PURCHASE AND SALE AGREEMENT
This Purchase and Sale
Agreement (referred to herein as the “Agreement”)
is between SUMMIT PETROLEUM MANAGEMENT
CORPORATION, a Texas corporation whose address is
550 West Texas, Suite 700, Midland , Texas
79701, SUMMIT PETROLEUM LLC, a Texas limited
liability corporation whose address is 550 West Texas, Suite
700, Midland , Texas 79701 (all of which are
collectively referred to herein as the
“Seller(s)”) and LEGACY RESERVES
OPERATING LP , a Delaware limited partnership whose
address is
303
West Wall, Suite 1600, Midland, Texas 79701, (referred to
herein as the “Buyer”) is made and entered August
28, 2007, to be effective for all intents and purposes as of
the Effective Time designated herein.
Seller and Buyer for and
in consideration of the mutual promises and covenants under
this Agreement, the benefits to be derived by each party, and
for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, agree as
follows:
ARTICLE
1
RECITALS
Seller desires to sell
to Buyer, and Buyer desires to purchase from Seller, certain
oil and gas properties and related Properties on the terms
and conditions set forth in this Agreement.
Seller and Buyer for and
in consideration of the mutual promises and covenants under
this Agreement, the benefits to be derived by each party, and
for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, agree as
follows:
ARTICLE
2
PURCHASE AND SALE
2.1
Purchase and Sale . Seller agrees to sell
and convey all of its right, title and interest in and to the
Property or Properties (as defined in Article 2.2) and Buyer
agrees to purchase the Property or Properties (as defined in
Article 2.2), subject to the terms and conditions of this
Agreement.
2.2
Properties Defined . The undivided interest
described as follows and on Exhibit “A” (hereafter
called the “Property or Properties”), except as
excluded in Article 2.2(e):
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(a)
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Leases, Lands, Wells and Pooling and Unitization Agreements
. All of Seller’s right, title, and interest of
whatever nature in all leasehold and other interests in; (i) the
oil, gas and mineral leases limited to those portions described on
Exhibit “A” and including the working and net revenue
interests set forth therein (the “Leases”), insofar and
only insofar as said Leases include and pertain to and cover the
lands and depths as specifically described herein on attached
Exhibit “A” (the “Lands”); (ii) the oil and
gas wells located on the Leases or on Lands pooled or unitized
therewith (the “Wells”) including those listed on
Exhibit “A”; and (iii) the units, pooled acreage,
spacing or proration units or other allocation of acreage
applicable to the Wells established by or in accordance with the
applicable state, federal or local law;
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(b)
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Production . Hydrocarbons produced from or allocable
to the Wells for periods on or after the Effective Time (as defined
in Section 2.3) and the proceeds therefrom;
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(c)
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Equipment . Personal property, equipment, fixtures,
and improvements appurtenant to or located on the Leases or the
Lands, or used or obtained in connection with the ownership or
operation of the Properties, and
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(d)
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Easements, Contracts, Land Files and Records . (i)
appurtenances, surface leases, easements, permits, licenses,
servitudes and rights-of-way; (ii) all leases, farmout agreements,
unitization agreements, pooling agreements, unit declarations,
division orders, transfer orders, joint interest billings,
accounting, production payment/payout records, operating contracts,
excluding drilling rig contracts which are proprietary and
non-assignable and any other applicable agreements and instruments,
including to the extent assignable all applicable production sales
agreements, the existing electric supply agreement and water
disposal agreements (except as to the Windham 14 (STA) SWD System
will be assigned to Buyer only to the extent that Buyer’s
disposal volume needs are subordinate to Seller’s disposal
volume needs on the Windham 14 SWD System), and (iii) all Records
as are defined in Section 7.4 (b); however Seller retains such
rights under this Section 2.2(d) to the extent necessary to enjoy
the use and access to its other properties, leases and
lands.
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(e)
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Excluded Properties . Seller’s interest
in these Properties has been collectively referred to as
“Property or Properties”, provided, however, the
Property or Properties shall not include and there is excepted,
reserved and excluded from this Agreement the
produced water disposal system(s) and its associated facilities and
equipment.
