CHAPTER 6 IMPLEMENTING THE PURCHASE AND SALE AGREEMENT
| Jurisdiction | United States |
(May 1983)
IMPLEMENTING THE PURCHASE AND SALE AGREEMENT
Baker & Botts
Houston, Texas
I. Introduction
When an agreement for the sale and purchase of producing oil and gas properties ("Agreement") has been executed by the parties, the lawyers involved often feel a sense of accomplishment, and justifiably so. They may have been through extended and intensive negotiation and drafting sessions, reducing a complex transaction between the buyer and seller to a concise, unambiguous written instrument; however, as any attorney who has been through the experience knows, his job has just begun. Numerous tasks must be accomplished prior to the closing under the Agreement, and it falls to the lawyer to do many of these things or to see that they are done, and to coordinate the efforts of moving the transaction to closing as smoothly as possible. The purpose of this paper is to discuss some of the more significant of these tasks and different methods by which they may be accomplished.
Throughout this paper I will be discussing the implementation of a purchase and sale agreement in the context of two different types of transactions. The first type involves the purchase and sale of a single producing property or a small number of producing properties located in one area or field in one state, and will be referred to as a "specific property transaction." The second type involves the purchase and sale of numerous properties in multiple states, and will be referred to as a "multi-property transaction." Obviously, most of the basic concepts regarding an Agreement and the implemention thereof apply equally to a specific property transaction and a multiple property transaction; however, differences between a small transaction and a large one frequently require different treatments and approaches to various aspects of the transaction, from the form and content of the Agreement itself to the scope and nature of the title examination that is undertaken. For example, the Agreement attached as an exhibit to Mr. McIntosh's paper, which I shall refer to as the "Selldear Agreement", is a very thorough and comprehensive document, appropriate for a multi-property transaction. On the other hand, a shorter, less detailed agreement might be adequate for some kinds of specific property transactions.
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An example of such a "short form" agreement is attached to this paper as Exhibit A, and I shall occasionally refer to this agreement as the "Penurious Agreement."
II. Prior to Closing
A. Conditions Other Than As To Title.
1. Responsibility. Although an Agreement may contain some conditions on the part of the buyer to be satisfied prior to the closing, such as those contained in Article VII of the Selldear Agreement, the conditions on the part of the seller are usually the most numerous and significant conditions that must be satisfied prior to closing. Immediately after the Agreement is executed, the persons involved on the seller's side of the transaction, including the attorneys, should collectively make certain that the responsibility for accomplishing or obtaining every item in connection with the satisfaction of each condition is assigned to someone. In this connection, a number of the tasks which might normally be considered items to be handled by lawyers can be handled by others, such as paralegals or experienced landmen. For example, it should be considered whether landmen or paralegals should initially prepare the property descriptions to be used in the conveyance to be delivered at the closing, particularly in the context of a large multi-property transaction, where such a job can be extremely time consuming and expensive if performed by lawyers. Of course, if the property descriptions are prepared by anyone other than the seller's attorneys, those attorneys must review the property descriptions to determine if they are legally sufficient.
In a multi-property transaction, local counsel in each state should be selected and retained as soon as possible, and provided a copy of the Agreement. Local counsel are necessary to confirm that the conveyances and the property descriptions to be included therein are in a recordable form which is legally effective in their respective states, and to identify any necessary governmental consents or approvals. Section 8.11 of the Selldear Agreement provides for the delivery of opinions of local counsel, and succinctly describes what those opinions should contain. Normally, local counsel will be selected by the seller and approved by the buyer, and frequently are lawyers
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who have been previously retained by the seller in connection with legal matters arising out of the operation of its oil and gas properties, and thus may have some familiarity with the properties in their state which are the subject matter of the transaction.
2. Preparation of Property Descriptions. In a specific property transaction, the property to be conveyed should be fully described in the Agreement, and nothing should be left to be done prior to the closing but to confirm the accuracy of that description. By fully described, I mean that the description should (i) include a complete identification of the lease or leases to be conveyed by reference to date, parties, and recording information, (ii) state the working interest and net revenue interest in the lease being conveyed, (iii) identify and describe the lands and depths covered by the lease insofar as they are being conveyed, and (iv) list and describe the encumbrances burdening the lease, such as overriding royalty interests, liens, operating agreements, production sales contracts and other like matters. In a specific property transaction, the Agreement should leave no question about what properties are to be sold and conveyed by the seller to the buyer.
On the other hand, in a multi-property transaction, it may not be possible to fully describe in the Agreement the properties to be conveyed. Depending on the size of the transaction and the numbers of properties involved, different approaches may be used at the Agreement stage. The Selldear Agreement uses the device of outlining areas on attached maps, coupled with a lease list exhibit identifying wells and leases. Another approach is to use a blanket description covering all of the seller's interest in oil, gas and mineral leases situated in specified counties or states, and to state that the properties to be conveyed include but are not limited to, certain specifically described properties (which would be the more valuable leases) and/or the properties covered by the reserve report or portions thereof which the parties used in making the trade.
In a large multi-property transaction, the burden of describing the properties may be so immense that fullblown descriptions may not be practical even in the conveyance. For example, it may be necessary to use a minimal tabular description in which essentially only the name of the lessor, the date of the lease, and the recording information are included. Of course, in some states such a description
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will not be legally sufficient for conveyancing or recording purposes, and as I have indicated, local counsel in each state must approve the property descriptions after their preparation. If a tabular format or any other format other than a full-blown property description is used, the property description exhibit to the conveyance should contain a preamble explaining in detail how the descriptions are structured and defining the meanings of the various terms employed in such description. Two examples of such a preamble are attached to this paper as Exhibits B and C.
In identifying the seller's interest in oil and gas properties which are leasehold or working interests (as distinguished from such nonoperating interests as royalties and overriding royalties), it must be realized that the seller has a dual interest in each such property — the seller's working interest and the seller's net interest in production after deducting all burdens on production, both of which interests should be set forth in the property description. For example, if the seller owns an undivided 1/2 interest in a particular lease, he will bear 1/2 of all development and operating costs but will only be entitled to 1/2 of 5/6 of production if the lease provides for a 1/6 royalty and if there are no outstanding overriding royalties or production payments. Simply identifying or describing the seller's interest in a lease by reference to the net interest in production does not tell the full story for purposes of evaluation; moreover, it may even be a legally insufficient description. For example, suppose that the seller's interest in a particular lease is described simply as being an interest entitling the seller to a net interest equal to 5/12 of production. If the lease provides for a usual 1/6 royalty, it may be that the seller has a gross working interest of 1/2, for this would produce a net of 1/2 of 5/6, or 5/12, in the absence of applicable overrides or production payments. The point is, though, that there may be applicable overrides or production payments in varying amounts so that a net interest of 5/12 may translate into any one of the following gross interests (among countless others):
(a) A gross working interest of 3/5 (.60000) if the seller's interest in the lease must bear in full an outstanding 1/12 override;
(b) A gross working interest of 100%, if the seller's interest is subject to an outstanding production payment dischargeable out of 50% of 5/6 of
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production (the net of 5/12 becoming a full 5/6 upon discharge of the production payment).
Obviously, since the gross interest ordinarily determines the share or development and operating costs to be borne by the seller's interest, a proper evaluation of the interest cannot be made without knowledge of both the seller's gross...
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