Non-Participating Royalty Interest

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Non-Participating Royalty Interests

 

 A non-participating royalty interest is an interest that entitles its holder to receive a share of all bonuses and royalties attributable to a tract of land but does not entitle the holder to grant leases and to develop the land. See Martin v. Knight, 275 So.2d 117 (1973).  In Kilfoyle v. Wright, 188 F.Supp. 899, 903, 904 (S.D. Ala. 1960),  the court cited a Texas definition of the interest as follows:

[A] non-participating royalty is defined as an interest in the gross production of minerals which is carved out of the mineral fee estate as a free royalty which does not carry with it the right to participate in the execution of, the bonus payable for, or the delay rentals to accrue under, oil, gas, and mineral leases executed by the owner of the mineral fee estate.

 

The  practical difference between a non-executive mineral interest and a non-participating royalty interest is that the non-executive mineral interest shares in lease bonuses and lease rentals.  H. Williams & C. Meyers, Oil And Gas Terms 616 (7th ed 1987). In the case of Pilcher v. Turner, 530 So. 2d 198 (Ala. 1988),  the Alabama Supreme Court held that the following language contained in a deed created a non-participating royalty interest:

Provided, however in the event minerals are produced from said lands the Grantors, their heirs and assigns, shall pay to the Grantee, its successors or assigns, a sum equal to one-half (1/2) of the net proceeds from the sale of such minerals at fair market prices.

 

Id., at 199.  In the deed, the grantors had reserved all the minerals with the “full and exclusive right and power to sell, lease, assign, or otherwise dispose” of the mineral rights without the grantees' consent. A dispute arose when the grantors were unable to lease the minerals. The grantors then filed suit seeking a declaratory judgment regarding the nature of the interest in the minerals acquired by the grantees. The trial court entered summary judgment in favor of the grantors ruling that the grantees acquired only a non-participating royalty interest.

 The Alabama Supreme Court affirmed the trial court and held that the grantors retained the power to lease the mineral estate and were entitled to all the benefits accompanying the leasing power, specifically the lease bonus payments and delay rental payments. The court also held that no trust relationship existed between the holder of the executive right and the holder of the non-participating royalty interest. The grantees were concerned that the holder of the executive right would be tempted to accept a high lease bonus in exchange for a lower royalty burden. The court found that the deed language regarding “fair market prices” protected the grantees without the imposition of fiduciary duties upon the grantors. The court distinguished McCall v. Nettles, 37 So.2d 635 (1948), which had found a fiduciary relationship, on the grounds that the deed in Pilcher had an expressed contractual undertaking that precluded any fiduciary duty from arising.  In Dauphin Island Property Owners v. Callon Institutional Royalty Investors I, 519 So.2d 948 (Ala. 1988),  the Alabama Supreme Court declined to rule one way or the other as to whether a non-participating royalty interest is real property. The court wrote:

We do not think it is sound to view a royalty interest in minerals as personal property simply because the profits therefrom may be realized only when the minerals are extracted, but we do not find it necessary to hold that royalty interests are real property for all purposes.

 

Id. at 951.

Copyright 2011 by Edward G, Hawkins. All rights reserved.