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2.3
Effective Time
. The
transfer of the Properties shall occur at Closing, which is
defined in Article 7.1, effective as of 12:01 a.m., local
time, September 1, 2007, (the “Effective Time”) on
the Properties as described herein.
2.4
Oil in Storage . All oil in storage at the
Effective Time, including working inventory, belongs to
Seller. “Oil in Storage” for purposes
of this Agreement, will mean all oil which was produced from
the Properties and which was, on the Effective Time, stored in
tanks located on the Properties (or located elsewhere but used
by Seller to store oil produced from the Properties prior to
delivery to oil purchasers) and above pipeline connections
shall be deemed to have been produced before the Effective
Time. Oil inventories will be valued based on the realized
price received by Seller for oil sales, from the Properties on
the Effective Date.
ARTICLE
3
PURCHASE PRICE
3.1
Purchase Price; Allocations .
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(a)
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Amount.
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The Purchase Price of the Properties shall be a consideration equal
to FIFTEEN MILLION THREE HUNDRED THOUSAND
($15,300,000) (Subject to adjustment
only as hereinafter provided ).
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(b)
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Allocation. Buyer
has allocated the Purchase Price among the Properties including the
undeveloped locations and behind pipe intervals, as set forth on
Exhibit “A-1” attached hereto for the purpose of (1)
establishing a basis for certain taxes, and (2) giving notices of
value to the owners of any preferential rights to purchase the
Properties, (3) determining the value of a Title Defect(s) and/or
Environmental Defect(s), if any and (4) allocation of the Purchase
Price to each individual Seller.
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(c)
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All
amounts required under this Article 3 to be paid by Buyer to Seller
shall be made by wire transfer of immediately available funds to an
account(s) designated by Seller which designation shall be made on
or before the date said payment is due. These amounts
are subject to further adjustment after the Closing as provided in
this Agreement. Seller may delay or refuse to proceed
with the Closing should Buyer refuse or fail to comply with payment
provisions as set forth by Seller. This right on the
part of Seller is in addition to all other rights and remedies
Seller may have under this Agreement, at law, or in
equity.
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(d)
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Buyer
and Seller hereby agree that Seller, in lieu of the sale of the
Properties to Buyer for the cash consideration provided herein,
shall have the right at any time prior to the Closing to assign all
or a portion of its rights under this Agreement to a qualified
intermediary, in order to accomplish the transaction in a manner
that will comply, either in whole or in part with the requirements
of a like kind exchange pursuant to §1031 of the Internal
Revenue Code of 1986, as amended. In the event Seller
does assign its rights under this Agreement pursuant to this
Article 3.1(d), Seller agrees to notify Buyer in writing of such
assignment not less than seven (7) days before
Closing. If Seller assigns its rights under this
Agreement, Buyer (i) consents to Seller's assignment of its rights
in this Agreement, and (ii) deposit the Purchase Price with the
qualified escrow or qualified trust account at the
Closing.
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(e)
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Buyer
has deposited with Seller, and Seller acknowledges receipt of, a
performance deposit in an amount which represents ten percent (10%)
of the Purchase Price (the "Deposit"), which amount shall be held
by Seller and distributed as follows:
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(i)
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if
this Agreement is terminated by mutual consent of the parties as
provided in Article 8.1, the Deposit shall be returned by Seller to
Buyer, without interest;
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(ii)
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if
this Agreement is terminated by either party pursuant to the
termination right provided in Article 8.1 and at such time all of
Buyer's conditions to Closing as set forth in Article 7.3 have not
been satisfied (and such failure is not due to a breach by Buyer of
its obligations hereunder), the Deposit shall be returned by Seller
to Buyer without interest;
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(iii)
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if
this Agreement is terminated by either party pursuant to the
termination right provided in Article 8.1 and at such time all of
Buyer's conditions to Closing as set forth in Article 7.3 have been
satisfied, the Deposit shall be retained by Seller, and such shall
constitute liquidated damages and Seller’s sole damages for
any breach by Buyer of this Agreement causing its termination as
set forth in this section; and
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(iv)
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if
Closing occurs, Seller shall apply the Deposit towards the Purchase
Price.
