Gresham v. Turner
21 Oil & Gas Rep. 171, 382 S.W.2d 791, 1963 Tex. App. LEXIS 1960 (1963)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
When an oil and gas lease reserves a specific royalty from land in which the lessor owns a fractional interest, and a proportionate reduction clause is deleted, courts will interpret the lease to mean the reserved royalty applies to the lessor's actual fractional interest, not the entire production, if that interpretation aligns with the parties' intent, the grant, and ordinary business realities.
Facts:
- Appellants (lessors) owned an undivided 1/540 mineral interest in Section 14, Block 4 1/4, G.C. & S.F. Ry. Co. Survey, containing 922 acres.
- On February 27, 1947, appellants executed an oil and gas lease on a printed form to appellee Fred Turner, Jr., as lessee.
- The lease described the land as 'Survey No. 14, Block 4 1/4, G.C. & S.F. Ry. Co. Survey and containing 922 acres more or less' and provided for a royalty of 'one eighth of that produced and saved from said land.'
- A printed proportionate reduction clause, which would have reduced royalties if the lessor owned less than the entire fee simple estate, was deleted from the lease prior to its execution.
- The bonus consideration for the lease was stipulated to be $10.00 per acre on 11.52 acres, and delay rentals were agreed to be $1.00 per acre on 11.52 acres.
- Oil production under the lease began during its primary term and has been continuous since that time.
- Appellants have not executed any division orders or accepted any of the tendered royalty payments, as lessees have always contended appellants were entitled to only 1/540th of the 1/8th royalty.
Procedural Posture:
- Appellants (lessors) initiated an action in the trial court (court of first instance) seeking a construction of their oil and gas lease.
- The trial was conducted before the court without a jury.
- The trial court entered judgment that the lessors were entitled only to 1/540th of the 1/8th royalty.
- The lessors, as appellants, appealed the trial court's judgment to the Texas Court of Civil Appeals.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does an oil and gas lease that specifies a royalty of 'one eighth of that produced and saved from said land,' where the lessor owns only a 1/540 mineral interest in the described 922 acres and a proportionate reduction clause was deleted, entitle the lessor to a 1/8 royalty on the entire production or a 1/8 royalty proportionally reduced to their actual 1/540 ownership interest?
Opinions:
Majority - Preslar
No, an oil and gas lease reserving a 1/8th royalty, where the lessor owns a 1/540th mineral interest and the proportionate reduction clause was deleted, does not entitle the lessor to the full 1/8th of total production, but rather to a 1/8th royalty proportionally reduced to their actual 1/540th ownership interest. The court found the instrument unambiguous, determining the parties' intention from within the 'four corners' of the lease, considering the language used, the subject matter, the situation of the parties, and surrounding circumstances (citing Texas Gas Corp. v. Hankamer, Ryan v. Kent, Lipscomb v. Fuqua, Murphy v. Dilworth, Gibson v. Turner). The term 'reserved' implies something retained out of what was granted, and since the lessors granted a lease of their 1/540th mineral interest, the 1/8th royalty must come out of that 1/540th. To interpret it otherwise would imply that one could become vested with a 1/8th interest by conveying only a 1/540th, which is illogical and would not comport with ordinary business dealings. The phrase 'produced and saved from said land' refers to the specific 1/540th mineral interest that was the subject of the contract, not the entire 922 acres. Furthermore, the stipulated bonus and delay rentals based on 11.52 acres, rather than the full 922 acres, indicate the parties' understanding that they were dealing with a fractional interest. The court distinguished Gibson v. Turner, where a 1/16th royalty was reserved out of a 1/16th interest, noting that while that was possible 'without any incongruity,' reserving 1/8th out of 1/540th would be 'not only an incongruity, but an impossibility.'
Analysis:
This case reinforces the interpretive principle that courts will determine the intent of parties to an oil and gas lease by examining the 'four corners' of the instrument, even when a standard clause like the proportionate reduction clause has been deleted. It provides critical guidance on the 'double fraction' problem, clarifying that a stated royalty in a lease of a fractional interest is presumed to apply to that fractional interest, not the entire production, especially when a literal interpretation would lead to illogical or commercially unreasonable outcomes. The decision underscores that a lessor cannot reserve a royalty that is disproportionate to the interest actually conveyed, thus preventing lessors from receiving a windfall where the terms of the lease, read holistically, do not support such an interpretation. This ruling serves to ensure that the practical and economic realities of oil and gas transactions are respected in contract interpretation.
