Your Louisiana Override – Where Does it Come From?

Originally published by Charles Sartain.

Posted by Charles Sartain

It’s a multiple choice question:

a.  The royalty interest reserved by the lessor.

b. The drillbit, courtesy of fearless, risk-taking entrepreneurs, the backbone of the great American free enterprise system and the sworn enemies of collectivism.

c.  A cache of DNC emails, discovered by Vladimir Putin himself.

d.  The working interest.

e. It doesn’t matter. Trump won. Get over it.

Can’t stand the suspense? It’s “d”. If the override doesn’t spring from the working interest, you don’t have it.

How did this happen?

EnCana Oil & Gas (USA) et al v. Brammer Engineering et al involved a Power of Attorney under which Brammer would manage minerals for the mineral owners. Terms in the POA regarding Brammer’s compensation:

• “. . . mineral leases executed in the future by Agent . . . will provide for the reservation of an additional free overriding royalty interest on behalf of the lessors.”
• Brammer’s compensation would be “on . . . leases under the terms of which not less than 1/16th override royalty is reserved, [Brammer] shall be entitled to 1/32^nd free overriding royalty”.

WW&M represented other mineral owners. With Brammer’s permission WW&M negotiated a lease with EnCana with a 1/4th royalty. The lease did not include overriding royalty language Brammer believed it was entitled to, so Brammer executed the lease and an assignment of a 1/32nd override in favor of itself out of the lessor’s royalty.

Then, the litigation 

The mineral owners’ point: Brammer didn’t carve the override out of the working interest and thus was not entitled to it.

Brammer’s response: The additional override was a contractual obligation payable to Brammer from the total royalty reserved in the lease.

The court decides

If Brammer obtained any lessor’s royalty greater than 1/8th, was it entitled to an override, or was Brammer required to expressly reserve an additional free override for itself?

Brammer had to expressly reserve an additional royalty interest for the mineral owners in order to trigger its right to the override. To the court, Brammer redefined “royalty” to mean the standard royalty, whatever that standard might be at any given time. This would require the court to look beyond the words of the unambiguous contract. Further, to the court, “additional” means an override in addition to the lessor’s royalty.

Stated another way: Brammer argued it was entitled to a 1/32^nd override anytime that it acquired, in favor of the mineral lessors, at least 1/16th more than the “typical” 1/8^th. This, it did not do. Brammer did nothing to obtain the 1/4th royalty in WW&M’s bid package. Judgment for the mineral owners.

What is an overriding royalty anyway?

The Mineral Code does not expressly define an override. Citing plenty of authority, the court concluded that the term describes a royalty carved out of the working interest, different from and in addition to the lessor’s royalty.  This is acknowledged in Brammer’s assignment language:  “It is hereby reserved in favor of Brammer . . . from the Lessors’ royalty . . . a free overriding royalty 1/32^nd of  . . .  .”

Have a happy holiday.

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