In the context of an oil and gas purchase and sale agreement (“PSA”), retained liabilities refer to the responsibilities or obligations that the seller retains after the transaction closes. These liabilities are typically those that arise before the effective time, the point at which the transfer of ownership takes place. The effective time is often specified in the PSA and generally governs when the buyer assumes responsibility for the assets and the associated liabilities.
Retained liabilities are a critical consideration in the negotiation of an oil and gas PSA because they help define the extent to which each party will bear risk post-closing. In most oil and gas PSAs, the buyer typically agrees to assume pre-effective time liabilities, making these liabilities assumed obligations. These assumed obligations may include liabilities associated with the operation of the assets up until that point, such as accrued costs for ongoing operations, contractual obligations, tax obligations, royalty payments, or even certain environmental remediation tasks.
Although the buyer typically assumes most liabilities related to the assets, the seller may retain certain liabilities. Typically, a seller’s retained liabilities include breach of the seller’s representations, warranties, and other covenants under the PSA, together with responsibility for various aspects of ownership and operation of the assets prior to the effective time. Depending on the seller’s negotiating position and the history of the assets, the seller may also retain liabilities such as environmental liabilities, outstanding litigation related to the oil and gas operations, personal injury claims, and certain contractual obligations with third parties.
To protect themselves from unforeseen liabilities, buyers will often seek comprehensive representations and warranties from the seller that survive the closing of the transaction. These representations and warranties may include assurances that there are no undisclosed liabilities or that the seller has satisfied certain obligations up to the effective time. Additionally, buyers may negotiate for indemnification provisions, where the seller agrees to reimburse the buyer for any losses or costs associated with specific liabilities that arise post-closing but are attributable to pre-effective time actions or events. These provisions serve as a safeguard, ensuring that the buyer does not bear the financial burden of risks they did not agree to assume as part of the transaction. Escrow arrangements may also be used to hold back a portion of the purchase price to cover potential claims related to the assumed obligations, providing an additional layer of security for the buyer.
The concept of retained liabilities is important for both the seller and the buyer, as it directly impacts the risk profile of the transaction. Clear definitions and agreements about which party is responsible for which liabilities helps to avoid disputes and provides a level of certainty for all parties. It is advisable to have an attorney prepare, draft and help negotiate the applicable retained liability provisions in your PSA.
Braedon Morrow is a senior attorney with a proven ability to navigate complex transactional law matters. He specializes in various oil and gas issues, focusing on divestitures, mergers, and acquisitions, particularly within the energy sector. His experience spans both upstream and midstream oil and gas, as well as renewable energy projects. His deep understanding of these areas enables him to effectively address the nuanced challenges of energy transactions and provide strategic, client-focused solutions.