WTX Fund, LLC v. Brown, 595 S.W.3d 285 (Tex. App.—El Paso 2020, pet. denied) held that grantors reserved the entire non-participatory royalty interest in a deed through the deed’s clear and specific reservation. In 1951, Grantor conveyed to Grantee all right, title and interest in and to certain rights in oil, gas, and minerals in Reagan County, Texas (“1951 deed”). The property is currently subject to an oil and gas lease owned by Pioneer and an oil and gas lease owned by Laredo. The Pioneer lease provides for a 1/6 royalty, and the Laredo lease provides for a 1/4 royalty. Grantor contested the royalty payments Pioneer was paying to Grantee. Grantee took the position that the 1951 deed conveyed all of the mineral rights which included the right to receive royalties. The trial court agreed with Grantee, and Grantor appealed.
The court of appeals began its analysis by agreeing with the parties that the 1951 deed is unambiguous. In deed construction cases, Texas courts attempt to ascertain the intent of the parties by examining the entire instrument. Courts interpret words and phrases in relation to the rest of the instrument in an attempt to harmonize any apparent inconsistencies. Here, the court focused on the 1951 deed’s granting clause, the “intended” clause, and the “shall not affect” clause.
The 1951 deed’s granting clause granted “all of grantors’ right, title, interest and estate in and to the leasing rights, bonuses, and delay rentals in and to all the oil, gas and other minerals . . . .” The court noted that by directly referencing the leasing rights, bonuses, and delay rentals, the Grantor conveyed each interest.
The 1951 deed’s “intended” clause states in part that grantee is given “the right to collect any all bonuses and benefits on any future oil and gas leases and any and all delay rentals . . . .” It concludes with the conveyance of “all of grantor’s right, title, interest and estate in and to the 7/8 leasing rights or working interest in the oil, gas and minerals in and under said land together with all bonuses, delay rentals, oil payments and all other rights and benefits . . . .” The court noted that a 1/8 royalty was commonplace in the era the deed was executed. Given the standard 1/8 royalty, the court stated there is no conflict between the granting clause’s “all . . . leasing rights” and the “intended” clause’s “7/8 leasing rights.”
The 1951 deed’s “shall not affect” clause provides the conveyance “shall not affect any interest which any grantors, heirs or assigns, have or may have in the future to the non-participating 1/8th royalty in and under said land . . . .” Further, “the grantors, heirs or assigns, shall have no right to any bonuses, delay rentals, oil payments or other benefits under any oil, gas and minerals leases which have been made or which may hereafter be made . . . upon said property.”
Grantee argued the “shall not affect” clause does not reserve Grantor a non‑participating royalty interest because it does not use typical words of reservation. The court disagreed. The court noted that there is no mandatory language required when making a reservation in a deed. Giving effect to its ordinary meaning, the court concluded “shall not affect” means that the “conveyance did not act on [Grantor’s] particularly described ownership rights,” which the court concluded operates as a reservation.
Next, Grantee argued the “shall not affect” clause should be interpreted as a “subject to” clause protecting Grantor from warranties owed to the grantee of the 1949 deeds, and it was ineffective to operate as a reservation. The court also disagreed with this argument. “Subject to” has a well-recognized meaning when used in a mineral deed. Such clause operates as a “limiting clause, and a qualifying term[.]” WTX Fund, 595 S.W.3d at 297 (quoting Cockrell v. Texas Gulf Sulphur Co., 299 S.W.2d 672, 676 (Tex. 1956)). Here, the 1951 deed was a quitclaim deed and did not contain a warranty which could be breached. Accordingly, the court held that “this conveyance shall not affect” evidenced a clear and specific reservation of a non-participatory royalty interest.
Finally, Grantee argued that the use of the word “benefits” in the “intended” clause and the “shall not affect” clause evidences all attributes of the mineral estate were conveyed. The court noted that the term “benefits” operates as a catch-all for various economic gains. The court heavily relied on KCM Fin. LLC v. Bradshaw, a case involving a claim of a breach of fiduciary duty brought by a non-participating royalty owner against an executive interest holder, to guide its analysis. The court explains that in Bradshaw, “the Court used the term ‘benefits’ as a catch-all term but not as an equivalent when comparing lease benefits.” The court concluded that “benefits” is being used as a catch-all term throughout the 1951 deed to represent the benefits of mineral leases, but these benefits differ from the reserved non-participatory royalty interest. The court therefore held the 1951 deed reserved a non-participatory royalty interest.
Having determined that a non-participating royalty interest was reserved, the court turned to the size of the royalty interest. Because 1/8 was the usual royalty in mineral leases at the time, landowners operated under the presumption that royalties would remain 1/8 in perpetuity. Another presumption at the time, the “estate misconception,” led landowners to assume they retained only 1/8 of minerals upon executing a lease instead of a fee simple determinable with a possibility of reverter. The court concluded that the use of “7/8 leasing rights” and “1/8 non-participatory royalty rights” shows the parties operated under the presumption of the 1/8 royalty and the “estate misconception.” Further, since the parties do not argue that grantors intended to convey a 7/8 working interest, to be consistent, the court held 1/8 is not used to describe a fractional share but instead is a proxy for the usual royalty at the time. The court therefore held that the 1951 deed reserved to grantors the entire non-participatory royalty as a floating royalty and conveyed all other rights in their entirety.
Significance
The significance of the case is the court’s application of Bradshaw. The case highlights the holding in Bradshaw that “benefits” is generally a catch-all term, but its scope on a case-by-case basis may not include all interests, such as reservations. It additionally provides an example of how courts interpret royalty deeds during the era of the 1/8 royalty presumption and the “estate misconception.”
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