The Interaction of the Division Order and the Lease Royalty Clause.

Because lease royalty clauses, which establish the obligation of the lessee to pay royalties to the lessor, generally fail to include the details necessary to calculate a lessor’s royalty, lessee or third party purchasers historically have implemented a division order. An additional document in the payment process, the division order protects against a lessee or third party purchaser’s liability for conversion or failure to account properly. Recent court of appeals and Supreme Court of Texas opinions provide an analysis of the interaction of the lease royalty clause and the division order under Texas statutory and case law. The awkward wording and internal inconsistencies of the current division-order statute will spawn litigation over its meaning and effect.

Also, for division orders executed before 1991, when existing case law applies, questions about the interpretations of those cases will persist as a source of dispute. Resolving the many controversies will require courts, and likely the legislature, to revisit division-order case law and statutory provisions, and to reconsider the competing policies of royalty owners and oil and gas producers.