Opinion ID: 1862385
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Heading: The Attributes of Royalty

Text: As stated, the royalty clause is construed not in the abstract but in reference to the economic and practical considerations underlying the royalty interest and with due regard to the relationship between a lessor and lessee. The lessor-lessee relationship ensues from a synallagmatic contract in which the obligation of each party is the cause of the other. See LA.REV.STAT. ง 31:122; La.Civ.Code arts. 1908, 1967, 2669; Wier v. Grubb, 228 La 254, 268, 82 So.2d 1, 6 (1955) (oil and gas leases require mutuality of rights and interest). Where royalty is conferred by the lease, royalty is the reason or cause for the lessor to obligate himself thereto. See La. Civ.Code art. 1967. Stated differently, royalty is the compensation or consideration the lessee pays to the lessor to secure the privilege of exercising the right to explore and develop the property for production of oil and gas. See Caddo Oil & Mining Co. v. Producers' Oil Co., 134 La. 701, 64 So. 684 (1914); H. Daggett at ง 60; R. Hemingway, The Law of Oil and Gas ง 8.1 (3d ed. 1991). By virtue of the beneficial relationship between lessee and lessor, the former avoids having to pay up front for the privilege of exploration, and the latter, assuming a passive role, is guaranteed participation in any eventual yield accruing from the lessee's entrepreneurial efforts, unconstrained by financial and operational responsibilities. See Martin, 27 Inst. on Oil & Gas L. & Tax'n at 194 n. 62. Inherent in the concept of lease as a bargained-for exchange is the recognition a lessor would not relinquish a valuable right arising from the leased premises without receiving something in return. Wemple, supra . In Wemple, lessor sued lessee to recover a one-eighth royalty on natural gasoline the lessee extracted from casinghead gas by the use of a separator. At the time the Lease was executed in 1909, the parties were unaware of this procedure. We determined the casinghead gas fell under the oil clause of the Lease, reasoning the parties would not have contemplated a lease where the lessee could extract a valuable substance and give nothing in return. Wemple, 145 La. at 1045, 83 So. at 237. This Court also had occasion to discuss the nature of a royalty interest in the context of ascertaining the meaning of market value of gas under a mineral lease. See Henry v. Ballard & Cordell Corp., 418 So.2d 1334, 1339 (La.1982). There, we reasoned the ambiguity in the royalty provision could not be resolved without consideration of the practical and economic realities of the oil and gas industry at the time the leases were negotiated and the obligations of the lessee to market the gas at the best possible price at the time the leases were made. Id. at 1337, 1338. Adopting the reasoning of Professor Thomas Harrell, we announced the rule that a lease arrangement is in the nature of a cooperative venture in which the lessor contributes the land and the lessee the capital and expertise necessary to develop the minerals for the mutual benefit of both parties. Id. at 1338 (citing Harrell, Developments in Non-Regulatory Oil & Gas Law, 30 Inst. on Oil & Gas L. & Tax'n 311, 334 (1979)). We also concluded the ultimate objective of the royalty provision of the lease is to fix the division between the lessor and lessee of the economic benefits anticipated from the development of the minerals. Id. We then quoted with approval Professor Harrell's contention: [A]ny determination of the market value of gas which admits the lessee's arrangements to market were prudently arrived at consistent with the lessee's obligation, but which at the same time permits either the lessor or lessee to receive a part of the gross revenues from the property greater than the fractional division contemplated by the lease, should be considered inherently contrary to the basic nature of the lease and be sustained only in the clearest of cases. Id. at 1338 n. 10 (quoting Harrell, 30 Inst. on Oil & Gas L. & Tax'n at 336). In light of Henry, we conclude an oil and gas lease, and the royalty clause therein, is rendered meaningless where the lessee receives a higher percentage of the gross revenues generated by the leased property than contemplated by the lease. The lease represents a bargained-for exchange, with the benefits flowing directly from the leased premises to the lessee and the lessor, the latter via royalty. An economic benefit accruing from the leased land, generated solely by virtue of the lease, and which is not expressly negated, see LA.REV.STAT. ง 31:3, is to be shared between the lessor and lessee in the fractional division contemplated by the lease. See Henry, supra ; Wemple, supra .