problems with the Mistake Doctrines:
Making an ASS out of U and ME

Although the mistake doctrines might make it easier for us to interpret some NPRIs, at least to the extent that Texas courts are now demonstrating a preference for finding floating NPRIs after integrating the mistake doctrines into the four corners analysis, their use requires certain assumptions to be made that do not have particularly solid justifications.

Get ready for some hot sports opinions!

Alright, the disclaimers here are (1) the law, as it stands now, requires that a reviewing court consider these mistake doctrines in their four corners analysis of a deed creating an NPRI and (2) I am a blithering idiot.  With those out of the way, let’s discuss two primary problems with the mistake doctrines: first, their application necessarily contradicts a four corners analysis, and second, they require the use of assumptions and generalizations that do not have defined boundaries in time or place.

4 Corners + 2 Mistake Doctrines = Whatever you Want it to Be

As we’ve hit on several times before, a court reviewing an unambiguous deed (again, this is something that the court will explicitly rule on in any given case) should theoretically restrict its interpretation to the plain meaning of the language used within its four corners.  Put another way, the court should be looking at what the parties actually said in the deed, not what they should have said.

<3 Nicholas Sparks 4 eva.

Regardless of whether a court can somehow determine the actual intent of the parties—what they really meant to do in their heart of hearts independent of the words used in a deed—their intent as expressed within the four corners of the deed is still all that counts under the four corners analysis, “without reference to matters of mere form, relative position of descriptions, technicalities, or arbitrary rules”.  Contrary to these limitations and despite the Texas Supreme Court itself remarking that reliance on an assumed mistake of the parties to a deed “is not proper harmonizing under the four corners analysis, and conflicts with a number of this court’s decisions”,  the mistake doctrines require a reviewing court to (1) assume, without any extrinsic evidence, that the parties drafting a deed misunderstood or did not understand the language they used in the deed and (2) based on that assumed mistake, interpret the deed by what the parties should have said rather than what was actually said in the deed.    

Further, implicit in the acknowledgement by the courts that the mistake doctrines apply to “conveyances of a certain vintage” (more on that later) is that the “plain meaning” of the language used within the four corners of a deed will directly depend on its date of execution.  In other words, two deeds with identical language could be interpreted differently if only one is of the proper vintage, which would run contrary to the very core of the four corners analysis.

But even if we accept the use of mistake doctrines as entirely valid, particularly with regard to the legacy of the 1/8th royalty, it doesn’t actually tell us anything about the intent of the parties.  Let’s say that, unequivocally, every single person who ever drafted a deed back in the day thought that lease royalties would always be 1/8th, and let’s inject that knowledge into our interpretation of a deed regardless of its particular language.  What does this tell us as far as the fixed/floating distinction is concerned?  Nothing.  The answer is nothing.  Even if a drafting party thought that lease royalties would be 1/8th until the heat death of the universe, this does not tell us whether they intended for the NPRI to be fixed or floating because, under such a mistaken assumption, it likely wouldn’t have even crossed their minds to differentiate.  After all, the split between the mineral owner and the NPRI is the same at 1/8th regardless of whether the NPRI is treated as fixed or floating.

But therein lies the rub: it is unequivocal that at least some people in the past understood that lease royalties could vary from 1/8th, so there’s a non-zero chance that imposing the legacy of the 1/8th royalty mistake doctrine on any given deed might be ascribing an intent that is the opposite of reality.  The time and place that the deed was drafted will have an effect on that probability, and the courts have acknowledged as much in their assertions that “conveyances of a certain vintage” are afflicted by the mistake doctrines, which leads us to the second main problem with the mistake doctrines.

Time and Place Mean Everything: Kind Of … Sort Of

As anyone can tell you who has spent enough time looking at oil and gas title, it’s clear that the 1/8th royalty was indeed pervasive in the past.  It’s also probably correct to say that yes, many parties drafted their deeds under the assumption that lease royalties would always be 1/8th or, probably more accurately, they used 1/8th as a synonym for “lease royalty”.  The same could be said for the estate doctrine—there’s plenty of clear examples where parties use fractions that only make sense under the mistaken assumption that a lease conveyed 7/8ths of the minerals and the royalty is paid on the retained 1/8th.  So, for the remainder of this elucidating blog post, let’s assume that the application of the mistake doctrines is necessary and correct in at least some circumstances (a/k/a the current interpretation paradigm in Texas). But even if valid, it’s also clear that both of these mistake doctrines are no longer applicable to anybody drafting a deed today. Everyone and their mother knows that a grant of an oil and gas lease grants a fee simple determinable, and a modern lease with a 1/8th royalty is a rarity these days.

Can’t wait for blockchain title and AI to put us out of business!

This raises several questions: When did the mistake doctrines become inapplicable? The Estate Misconception cutoff could potentially be tied to the relevant court holding, but what about the legacy of the 1/8th royalty? Is there a specific date that we can peg as the cutoff? Would this date apply to the whole state? If not, would it apply on a county-wide basis? Based on the play? Formation? How many leases with royalties other than 1/8th would be necessary to justify the cutoff date? One? A dozen? Would the same geographic limitations apply? At least with the Estate Misconception, courts have taken into consideration whether the minerals were leased at the time of execution of the deed at issue. Could this same argument be applied to the legacy of the 1/8th royalty if the minerals conveyed by a deed were then or previously leased at a royalty other than 1/8th?

Anyone else having trouble with all these questions? Just me? My two brain cells are rubbing together as hard as they can.

As early as 1931, the Texas Supreme Court was already dealing with oil and gas leases that provided for royalties other than 1/8th.  In that particular case, the lease at issue was executed in 1919 and had a variable royalty that escalated from 1/8th to 1/6th and then to 1/4th based on the number of barrels of oil produced per day.  An unscientific survey of reported cases dealing with the fixed/floating NPRI distinction shows the instruments in dispute range in dates from the early 1920’s into the late 1960’s.  In cases where the court applied the legacy of the 1/8th royalty, there is rarely much discussion as to the temporal limitations of the doctrine outside of nonspecific remarks that the 1/8th royalty rose to ubiquity sometime in the 1920’s to 1930’s but had lost that status by the 1970’s.  No notable discussion as to potential geographical limitations of the doctrine can be found in reported cases.

It should come as no surprise that courts have applied the mistake doctrines with a broad brush and no apparent regard for the specific time or place of the NPRI’s creation—it would require monumental effort outside the purview of the courts to establish clear timeframes in which the mistake doctrines were applicable in fact (like the aggregation of tens of thousands of data points from across the state including, but definitely not limited to, all recorded oil and gas leases).  But that impediment should not necessarily justify the nonspecific, broad application of the mistake doctrines.  If the courts are insistent on injecting outside information (whether generalized or not) into the four corners of an unambiguous deed, then it is necessary for that information to be accurate and precise.

Closing Thoughts: Don’t Try This At Home

While Texas courts have gone around and around for a hundred years trying to grapple with the self-inflicted intricacies of NPRIs, and while great legal minds and crayon-eating attorneys alike (much love from yours truly <3) can armchair quarterback over how NPRIs should be treated each time a new case is decided, it is practicing attorneys and, more importantly, their clients who have to deal with NPRIs in real life and who need concrete, practical solutions rather than what amounts to ineffectual handwringing over legal fictions.  Unfortunately, the solutions typically available are not always immediate or particularly practical, and picking which one to pursue can be remarkably difficult.  For that reason, I highly recommend engaging an experienced professional to help you navigate this mess.

Nudge nudge hint hint

Thanks for reading!