Water Rights Due Diligence Water Rights Due Diligence

Transcription

1 Water Rights Due Diligence Water Rights Due Diligence Introduction Assuring the existence of an adequate water supply is a critical aspect of due diligence for a land acquisition or commercial transaction. Unlike general property and commercial law, which is governed by legal principles that are largely uniform (or at least recognizable) from jurisdiction to jurisdiction, legal concepts governing ownership of water and water rights vary greatly from state to state. An analysis of water rights issues usually requires specialized legal knowledge and often, scientific expertise. The typical due diligence team of transactional lawyers will usually lack the expertise to conduct water rights due diligence, and as a result, this aspect of the transaction may be ignored, left to the last minute, or farmed out to local counsel who may be isolated from other aspects of the transaction. In fact, the importance of water coupled with the complexity and obscurity of water law mandates that water rights due diligence should be given primary and immediate consideration and that the water rights due diligence effort be closely integrated with other transactional due diligence. The water rights due diligence team should be identified early in the transaction, and allocation of responsibilities among the team members should be specified, preferably in writing, at the outset of the effort. Because of the variability in water law from state to state, no single checklist can adequately describe the tasks comprising appropriate due diligence. Due diligence checklists tailored to specific states (Arizona, California, Colorado, Oregon, Nevada, and New Mexico) are included at the end of this paper. The sections of this paper are bookmarked as follows: I. State Water Right Basics II. III. IV. Identifying the Water Rights Water Right Ownership and Title Examination Validity: Nonuse, Abandonment and Forfeiture V. Security of Priority VI. VII. VIII. Water Quality Impact on Water Availability Change of Use and Transfer Issues Is the Water Wet? Due Diligence Checklists Arizona Due Diligence Checklist California Due Diligence Checklist

2 Colorado Due Diligence Checklist Nevada Due Diligence Checklist New Mexico Due Diligence Checklist Oregon Due Diligence Checklist I. State Water Right Basics A. Arizona Arizona, like most other Western states, follows the prior appropriation system for surface water,[1] and it has since the enactment of Arizona s first territorial water code in In those days, a water user acquired a right to use water by putting water to beneficial use. Now a permit is required. Groundwater, however, is not generally subject to a prior appropriation system, and follows the reasonable use doctrine where it is not regulated under the Groundwater Management Act in specific areas of the state. Water rights are administered by the Arizona Department of Water Resources (DWR). The distinction between surface water and groundwater was judicially defined in the 1932 case Maricopa County Water Conservation Dist. No. 1 v. Southwest Cotton Co., 39 Ariz. 65, 4 P.2d 369, modified and reh g denied, 39 Ariz. 367, 7 P.2d 254 (1932). The Southwest Cotton court defined appropriable water to include the underflow, subflow or undercurrent of a surface stream. The subflow was defined as those waters which slowly find their way through the sand and gravel constituting the bed of the stream, or the lands under or immediately adjacent to the stream, and are themselves a part of the surface stream. 39 Ariz. at 96. Groundwater not immediately adjacent to a stream is not appropriable, and it is referred to as percolating groundwater. Although later courts have acknowledged that this division of water underground is a legal fiction that does not make sense hydrologically, they have refused to change the distinction. In an opinion issued last September, the Arizona Supreme Court attempted to further refine the definition of subflow in the Gila River System to a particular hydrologic unit in the system, the saturated flood plain Holocene alluvium. In re the General Adjudication of All Rights to Use Water in the Gila River System and Source, Ariz., 9 P.3d 1069 (2000) (Gila River IV).[2] To further complicate groundwater matters, the Arizona Supreme Court issued an opinion in 1999 that federal reserved water rights, notably for Indian reservations, transcend and trump state water law. In re the General Adjudication of All Rights to Use Water in the Gila River System and Source, 195 Ariz. 411, 989 P.2d 739 (1999), cert. denied, 120 S.Ct (2000) (Gila River III). The high court ruled: (1) federal reserved water rights extend to groundwater that is not subject to prior appropriation under Arizona law to the extent that groundwater is necessary to accomplish the purpose of a federal reservation, and (2) federal reserved right holders are entitled to greater protection from groundwater pumping than are water users who hold only state law rights. This means the holder of a federal reserved right to either appropriable surface water or nonappropriable percolating groundwater may be able to enjoin pumping of percolating groundwater that interferes with the use of the federal right, even though a state law user of either appropriable surface water or nonappropriable percolating groundwater would have no similar right to enjoin an interfering use of percolating groundwater.

