Double Reservations and Double Fractions: Ohio Appellate Court Addresses Complex Fixed vs. Floating Royalty Interest Debate

AUTHOR(s)

ohio appeals

 

The Ohio Seventh District Court of Appeals recently came down on (yet another) dispute between fixed fractional and floating royalty reservations. The case of Min. Dev. Inc. v. SWN Prod. (OHIO), LLC, et al.,[1] overturned a slightly convoluted and forced interpretation of two reservations made with double-fractions.

Plaintiff-Appellant (“Mineral Development”) appealed the judgment of the trial court, seeking a declaration of the correct way to read the prior reservation interest.[2] The reservations interests at issue come from a 1936 deed conveying two adjacent parcels each with their own reservation language.[3] The Eastern parcel of land’s reservation language read in relevant part; “reserve and except from this deed the 1/2 of the 1/8, being the 1/16 of the royalty of all the oil & gas….”[4] The Western parcel of land’s reservation language was marginally different from the Eastern, in that it read in relevant part; “reserve and except from this deed the 1/2 of the 1/16, being the 1/32 of the royalty of all oil and gas….”[5] The reason for the change in fractional interest in the Western Parcel is attributed to a 1911 deed which, just previously, reserved half of the royalties meaning the grantors of the property did not own all of the royalty interests to reserve like they did with the Eastern parcel of land.[6] In all other respects, the reserving language is the same and was treated as such for the court’s analysis.[7]

This Court was confronted with three different interpretations for reading the reserving language. The first was the argument of SWN the Appellee, which was to rely primarily on the “the royalty” language to presume that inserting “the” refers to a fraction of the entire royalty.[8] Furthermore, the Appellees argue that referring to a fraction of the entire royalty subjects the reserved royalties to be further fractionalized, thus reducing the royalty payments dispersed.[9] The court found that there was no basis for this interpretation and rejects the Appellees argument.[10]

The second interpretation the court was confronted with was one of the arguments that Mineral Development made, which was that the 1936 reservations reserved a 1/2 and 1/4 floating interest in the Eastern and Western parcels, respectively.[11] This is because Mineral Development would have the mention of “the 1/8” be read as a term of art, which would come to mean “whatever royalty amount might appear in a future lease.”[12] This argument stems from this very same Court’s decision in Moore Family Tr. v. Jeffers[13], which came down in September 2023, where the Court recognized that 1/8 was the standard royalty in most older cases.[14] The Court here refuses to set this bright line rule simply based on the fact that the 1/8 royalty, while common, was not absolute enough to become shorthand.[15]

The third interpretation is the Appellant’s alternative argument and the one that the appellate court held to be correct. This argument is that the interest reserved was a fixed 1/16 royalty and a fixed 1/32 royalty with respect to the Easten and Western parcels.[16] The court agrees with this interpretation by going through the ordinary rules of contract interpretation to try and figure out the intent of parties.[17] As to the “1/2 of the 1/8” and the “1/2 of the 1/16” the Court found that there was nothing peculiar about the reservations as the Grantors were simply reserving half of what they owned.[18] Relatedly, the Court tried to determine whether the phrase “of the royalty” further limited the first part of the reservation.[19] Referencing West v. Bode[20], the Court notes that the words “of the royalty” do not necessarily subject the language to further fractionalization. Rather, the Court looks at the entire document to see that there is nothing leading the court to believe that the Grantors intention was to reserve anything less than half of what they owned.[21] Additionally, Mineral Development cites to Hysaw v. Dawkins,[22] a Texas case, which while not binding, stands for the proposition that “[i]n fractional-royalty cases, courts generally take the straight-forward mathematical approach of multiplying double fractions to establish the fractional royalty interest.” Therefore, if the reservation was meant to be a floating royalty interest or further fractionalized the reserving party would have drafted it so, but the most sensible interpretation is that the grantors reserved half of what they owned being 1/16 and 1/32 in the Eastern and Western reservations, respectively.[23]

This case represents the indiscernibility of the difference between fixed and floating royalties, even to the trained eye. The Court here does not muddy the waters further, but certainly does not clear them up at all due to their reluctance to set a bright line rule. For this reason, the debates surrounding these two types of royalty interests will continue on.

 

[1] 2023-Ohio-4749.

[2] Id. at ¶14.

[3] Id. at ¶7-9.

[4] Id. at ¶9.

[5] Id. at ¶8.

[6] Min. Dev., at ¶6,35.

[7] Id. at ¶35.

[8] Id. at ¶39

[9] See Id.

[10] Id.

[11] Min. Dev., at ¶40.

[12] Id.

[13] 2023-Ohio-3653.

[14] Min. Dev., at ¶31 (citing Moore).

[15] Id. at ¶43-44.

[16] See Id. at ¶24.

[17] Id. at ¶26-27.

[18] Id. at ¶38.

[19] Id. at ¶37.

[20] 165 N.E.3d 298 (2020).

[21] Min. Dev., at ¶38.

[22] 483 S.W.3d 1 (Tex.2016).

[23] Min. Dev., at ¶53-54.

 

Authored by Andrew Good and Matthew Gibson. 

Andrew represents companies active in the oil and gas industry in both litigation and arbitration matters, from risk management to trial. He also advises clients on compliance and regulatory issues and handles proceedings in front of administrative agencies / governmental bodies, including the Ohio Department of Natural Resources and the Ohio Department of Commerce.

In addition to his energy practice, Andrew has broad experience in commercial and business litigation, including breach of contract / lease claims, construction disputes, non-compete / non-solicitation disputes, trade secrets, business torts, and real property-related claims. He is OSHA certified in Construction Safety and Health and has drafted and reviewed numerous construction contracts.

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