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(v)
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the
Deposit shall be sent by wire transfer by end of business on August
31, 2007, as instructed by Seller.
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At
Closing, Buyer shall pay to Seller the total Purchase Price
set forth in Article 3.1(a) less an amount equal to the
Deposit set forth in Article 3.1(e) and less any adjustments
as set forth in Article 7.5
ARTICLE
4
TITLE & ENVIRONMENTAL
4.1
General Access . Immediately upon execution
of this Agreement and prior to Closing, Seller will provide
Buyer, at Buyer’s sole risk, cost and expense, access at
all reasonable times to the Properties and to the files,
records, contracts, correspondence, maps, data, reports,
plats, title opinions and title reports and other documents of
Seller pertaining to the Properties for purposes of conducting
due diligence to determine the existence of any Title Defects
and/or Environmental Defects.
4.2
Seller’s Title . Each Seller hereby
warrants and represents by through and under each Seller, but
not otherwise, to Buyer that each Seller's title to the
Properties as of the Effective Time is (and as of the Closing
will be) free of "Title Defects", as defined
below.
4.3
Title Defect . The term “Title Defect” as
used herein shall mean any encumbrance, encroachment,
irregularity, defect in or objection to Seller’s title
to the Properties (except Permitted Encumbrances) that alone
or in combination with other defects renders Seller’s
title to the Properties less than Defensible Title, as defined
in Article 5.1(d) below, including; (i) liens securing unpaid
indebtedness or taxes; (ii) preferential rights, consents to
assignment and similar provisions of the type commonly
encountered in the oil and gas industry; (iii) matters
indicating that Buyer, or Buyer's successor could not
successfully defend against a claim by any person or entity
that a defect exists as to any Property; (iv) differences
between the net revenue interest or the working interest as
set out on Exhibit “A-1”, and the net revenue
interest and working interest determined by Buyer pursuant to
its review of title; (v) obligations to deliver production at
a future date without payment for the production; and/or (vi)
a default by Seller under some material provision of a lease,
farmout agreement or agreement affecting any
Property.
4.4
Permitted Encumbrances . “Permitted
Encumbrances” shall mean: (i) minor defects in title
which do not require the payment of money and otherwise do not
have a material adverse effect on the value or operation of
the affected portion of the Properties; (ii) liens for labor,
services, materials or supplies furnished to the Properties
which are not delinquent and which will be paid or discharged
in the ordinary course of business; (iii) liens for taxes or
assessments not yet due and not delinquent;
(iv) Lessor’s royalties, overriding
royalties, division orders and similar burdens if the net
cumulative effect of such burdens does not operate to reduce
the net revenue interest from that set forth on Exhibit
“A-1”;and (v) production sale contracts, so long
as the prices payable under the contracts are representative
of general arms length market prices being paid for similar
production in the area, unitization and pooling declarations
and agreements and any operating agreements, insofar as such
contracts and agreements do not operate to increase the
working interest or decrease the net revenue interest of Buyer
from that stipulated on Exhibit “A-1” attached
hereto; (vi) preferential rights to purchase and required
third party consents to assignments and similar agreements
with respect to which, prior to Closing, (A) waivers or
consents are obtained from the appropriate parties, (B) the
appropriate time period for asserting such rights has expired
without an exercise of such rights, or (C) with respect to
consent, failure to obtain consent does not affect the
validity of an assignment to Buyer; (vii) all rights to
consent by, required notices to, filings with, or other
actions by Governmental Bodies in connection with the sale or
conveyance of oil and gas leases or interests therein if the
same are customarily obtained subsequent to such sale or
conveyance; (viii) rights reserved to or vested in any
municipality or governmental, statutory, or public authority
to control or regulate any of the Properties in any manner,
and all applicable laws, rules and orders of any governmental
authority; (ix) such Title Defects as Buyer shall have waived;
and (x) liens released at Closing.