3 A statutory system to regulate surface water was adopted in 1919, after which water users had to apply for permits to appropriate surface water. Most surface water was appropriated early on, and some judicial decrees were issued, but they did not explicitly quantify the reserved rights held for Indian reservations. Two large general stream adjudications (on the Gila and Little Colorado rivers) are now under way to sort out the relative rights of most of the water users in Arizona. Technically, people can still apply for surface water rights, but very little is available. New groundwater developments are possible in the Active Management Areas (AMAs), as detailed below. Outside of AMAs, reasonable use is still the standard, except that some people believe Gila IV expanded the definition of subflow to the point where no percolating groundwater is left. If water rights are not put to beneficial use for five years, they may be forfeited.[3] As in other Western states, rights may be abandoned if the user fails to use the water and intends to abandon the associated water right. Gila Water Co. v. Green, 29 Ariz. 304, 241 Pac. 307 (1925). Changes in the point of diversion, place and purpose of use require application to the DWR and are subject to public notice and protest, as outlined below. B. California California s system of water law combines the principles of prior appropriation[4] and riparian rights[5] into a hybrid and often confusing system referred to as the California System. [6] Under this system, junior appropriators must give way to senior appropriators when insufficient water exists to satisfy all users.[7] And use of the appropriative right is limited to the declared place of use. [8] Separately, holders of riparian rights are to exercise their rights in a correlative manner, with some sort of pro-rata cutback when sufficient water is not available to satisfy all water users.[9] When there are both riparian and appropriative rights on a water course and there is insufficient water to satisfy all users, riparian rights are subordinate to all appropriative rights created before the federal patent for the particular tract at issue, and are superior to all appropriate rights created subsequent to the point in time at which that patent was issued.[10] Much as in most other western states, the right to water is usufructory, meaning that the party legally entitled to the water does not own the water in question but is instead entitled to its use.[11] In any case, all users of water in the state must put a reasonable quantity of water to beneficial use through reasonable diversion methods pursuant to a 1928 amendment to the California Constitution.[12] A failure to achieve a beneficial purpose and reasonable use could result in the loss of one s water right in California.[13] Prior to 1914, the Civil Code provided for a method of appropriation which varied little from the mostly judicially created elements of appropriation, where the diversion and use of the water with notice was adequate to establish the right.[14] The current water code however, dating back to its 1914 predecessor, provides an orderly method for appropriation in California.[15] It provides that [a]ll water flowing in any natural channel is a public water of the state and subject to appropriation in accord with the water code.[16] Under this new system, the State Water Resources Control Board (SWRCB), the successor to the State Water Rights Board, administers water rights in California.[17] Pursuant to statutory and regulatory provisions, any person may file an application to apply for any unappropriated water from the SWRCB, seeking to obtain a permit, except where the diversion will be pursuant to a riparian right.[18] The SWRCB must conduct a hearing prior to approving the application if, upon notice, an interested party files a grievance regarding the application and that grievance is not subsequently resolved.[19] If the application is approved, a permit is given to the applicant.[20] Once the right is proved up by demonstration of putting the water to use for an adequate period of time, the SWRCB will issue a license.[21]

