When purchasing a parcel of land—whether a primary residence, vacation home, industrial complex, or working ranch—the existence or non-existence of water rights, and the characteristics and elements of any such water rights, are a critical consideration. The water supply can be different from the property’s water rights. There is generally a period of time in any real estate contract during which you can review and understand water rights on the property. The involved water rights inform many determinations, including:
Many landowners have a good understanding of their land’s water rights. Also, however, assumptions are sometimes made by landowners or prospective landowners as to which the legal or factual foundation is limited. Given drought, the high cost of water-dependent investment, complex municipal development reviews, ever-increasing regulatory focus, and other factors, landowners (buyers and sellers) find themselves wanting to “know what they’ve got.” Also, of course, prospective buyers, lenders, and others who may invest in land have a need to know its true value, which in part depends on water availability for both potable/drinking water and non-potable uses. Indeed, an adequate and reliable water supply to meet a landowner’s existing and future needs is a critical factor in deciding whether to purchase a particular property.
Given the importance of understanding water rights concerns during property transactions, potential buyers often engage legal and engineering assistance to review both physical availability (including water quality) and legal water rights associated with the property. While every transaction is different, doing due diligence on water rights can include (but is not limited to) the following steps.
The first step in a due diligence review is to identify the water rights to be conveyed as part of the transaction and to determine their relative value or worth. It is also wise to determine how the water rights line up with physical and historic water use on the involved property. In Colorado, water rights are administered generally under the doctrine of prior appropriation, but a water right is not an incident of land ownership and can be bought and sold separately from the land. Different doctrines govern surface water and groundwater under California law. California recognizes both “riparian” and “appropriative” approaches to surface water rights. Riparian rights are inherent to property ownership appurtenant to a river, lake, or stream. Appropriative rights are state licensed or permitted surface water diversions for beneficial use. Rights to groundwater may be obtained either through groundwater pumping from beneath land upon which it will be used (“overlying,” similar to surface water riparianism), or through appropriation perfected by pumping, conveyance, and reasonable beneficial use. Other states and tribes have various permitting or court processes to determine legal rights to use the water resource—while similarities exist, different jurisdictions have differences in approaches.
In the arid west, the value of a given parcel of land is often intimately linked to the physical and legal water available to the property. Therefore, not only is it important to examine the physical supply of water to the land, but also to examine the legal value and entitlement to the water. For example, the “seniority” of a water right is very important in Colorado’s “first in time, first in right” prior appropriation doctrine. For rural tracts of land not served by some type of municipal water system, physical water is typically available to a property through surface diversions, underground diversions (wells), and/or natural springs. These water “sources” are all administered by law within Colorado’s prior appropriation system. Whenever there is a shortage in the physical amount of water available in a stream in comparison to the number of water rights, junior water rights are curtailed or shut down for the benefit of senior water rights under the prior appropriation doctrine.
In any initial analysis during due diligence, you should try and obtain and review the following items, to the extent they exist: purchase contract documents, title commitment, water right decrees, water right permits and certificates, well permits, stock certificates, allotment contracts, water use agreements, homeowner association restrictions, maps/aerial photos for any water features, and dam safety inspection records, among other things. A property survey can also locate all the physical water features on the involved parcel—wells, ditches, pipelines, diversion structures, etc. Unless the property is entirely served with a municipal connection, it is warranted to look into any information a seller can provide.
Once initial background material on water rights and water use are gathered, the next step is to determine the current validity of the water rights associated with the property. In Colorado, court determined water rights can be lost in part or in whole by court ordered abandonment or, in the case of conditional water rights, for the failure to demonstrate reasonable diligence in a timely manner. By contrast, states like Wyoming and California have permit systems, but water rights can also be forfeited by non-use in Wyoming. Because water right administration is increased as conditions become more arid, an understanding of validity and risks with water rights during low flow/drought periods is important. Accordingly, it is important to examine the state administrative records to determine the validity of the water rights to be transferred. In Colorado, the State Engineer’s Office creates a tabulation for current abandonment listings, and you should also review the most recent abandonment list, past diligence decrees for conditional rights, well drilling and pump installation reports, well completion report and pump test, reservoir storage restrictions, augmentation plan documents and associated allotment contracts, documentation of rights-of-way and/or easements associated with your water rights or water rights of others that are located on or cross your property, among other things. Similarly, California’s State Water Resources Control Board keeps records associated with applications, permits, licenses, transfers, and other related water rights documents that can inform the validity of legal water rights associated with any property.
To determine the adequacy of the water rights, you should focus on your anticipated use of the property and the water requirements for those future uses. This may involve a review of the physical availability of the water; dedication or dry-up requirements; the quality of the water; and other decreed aspects of the right, including the point of diversion, place of use, or type of use. If a change of any of these decreed aspects of the right is necessary to serve anticipated uses, certain restrictions may be imposed to prevent injury to the other water users. For example, if you buy a ranch with the intent to secure development approvals for a new housing development, then you may have to either dedicate all the long-term irrigation water rights to a water service entity or change the existing water rights so that the water use can serve new needs for an existing property. In a change proceeding, the water right will be limited to the extent of its historic consumptive use, both in time and amount, to replicate the amount and timing of historic use. Across many western states, this limitation is a function of beneficial use. Beneficial use is the basis, the measure, and the limit to most water rights in the west. Therefore, it is important to determine what the historic use of the water right to be transferred was in order to determine the adequacy for anticipated use.
This step in the due diligence analysis normally requires the employment of a water engineer to review and analyze the following in order to calculate historic consumptive use and historic return flows:
Often, some in-stream or environmental flow exists that may affect the ability to divert water. There also can be federal reserved rights or bypass flows, Endangered Species Act requirements, ditch company bylaw restrictions, and covenants running with the land, including conservation easements or dry-up requirements.
A title opinion may be desirable for high value transactions, where water rights play a key role in the future development of the property, because water rights may be conveyed separate and apart from the land historically benefitted by that right. However, many due diligence reviews do not include a formal title opinion due to the timing and expense involved. Also, because title insurance companies do not insure for water rights, and often historic conveyancing is sub-optimal or non-existent, there are few circumstances where a legal review will give you a title opinion.
Water rights counsel deals with a variety of water use and water rights issues on a regular basis; as such, for you to fully understand the water rights associated with a property that you are considering purchasing, water rights attorney assistance can be invaluable. At Somach Simmons & Dunn, we can prepare a specific letter report outlining your water rights and providing an overall view of the water rights protections that have recently been subject to water court cases, permitting, or other legal processes. In addition to completing a due diligence report summarizing the water rights, any defects, or vulnerabilities of these rights, and recommending any further clarifications that might be necessary, we can assist in the conveyance of the water rights by preparing the conveyance documents, such as deeds, warranties, affidavits, covenants, stock transfers, notices, water agreements, corporate documents, easements, and rights-of-way. Sellers and developers often want to organize their water rights for potential buyers to review or for annexation types of processes, and our team is familiar with the multiple sides of water related property transactions.
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Somach Simmons & Dunn provides the information in its Environmental Law & Policy Alerts and on its website for informational purposes only. This general information is not a substitute for legal advice, and users should consult with legal counsel for specific advice. In addition, using this information or sending electronic mail to Somach Simmons & Dunn or its attorneys does not create an attorney-client relationship with Somach Simmons & Dunn.