Dear All:
Having attended our recent committee meeting in person this past weekend, I am a bit confused about what we are supposed to do. I have read the study report three times. Assuming that we are trying to provide an improved "management" process for tenancies in common (but not trying to change basic co-tenancy property law principles, which might be a good idea in theory but hard to enact in practice), then I think the manner in which the oil and gas industry has addressed the cotenancy problem may be helpful.
As I mentioned, cotenancy problems pertaining to oil and gas development have been a major problem since the 1930s; however, by the mid-1950s, many of the problems were addressed with a standardized agreement that is now ubiquitous in the industry--the "joint operating agreement." Its provisions are not so standardized that very little is actually negotiated. The JOA's basic principles could be framed as legislative default rules (rules that cotenants could change by agreement or opt out of). Perhaps we might trigger these default rules whenever there are "__[5] or more cotenants." By analogy, the condominium act does not apply to really small condo units.
The default rules would include designating a "manager" (called the "operator" in an oil and gas JOA); a means for selecting the default manager (almost always the owner of the largest interest in an oil and gas JOA) but perhaps the cotenant in possession under our act, followed by a series of appropriate alternatives; a statement that a partnership or trust does not result; provisions on the duties of the manager; an opportunity for other co-tenants to weigh-in on management decisions (with the details turning on whether the decisions involve routine maintenance to maintain value or improvements to enhance value); a provision that cotenant liability is several, not joint; robust remedies when a cotenant defaults on an obligation; a "nonconsent" option for a cotenant to opt out of participating in "improvements" (as opposed to maintenance and property taxes) subject to the right of participating cotenants to recover the nonconsenting co-tenant's share of costs plus a "premium" from the cotenancy property income stream before the nonconsenting cotenant can enjoy the fruits of an improvement; provisions to allow for replacement of the manager (operator) at death, insolvency, or for cause; and a right-of-first refusal in other cotenants where a cotenant wishes to sell its interest.
The manager (operator) serves as an "accommodation" to the other owners without compensation. In other words, the manager (operator) is not entitled to profit from its position as operator--only from its position as a co-owner. The manager (operator) has a robust duty to safeguard joint funds (funds used to maintain, improve, or pay taxes) but is otherwise not liable for its management activities unless it is "grossly negligent" or unless it engages in "willful misconduct."
All of the foregoing are standard JOA provisions and have been time tested since the mid-1950s. Given that tens of thousands (perhaps hundreds of thousands) of these agreements have been made in the industry, there has been comparatively little litigation.
The standard form of agreement has been updated a few times (I think 5 since the 1950s) but the basic principles that I have outlined above remain the same. If this is of interest, it would be easy for the reporter to adapt the contract language to a statute.
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Owen Anderson
Professor
North Dakota Delegation
Austin TX
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