4.5
Notice of Title Defects . Buyer shall give
Seller notice of any Title Defects as soon as
practicable. The notice shall:
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(b)
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describe
in sufficient detail the nature of Title Defect and include
appropriate evidence to substantiate the Title Defect;
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(c)
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describe
the steps and actions (in reasonable detail) which are necessary in
Buyer’s opinion for the curing of identified Title
Defects;
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(d)
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be
delivered to Seller as soon as possible, but no later than
September 24, 2007
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Buyer
shall be deemed to have waived all Title Defects of which
Seller has not been given the notice described in this Article
4.5.
4.6
Remedies for Title Defects . Seller shall
have until Closing (after receipt of Buyer’s
notification as to a specific Title Defect) in which to
provide Buyer written evidence that the subject Title Defect
has been either cured or removed. Should Seller
fail or be unable to provide evidence of Title Defect curative
or removal then Buyer may at its option:
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(a)
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waive
such Title Defect; or
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(b)
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In
the event the Seller and Buyer cannot mutually agree on a purchase
price adjustment for an alleged Title Defect, Buyer shall have the
right to (i) proceed to Closing and accept the Interest with no
purchase price adjustment, or (ii)terminate this Agreement as to
the Properties affected by the alleged Title Defect and receive a
Purchase Price adjustment for such Properties as set forth in the
allocation of value set forth in Exhibit “A-1”, or ,
where feasible, the proportionate allocated value; or.
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(c)
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Buyer
and Seller may proceed to Closing without any adjustment to the
Purchase Price and Seller will have until the Post-Closing to
provide evidence of cure of any such Title Defect. If Seller is
unable to cure under this Section 4.6(c), Buyer shall be entitled
to an adjustment at Post-Closing in accordance with Section
4.6(b).
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If the reduction in the
Purchase Price from an aggregate total of all Title Defect
adjustments does not exceed One Hundred Thousand Dollars
($100,000), then there shall be no adjustment to the Purchase
Price. However, if the aggregate total of all Title Defects
exceeds One Hundred Thousand Dollars ($100,000), then the
Purchase Price shall be adjusted by the total amount of such
Title Defects.
Should Seller be unable to
provide evidence of Title Defect curative or desire to not
make adjustment to the Purchase Price and it is determined by
Seller that such Title Defect will materially and adversely
reduce the net value of the Properties affected by an amount
equal to or greater than ten percent (10%) of the Purchase
Price, either Seller or Buyer may terminate this
Agreement. In such event, the Deposit shall be
promptly returned to Buyer, without interest.
If Buyer notifies Seller
of a Title Defect, as provided for in Section 4.5 which Buyer
desires to have cured and for which an adjustment to the
Purchase Price has been made in accordance with the terms of
this Agreement, Seller agrees to cooperate with Buyer prior
to or after the Closing in endeavoring to cure any such
defects (but Seller shall have no obligation to pay money or
to undertake any legal obligation in this
regard). Buyer agrees to bear the cost of
examining the title data furnished by Seller as curative
hereunder, if any, or obtained by Buyer.
4.7
Environmental Defects . Buyer is aware that the
interests and property have been used for exploration,
development, and production of oil and gas and that there may
be petroleum, produced water, wastes, or other materials
located on or under the Property or associated with the
interests. Equipment and sites included in the interests or
property may contain asbestos, hazardous substances, or NORM.
