We own a non participatory royalty covering 18.75% of a 320 acre tract.
The Non Participatory Royalty was conveyed in early 1950 and the deed says "NEVERTHELESS, neither the Grantor nor the heirs, administrators, executors and assigns of the Grantor shall make or enter into any lease or contract for the development of said land or any portion of same for oil, gas or other minerals, unless each and every such lease , contract, leases or contracts, shall provided for at least a royalty on oil of the usual one-eighth to be delivered free of costs in the pipe line, and a royalty on natural gas of one-eighth of the value of same when sold or used off the premises, or one-eighth of the net proceeds of such gas, and one-eighth of the net amount of gasoline manufactured from natural or casinghead gas."
The Grantor is deceased and has three offspring who appear to now be in their 70's. The most recent lease they did was for a 1/6 royalty subject to costs which brings it closer to the 1/8 Cost Free.
In 1950, a one-eighth royalty might have been market but it certainly is not today.
Is there any case law that would support dictating the need for a 25% cost free royalty as "market" in the Permian Basin of Texas?
What would be a way to encourage this group of older ladies to see the light as to what is market?
William, I've got your royalty deed up on my screen, and you are correct in that the NPRI created is for a "fraction of royalty", and it is floating royalty, meaning that it fluctuates with the royalty that is called for in the current and any future leases. An NPRI is by nature, cost-free, so I wouldn't worry so much about whether the lease covering the mineral estate that your NPRI burdens has a cost-free royalty clause.
There is case law addressing the duty an executive right holder has to NPRI owners, but it leans heavily in favor of the executive right holders, assuming there is no self-dealing or malicious intent on behalf of the executive right owner to deprive the NPRI owner of their rights. An example of something that would be frowned upon would be an instance whereby an executive right holder executes a 1/8 lease, with a promise from the lessee that the lessee will assign to the lessor an override. Absent something as egregious as that, the courts view the executive right owners as not having to place the rights of an NPRI owner above their own, and recognize that there are multiple components to an oil and gas lease negotiation that comprise the full benefits realized by the lessor. i.e., the bonus price. Thus I don't think the concept of what is considered market royalty would hold that much weight. Further, if that was the basis of an argument, it would be an uphill battle since there are a lot of leases in the Permian still signed for under a 1/4, and one could argue that the market royalty to encourage development in a low commodity price environment is actually a lower lease royalty, in an effort to lure the operator to drill by juicing their returns.
If you are upset with the leases signed by the executive right holders, your suit would need to be against them, and not the lessee, as the lessee is viewed as having the freedom to offer whatever terms necessary to secure their deal. If you're wanting to boost your returns, I'd ask the executive rights holders if they'll sell you their minerals, or, workout a deal with them whereby your NPRI is converted to a fee mineral interest with executive rights.