Precise drafting is critical to a successful transaction, even involving a seemingly simple assignment of an overriding royalty interest. In Piranha Partners v. Neuhoff, 596 S.W.3d 740 (Tex. 2020), the Texas Supreme Court was called upon to determine the scope of an assignment of overriding royalty interest. The issue was whether the overriding royalty interest affected the entire oil and gas lease, or whether it was limited to the lands or wellbore described on the Exhibit A attached thereto. After discussing various rules of construction and the surrounding circumstances, the court concluded that the overriding royalty interest affected the entire lease specifically holding that, the overriding royalty assignment conveyed “all of [grantor’s] right, title and interest in and to the properties in Exhibit “A”. The Piranha opinion contains a depiction of the relevant portion of the Exhibit A, which reads as follows:
Lands and Associated Well(s):
Wheeler County, Texas
NW/4, Section 28, Block A-3, HG&N Ry. Co. Survey
Oil and Gas Lease(s) and/or Farmout Agreements:
Oil & Gas Lease(s)
Lessor: [the Puryears]
Lessee: Marie Lister
Recorded: Volume 297, Page 818
The first part of the description on Exhibit A identifies the “Lands and Associated Well(s)” as the NW/4 of Section 28 and the Puryear #1-28, respectively. The second part identifies the “Oil and Gas Lease” as the relevant oil and gas lease, which covers all of Section 28.
The grantor in the overriding royalty assignment is Neuhoff Oil & Gas, which owned a 3.75% overriding royalty interest on all production under the lease (various members of the Neuhoff family succeeded to the interest of Neuhoff Oil and Gas and are referred to as “the Neuhoffs”). The grantee in the assignment is Piranha Partners.
After the overriding royalty assignment, several new wells were drilled on the lands affected by the referenced oil and gas lase. The operator paid the overriding royalties on those wells to the Neuhoffs, believing that the overriding royalty was limited to the wellbore for the Puryear #1-28 well. However, after obtaining title opinions stating that Piranha owned the overriding royalty interest on production under the entire lease, the operator paid Piranha retroactively to first production from the new wells and demanded a refund from the Neuhoffs for the proceeds that they erroneously received.
The Neuhoffs filed suit, claiming that the overriding royalty interest affects only production from the Puryear #1-28 well. The trial court disagreed and held that the assignment conveyed an overriding royalty interest affecting the entire lease. The court of appeals disagreed with both the trial court and the Neuhoffs and held that the overriding royalty interest affected the northwest quarter of Section 28, but not the remainder of the leased premises.
The Texas Supreme Court began its analysis with the granting language quoted above, which does not describe the interest conveyed, but instead incorporates the description found on the attached Exhibit A. The court then considered and rejected three rules of construction relied upon by Piranha Partners. Piranha argued that the deed should be construed to convey the greatest estate permissible under its language, focusing on the word “all” in the granting clause. However, the court rejected this argument and said that the deed conveyed “all” interest in the properties on Exhibit A, not “all” interest in the lease. Piranha next argued that the court should reject any alleged exception, reservation, or limitation that is not expressly and clearly stated in the deed. The court rejected this argument as well, stating that this rule is inapplicable because the assignment did not contain a reservation or exception. The relevant issue was the scope of the grant, not the extent to which a reservation or exception limits that grant. Piranha’s final argument was that if there is any doubt the deed should be construed against the grantors. The court said that this rule is inapplicable here because the deed is not ambiguous or in doubt.
The court next turned to the circumstances surrounding the assignment. Neuhoff Oil & Gas sold the interest through an oil and gas clearinghouse auction, which involved numerous other properties in different states, and did not include any negotiations between the parties. Neuhoff argued that because certain references in the paperwork, including the invoice provided by the clearinghouse, refer to the “Puryear B #1-28” well, the intention was to convey an overriding royalty only as to lands in the northwest quarter of Section 28. In contrast, Piranha argued that the reference to the well was simply a shorthand label because that was the only producing well on the lease at the time. The court, however, noted that the circumstances fail to provide meaningful support for either party’s arguments, so it then turned its attention to the assignment itself to determine the amount of interest sold.
The court acknowledged that, standing alone, the Exhibit A is ambiguous because it does not adequately identify the interest assigned, but that taking a holistic and harmonizing approach required it to consider all provisions in the assignment. It then engaged in a detailed analysis of several specific clauses and phrases throughout the assignment, and the manner in which they aid in interpreting the Exhibit A. One clause found after the grant states that it includes “All oil and gas leases, mineral fee properties or other interests, INSOFAR AND ONLY INSOFAR AS set out on Exhibit A … whether said interest consists of leasehold interest, overriding royalty interest, or both … which [interest] shall include any working interest, leasehold rights, overriding royalty interests and reversionary rights held by [Neuhoff Oil], as of the Effective Date” (emphasis added). The court determined that even though the paragraph limits the interest to that found on the Exhibit A, the italicized language states that the Exhibit A includes any overriding royalty held by Neuhoff. The assignment also includes a grant of contracts “to the extent that they affect the Leases,” and the court stated that if the conveyance included only Neuhoff’s overriding royalty in the well or the northwest quarter, there would have been no reason to convey all contracts that affect the lease. Finally, the court made reference to language stating that the overriding royalty was payable pursuant to the terms of the oil and gas leases described on Exhibit A, and that the interest is to be proportionately reduced to the interest in the oil and gas leases described on Exhibit A owned by the assignor or if said leases cover less than the entire mineral estate, and concluded that the reference to the oil and gas leases meant that the interest assigned was an overriding royalty in the oil and gas lease itself, even though the exhibit also made reference to lands and a well.
After construing the assignment in its entirety and harmonizing all provisions, the court concluded that the overriding royalty included production from the entire lease, and was not limited to the lands or well listed on the Exhibit A.
There is a vigorous dissent by Justice Bland, who was joined by Justice Lehrmann, which argues that the court should have held the property description to be ambiguous and remanded the case for a jury to determine the meaning. The dissent states that the majority should not seek “clues from snippets of unrelated words found in other phrases in the assignment to resolve the case.”
The Piranha case illustrates the importance of careful drafting of assignments of overriding royalties, especially if there are limitations involving certain lands or wellbores. Although not at issue in the case, overriding royalties can also be limited by depth, which adds another dimension. Further, these same issues and considerations are important in conveyances of mineral interests, including leasehold assignments and mineral and royalty deeds.
Jimmy Dupuis is a partner in The Woodlands office of Kean Miller, LLP. His practices focus on upstream oil and gas matters. Jimmy may be reached at 832.509.2302 or Jimmy.Dupuis@keanmiller.com.