Notwithstanding anything to the contrary in this Agreement
(including, without limitation, the provisions of Section
5.1(r) hereof), (a) this Section 4.7 and Section 10.3 contains
all representations and warranties with regard to any
Environmental Laws (as hereinafter defined) and, except as
expressly set forth in this Section 4.7 and Section 10.3,
SELLER EXPRESSLY DISCLAIMS ANY REPRESENTATION OR
WARRANTY, EXPRESS OR IMPLIED, REGARDING OR IN ANY WAY RELATING
TO OBLIGATIONS OR LIABILITIES UNDER ANY ENVIRONMENTAL LAWS OR
THE ENVIRONMENTAL CONDITION OF THE PROPERTIES, and
(b) it makes no representation or warranty of any kind
whatsoever regarding the presence or absence of any naturally
occurring radioactive materials ("NORMs") on or near any of
the Properties, and Buyer shall not be entitled to any
adjustment to the Purchase Price or any other remedy or
settlement of any kind whatsoever except as provided for in
this Section 4.7, and it shall have no obligation or liability
of any kind whatsoever to Buyer or any of its successors or
assigns, with respect to any NORMs. To the best of
Seller’s knowledge, (i) neither the Properties nor the
operation thereof are in violation of any Environmental Laws
in any material respect and (ii) it has not received any
notice from any Governmental Authority (as hereinafter
defined) of any violation of any Environmental Laws. For
purposes of this Agreement, the term "Environmental Laws"
shall mean, as to any given Property, all laws, statutes,
ordinances, rules and regulations of any Governmental
Authority pertaining to protection of the environment in
effect as of the Effective Time and as interpreted by court
decisions or administrative orders as of the Effective Time in
the jurisdiction in which such Property is located. For
purposes of this Section 4.7 the term "Governmental Authority"
shall mean, as to any given Property, the United States and
the state, county, parish, city and political subdivisions in
which such Property is located and which exercises
jurisdiction over such Property, and any agency, department,
board or other instrumentality thereof that exercises
jurisdiction over such Property.
Upon
Closing, Buyer will assume all liability for the assessment,
remediation, removal, transportation, and disposal of wastes,
asbestos, hazardous substances, and NORM from the interests
and property and associated activities and will conduct these
activities in accordance with all applicable laws and
regulations, including the Environmental Laws.
Buyer
will have until September 24, 2007 to notify Seller of any
material adverse environmental condition associated with the
Property that Buyer finds unacceptable and that has an
estimated cost net to the Property greater than One Hundred
Thousand Dollars ($100,000) and is documented by third party
evidence of said condition for which remediation is required
under any Environmental Law. Upon Seller’s receipt of
such notification, Seller will have until two (2) days before
the Closing Date in which to elect to:
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(a)
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proceed
with Closing and either elect to remedy the condition or account
for said costs for the remediation of the condition contained in
Buyer’s notification as a normal pre-Effective Time operating
expense item in the Post Closing Adjustment, or
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(b)
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remove
the subject Property from this Agreement and adjust the Purchase
Price based upon the allocation of value set forth in Exhibit A-1,
or
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(c) terminate
this Agreement if the total cost to remediate all Environmental
Matters will exceed ten percent (10%) of the Purchase
Price.
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Should
Seller elect to remedy the condition set forth in Section 4.7
(a) above, Seller shall remain as operator of the Property and
continue remediation of the condition until the first of the
following occur:
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(I)
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the
appropriate governmental authorities provide written notice to
Seller or Buyer that no further remediation of the condition is
required to comply with the applicable Environmental Laws;
or
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(II)
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An
independent third party determines to Seller’s and
Buyer’s reasonable satisfaction that the condition has been
remediated to the level required by the Environmental Laws or as
mutually agreed to by Buyer and Seller.
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Upon
the occurrence of either (I) or (II) above, Seller will notify
Buyer that remediation of the condition is complete and
provide a copy of the notification provided in (I) above, if
applicable. Upon delivery of Seller’s notice, Seller
will be released from all liability and have no further
obligations under Section 4.7 and Section 10.3 of this
Agreement.
Buyer,
for that period of time for which Buyer is operator of the
Properties, Buyer will store, handle, transport, and dispose
of or discharge all materials, substances, and wastes from the
interests and property (including produced water, drilling
fluids, NORM, and other wastes), whether present before or
after the Effective Time, in accordance with applicable local,
state, and federal laws and regulations. Buyer will keep
records of the types, amounts, and location of materials,
substances, and wastes that are transported, handled,
discharged, released, or disposed of onsite and
offsite.
Notwithstanding
any other provision within this Section 4.7, Buyer shall have
the right to waive all such Environmental Matters and proceed
with Closing.
