ARTICLE
23 April 2024

Ohio Appellate Court Interprets Reservations Of NPRIs Involving Double Fractions As Reserving Fixed Royalty Interests

Ohio's Seventh District Court of Appeals recently interpreted two reservations of non-participating royalty interests (NPRIs) involving double fractions, holding that they reserved fixed...
United States Energy and Natural Resources
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Ohio's Seventh District Court of Appeals recently interpreted two reservations of non-participating royalty interests (NPRIs) involving double fractions, holding that they reserved fixed, rather than floating, royalties. Min. Dev. Inc. v. SWN Prod. Ohio, LLC, 2023-Ohio-4749. The decision marks the third instance in four months where the Court interpreted a NPRI severance. See Moore Family Trv. v. Jeffers, 2023-Ohio-3653, and Crum v. Mooney, 2023-Ohio-4451.

The subject deed conveyed two parcels of adjacent land. As to the western parcel, the grantors reserved "the 1/2 of the 1/16, being the 1/32 of the royalty of all oil and gas underlying the [western 40 acres]." As to the eastern parcel, the grantors reserved "the 1/2 of the 1/8, being the 1/16 of the royalty of all the oil & gas underlying the [eastern] 40 acres." While the NPRI holders primarily argued that the deed reserved a floating royalty equal to 1/4 of the applicable lease royalty for the western parcel and 1/2 of the applicable lease royalty for the eastern parcel, the oil and gas lessee contended that the deed reserved floating royalties equal to 1/32 of the lease royalty for the western parcel and 1/16 of the lease royalty for the eastern parcel.

On appeal, the Court applied ordinary rules of contract interpretation to ascertain the grantors' intent. Finding the reservation language to be ambiguous, the Court looked at the entirety of the deed for guidance. Notably, with respect to the western parcel, the deed referenced an earlier term royalty reservation of "one half of the royalty of all oil produced and saved [from the western 40 acres], that is to say: 1/16 of all the oil produced and saved from said premises, and one half of all monies received for rentals for gas wells that may be drilled on said premises." According to the Court, this prior term royalty reservation explained why the grantors only reserved "the 1/2 of 1/16" while at the same time reserving "1/2 of the 1/8" for the eastern parcel. The grantors only owned half of the royalties attributable to the western parcel, while the grantors owned all of the royalty attributable to the eastern parcel. Next, the Court was faced with determining what impact the use of double fractions had on the interests created.

Had the second sub-clause in each reservation simply mirrored the first sub-clause, such as stating "being the 1/32 royalty of all the oil and gas" for the western parcel and "being the 1/16 royalty of all the oil and gas" for the eastern parcel, the Court's job of interpreting the deeds would have ended there. However, the second sub-clause did not mirror the first sub-clause in either reservation. Instead, the second sub-clauses state "being the 1/32 of the royalty of all oil and gas" (emphasis added) and "being the 1/16 of the royalty of all the oil & gas," (emphasis added) respectively. Thus, the question became whether the inclusion of the phrase "of the royalty" indicated a further reduction of the 1/32 and 1/16 fractions stated in the first sub-clauses by another undefined fraction, such as a 1/8 royalty provided in a lease.

In trying to construe the second sub-clause in each reservation, the Court questioned whether the phrase "of the royalty" referred to "the entire royalty interest" or "of the 1/8" royalty." After reviewing the deed as a whole, the Court found nothing leading it to believe that the grantors intended to reserve anything other than 1/2 of their entire royalty interest. Consequently, the Court held that the grantors reserved a fixed 1/32 royalty (described as 1/2 of 1/16) as to the western parcel, and a fixed 1/16 royalty (described as 1/2 of 1/8) as to the eastern parcel.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ARTICLE
23 April 2024

Ohio Appellate Court Interprets Reservations Of NPRIs Involving Double Fractions As Reserving Fixed Royalty Interests

United States Energy and Natural Resources

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