Fixed vs. Floating Royalties at the Texas Supreme Court:
Van Dyke v. Navigator and Thomson v. Hoffman Texas
other considerations cause double-fractions to create floating interests. In their view, while the first fraction remains constant over time, the second fraction “floats” with chang- ing lease royalty rates. Under this argument, if the current lease was at a one-fifth royalty rate, the arithmetic for the floating interest would be: 1 4 𝑥𝑥 1 5 = 2 1 0 In this scenario, the royalty owner would be entitled to a much higher 0.05000000 and, whenever the lease royalty rate changes, so will the second fraction and the resulting floating royalty interest. As royalty rates have trended higher over time, so has the appetite for royalty owners to bring floating royalty litigation.
The Texas Supreme Court is poised to decide two major fixed vs. float- ing royalty cases in 2022: Van Dyke v. Navi- gator , a Permian Basin case from Martin County, and Thomson v. Hoffman , from Mc- Mullen County in the Eagle Ford. Along with production in paying quan- tities, the interpretation of fixed and floating royalty interests is one of the hottest areas of upstream oil and gas litigation. Van Dyke and Thomson will not only be battles between interest owners and lawyers, but also among industry and landowner groups, law profes- sors, and other amici curiae (“friends of the court” who provide briefing in support of their preferred positions). The dispute over fixed and floating royalty interests is rooted in the antiquated use of double-fractions in drafting, i.e. , “one- fourth of one-eighth.” These double-fractions are typically found in older conveyances. Since fractions are multiplied straight across, the arithmetic for a fixed royalty in- terest would be: 1 4 𝑥𝑥 1 8 = 3 1 2 A fixed interest never changes. The “one-fourth” is always one-fourth; the “one- eighth” is always one-eighth; and the arith- metic always renders a 1/32nd. In decimal terms, 0.03125000.
Van Dyke v. Navigator No. 21-0146
Van Dyke is a mineral interest double- fraction case. That said, courts employ the same principles of interpretation to grants and reservations of mineral and royalty inter- ests, so Van Dyke will be instructive for fixed vs. floating royalty cases. The parties were competing over the in- terpretation of a mineral reservation of “one- half of one-eighth.” One side claimed that “one-half of one- eighth” actually meant “one-half of the min- erals,” since the prevailing lease royalty at
Attorneys representing mineral and royalty owners disagree, however. They say
16
N a t i o n a l A s s o c i a t i o n o f D i v i s i o n O r d e r A n a l y s t s
Made with FlippingBook flipbook maker