ARTICLE
5
REPRESENTATIONS AND WARRANTIES
5.1
Seller’s Representations and Warranties
. Each Seller represents and warrants, with respect
to such Seller, to Buyer as follows:
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(a)
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Description and Title . Seller represents and
warrants that Exhibit “A” sets forth a true, complete
and legally sufficient description of the Properties. It
is understood that pursuant to this Agreement, Seller warrants
title to the Properties as set forth on Exhibit “A” by,
through and under Seller only, but not otherwise.
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(b)
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Organization, Standing and Power . To the extent
that each Seller is a corporation, partnership or similar entity,
the affected Seller is validly existing and in good standing under
the laws of the State of Texas and has all requisite
powers and authority to own, lease, operate, sell and convey the
Properties and to carry on its business as is now being
conducted.
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(c)
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Authority and Enforceability . The execution and
delivery of this Agreement, and the consummation of the
transactions contemplated hereby, have been duly and validly
authorized by all necessary action on the part of each party
constituting Seller. This Agreement is the valid and
binding obligation of Seller, enforceable against each Seller in
their respective proportionate ownership share in accordance with
its terms. Neither the execution and delivery by Seller
of this Agreement nor the consummation of the transactions
contemplated hereby nor the compliance by Seller with any of the
provisions hereof will conflict with or result in a breach of any
provision of Seller's organization documents or
by-laws. The execution and delivery hereof by Seller
does not, and the fulfillment and compliance with the terms and
conditions hereof, and the consummation of the transactions
contemplated hereby, will not result in the creation or imposition
of any lien, charge or other encumbrance on the
Properties.
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(d)
Seller's Title to Properties . Seller has
Defensible Title to the Properties. The
term “Defensible
Title” shall mean in the case of the leasehold interests
listed on Exhibit “A”, such right, title and interest
(owned beneficially or of record) that, except for Permitted
Encumbrances:
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(i)
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is
free from reasonable doubt that a prudent person engaged in the
business of purchasing and owning, developing and operating
producing oil and gas properties with knowledge of all of the facts
and their legal effect would be willing to accept the
title;
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(ii)
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entitles
Seller to receive not less than the interest set forth in Exhibit
“A-1” as the net revenue interest with respect to all
of the oil, gas, and hydrocarbon minerals produced, saved and
marketed from each unit or well, as the case may be, that relates
to Seller’s producing interval in the lands and depths
included within each property identified in Exhibit
“A-1”;
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(iii)
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obligates
Seller to pay costs and expenses relating to the operations on and
the maintenance and development of each unit or well, as the case
may be, that relates to Seller’s producing interval in the
lands and depths included within each property, in an amount not
greater than the working interest set forth in Exhibit
“A-1”;
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(iv)
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is
free and clear of any mortgages, pledges, deeds of trust,
hypothecations and production payments, except for the DML
Properties which currently partially secures a line of Credit
between WM. Mark Cranmer, Trustee and JPMorgan Chase Bank N.A. as
Lender and Summit Petroleum LLC, et al as borrower (recorded May
14, 2007, INS. No. 101006, Vol. 82, Page 346 in the Official Public
Records of Reagan County, Texas, which will be released no later
than 5 days prior to Closing;
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For
purposes of this Article 5.1(d), “owned beneficially or
of record” means Seller’s ownership interest
reflected of record in the office of the county clerk in the
county where the relevant lands are located, ownership
interests reflected with respect to federal or state owned
lands, in the office of the federal or state agency having
jurisdiction, subject to and as impacted by the terms and
provisions of the Permitted Encumbrances.
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(e)
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Liability for Brokers’ Fees . Seller has not
incurred any liability, contingent or otherwise, for brokers’
or finders’ fees relating to this Transaction for which Buyer
shall have any responsibility whatsoever.
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(f)
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Insurance . Seller shall maintain through the
Closing with respect to the Properties its existing insurance
coverage.
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(g)
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Compliance with Law . Seller has not received a
written notice of a material violation of any statute, law,
ordinance, regulation, permit, rule or order of any federal, state,
tribal or local government or any other governmental department or
agency, or any judgment, decree or order of any cou
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