Title to minerals and royalties in Texas has long been riddled with problems arising from subject-to, reservations-from, and exceptions-to provisions.  Over the years these problems have naturally found their way into the Texas courts, highlighting the critical importance of drafting language to avoid ambiguity and clarify intent.  Emphasis is placed on intent, as unambiguous deeds often are found at the center of litigation. In practice, Texas has always recognized the fundamental public policy of allowing parties the broad freedom to enter into contracts, including mineral conveyances, on terms agreed to by the parties, and Courts will usually enforce the terms as written.  It is also understood amongst oil and gas lawyers that the trend in Texas case law appears to be a gradual transition from a simple mechanical application of the basic rules of deed construction, with an increased focus on the parties’ intent. However, that trend towards increasing recognition of the intent of the parties may be contrived or overstated, as illustrated by the recent Texas Supreme Court case of Wenske v. Ealy, 521 S.W.3d 791, 797 (Tex. 2017) This caseillustrates the importance of clearly stating the intent of the contracting parties to remove doubt and avoid a rigid application of the default rules of deed construction.

Wenske v. Ealy

In the Wenske case, the issue at hand was whether a deed transferred the entire burden of an outstanding non-participating royalty interest to the grantee, or whether the non-participating royalty interest was intended to burden both the grantee and grantor’s reserved interest proportionately.

A quick summary of the facts – in 1988, the Wenskes purchased a tract of land by deed in which the grantors reserved a collective one-fourth (1/4) non-participating royalty interest covering all oil, gas, and other minerals for a term of twenty-five (25) years.  Subsequently, in 2003, the Wenskes conveyed the tract to the Ealys by warranty deed, “subject to” a reservation of an “undivided 3/8ths of all oil, gas, and other minerals in and under and that may be produced from the tract” and included the following clause:

Exceptions to Conveyance and Warranty:

Undivided one-fourth (1/4) interest in all of the oil, gas and other minerals in and under the herein described property, reserved by [the grantors in the 1988 deed] for a term of twenty-five (25) years … together with all rights, express or implied, in and to the property herein described arising out of or connected with said interest and reservation …

In 2011, the Wenskes and Ealys executed oil and gas leases covering the property and in 2013, a dispute arose concerning how the 1/4th non-participating royalty interest would burden their interests.  The Wenskes argued that their reserved 3/8ths mineral interest was not burdened by the 1/4 non-participating royalty interest, while the Ealys argued that each mineral owner bore their proportionate share of the burden. Neither party argued that the 2003 warranty deed was ambiguous.

At the appeals level, in deciding in favor of the Ealys, the Court reasoned that since the 2003 warranty deed was silent as to how the burden of the 1/4th non-participating royalty interest should be allocated, the “default rule” prevails – being that ordinarily a non-participating royalty interest is carved proportionately out of any applicable mineral interest from which it was created.  The Texas Supreme Court, although agreeing with the Appeals Court’s ultimate result, rejected the reasoning, emphasizing that the “Parties’ intent, when ascertainable, prevails over arbitrary rules.”

The Texas Supreme Court focused on the fact that the grant in the 2003 warranty deed was made subject to both the reservation of the 3/8ths mineral interest, as well as the exception to conveyance, which neither party disputed.  Simply put, the 2003 warranty deed conveyed the minerals to the Ealys, reserved 3/8ths of the minerals to the Wenskes, and put the Ealys on notice that the entirety of the mineral estate was subject to the 1/4th non-participating royalty interest (thus avoiding a warranty claim from the Ealys).  The Court reasoned that the deed did not contain language that would contradict the long-standing oil and gas principal that ownership of minerals carries with it the right to receive a corresponding interest in the royalties, and that a “severed fraction of a royalty interest”, like the 1/4th non-participating royalty interest at issue, generally burdens the entire mineral interest from which it was carved out.  As a result, the Court held that under a careful and detailed examination of the 2003 warranty deed, while recognizing the words in the deed their plain meaning and harmonizing all of its parts, it could not be construed to read that the parties intended only the Ealy’s interest be subject to the 1/4th non-participating royalty interest.  In other words, the Court reasoned that the language used in the 2003 warranty deed could not be read as intending to alter the default rule, therefore, the default rule was applied and Wenske and Ealy were both proportionately burdened by their share of the non-participating royalty interest.

The Court purported to reject the idea of simply using a default rule, in this case, the rule being that a non-participating royalty interest generally proportionately burdens the entire mineral interest from which it was carved.  However, despite the Court’s stated goal of emphasizing the parties’ intent over a strict application of the default rule of contractual interpretation, the Court appears to have created uncertainty, as its holding is essentially based on a default rule. In hindsight, if Wenske intended to transfer the entire burden of the non-participating royalty interest to Ealy, the deed should have expressly stated that intent, bypassing any application of the default rule explained above.

Conclusion

The Wenske case illustrates that, although the intent of the parties has been increasingly important in recent years, intent is still often looked at through the lens of long-standing oil and gas rules and principles.  Therefore, when drafting contract language addressing Texas oil and gas rights – lease provisions, deed provisions, reservations, exceptions, etc. – the drafter should be mindful that intent is not always readily ascertained or applied.  Consequently, it remains critical to recognize that if a party wishes to stray from the default rules of construction, those intentions need to be clearly expressed in the document.

 

Cory Page is an associate in The Woodlands office of Kean Miller, LLP.  His practices focus on upstream oil and gas matters. Cory may be reached at 832.509.2445 or Cory.Page@keanmiller.com.