Originally published by Chrysta Castañeda.
Unlike the standardized Joint Operating Agreement, though, AMI contracts tend to be handcrafted by the parties promoting the deal, and often have unintended flaws and consequences. If you’re an investor or operator who wants to put together an AMI Agreement, what do you watch out for? And what about buying an interest or properties that might be encumbered by an AMI Agreement? Will your due diligence reveal the significant issues associated with AMI obligations?
This short paper briefly addresses some of the issues to watch for, and is adapted from a longer paper that can be accessed here.
Let’s start with the basics.
An AMI Agreement usually states that if any of the parties acquires any interest in a defined area (whether minerals, royalties, rights to production, development rights, leases, etc.), then the acquiring party is required to notify the others about the acquisition. The notice allows the non-acquirers to elect to participate in the purchase. Agreeing to participate requires the non-acquirers to pay their percentage of the costs in exchange for a percentage of ownership.
First Issue: AMI obligations “run with the land” in most cases.
What does that mean? It means even subsequent purchasers of the land (or an interest in it) may owe obligations to companies or investors from AMI deals long past. If you are purchasing an interest, you really need to conduct due diligence to make sure none of these agreements impact your ownership. And, even contracts and ownership interests not filed of record can impact your title.
Second Issue: AMI Agreements must comply with the Statute of Frauds.
Because they convey an interest in land, courts hold that the land must be described within the contract itself well enough to identify it without resorting to parole evidence. So, generally speaking, don’t sign up a deal where the AMI lands are described simply by drawing a box on a map, because that doesn’t satisfy the Statute of Frauds.
Third Issue: Termination of an AMI Agreement must be in writing and signed by the parties to be charged with enforcement.
Again, because an AMI Agreement creates an interest in land, it can only be terminated by a written agreement. If you can’t tell from a title opinion or division of interest deck what happened with an interest, that should be a red flag that requires you to investigate further.
Fourth Issue: Limitations may not begin to run on enforcement actions for a very long time.
Controlling Texas Supreme Court precedent instructs that if the notice required by the AMI Agreement is not actually given, then claims for specific performance of those obligations do not accrue until the notice is given. More recent cases make inroads into delayed accrual of limitations periods in other oil and gas contexts, but not this one.
Fifth Issue: AMI Agreements may create fiduciary duties for those who administer them.
This may be particularly true if the promoter or operator has taken money up front that is not attributable to a specific property, or is receiving a “carry” (paying less than its share of the costs as a benefit of administering the deal).
Want to know more?
Click here to read my full paper.
The Castañeda Firm represents litigation clients in the energy industry and beyond. From offices in Dallas, the firm provides extensive experience in a variety of complex litigation, including oil and gas disputes, complex commercial cases, products liability suits, and toxic torts and other environmental matters. For more information, visit http://ift.tt/2ptHrJT or contact info@castaneda-firm.com.
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