4 Water rights acquired under the Civil Code prior to 1914 and non-statutory appropriations from that same period were grandfathered in under provisions of the current law.[22] The SWRCB does not have jurisdiction over these rights. Hence, it is possible for one to have a superior water right in California even though that person, or her predecessor, did not comply with the current mandates of the water code as to acquisition of that right, because that individual did comply with the law on appropriation as it stood prior to These appropriative rights are called pre-1914 rights.[23] Just as with California s surface water system, California s groundwater system is also bifurcated.[24] Subterranean streams flowing through known and definite channels are treated the same as surface waters in California.[25] Furthermore, percolating groundwater that is tributary to and feeds the surface flow of a stream is regarded as part of the stream.[26] These types of groundwater are subject to the jurisdiction of the SWRCB if one wishes to appropriate them, except as to riparian lands which do not acquire their right through the SWRCB.[27] In contrast, percolating groundwater that does not flow through a defined subsurface channel is treated under a different system.[28] Landowners overlying the percolating groundwater who wish to use the water on their overlying parcel are treated roughly the same in California as are riparian landowners.[29] Hence, correlative rights exist between two or more overlying owners, meaning that in a shortage all landowners must cut back on their use correlatively, and no overlying landowner may divert water to non-overlying lands injuring another overlying owner.[30] The rights of the overlying owners are mutual and reciprocal.[31] Parties who pump percolating groundwater to parcels that do not overly the groundwater basin are considered to be appropriators, and they may appropriate groundwater only to the extent that the groundwater they appropriate is surplus to the needs of those with overlying rights.[32] But because the SWRCB does not have jurisdiction over these percolating groundwaters, no permit is required to become an appropriator of these waters. Interestingly, municipal entities (except to the extent they are serving water to land they own) are considered appropriators.[33] California does recognize prescriptive rights in groundwater. These rights may come into existence after a groundwater basin has been in overdraft for five years.[34] At that time, appropriators may seek judicial remedy to declare their rights to be prescriptive.[35] Such prescriptive rights are of a higher priority than overlying rights.[36] C. Colorado In Colorado water rights are acquired by diversion of water and its application to a beneficial use.[37] Surface rights require no permit or administrative approval. In times of shortage (which is almost always) water rights are allowed to divert in order of their priority.[38] The priority of a water right is dependent on its priority date, which is generally the date on which the water right was decreed.[39] With respect to water rights decreed in the same proceeding (or after 1969, in the same calendar year) relative priority is determined by the decreed date of appropriation (the date on which the appropriator had both an intent to appropriate and have taken the first step towards such appropriation).[40] Groundwater rights in Colorado are generally governed by these same rules. All groundwater that is hydrologically connected to a stream system is administered as part of the surface priority system.[41] Non-tributary groundwater (groundwater, the withdrawal of which, will not, within 100 years, deplete the flow of a natural stream) is not subject to appropriation or the priority system.[42] Such nontributary water is allocated based on the amount of water underlying the surface of the landowner s property, with the rate of withdrawal limited to 1% of such amount per year.[43] Much of eastern Colorado is located with designated groundwater districts, in which

5 groundwater rights are administered in priority against each other, but not against rights lying outside of such districts.[44] D. Nevada Nevada is a pure appropriation doctrine state. Both surface and groundwater are held by the state in trust for the public.[45] Under Nevada law, a water user may acquire a right to use water, but never absolute ownership of the water itself. One obtains a water right by putting water to beneficial use.[46] The principle of first-in-time, first-in-right, governs relative priority among users of the same water source. Water rights are administered by the State Engineer, Division of Water Resources, Nevada Department of Conservation and Natural Resources. A statutory permit system governing water rights acquisition, administered by the State Engineer, was first adopted in Nevada in 1913 for surface water.[47] Essentially the same system was adopted for groundwater in 1939.[48] Prior to the enactment of the statutory systems, water users gained water rights simply through the physical acts of appropriating water and putting it to beneficial use. These pre-statutory vested rights were unaffected by the implementation of the permit system.[49] Relative priorities among pre-statutory appropriations are generally governed by adjudications among users of the same source, leading to judicial decrees.[50] Not surprisingly, given the scarcity of surface water in the state, most surface water in Nevada was first appropriated prior to the implementation of the statutory system; most surface water rights are thus governed by one of Nevada s hundred or so different decrees. Under present law, the first step in acquiring a water right in Nevada is to apply to the State Engineer for a permit to appropriate water.[51] Applications to appropriate water are subject to public notice and may be protested by any interested person.[52] In reviewing an application, the State Engineer considers whether unappropriated water is available from the source in question, whether the proposed appropriation will impair existing rights, and whether the appropriation is in the public interest.[53] If the application is approved, the State Engineer will issue a permit to appropriate, with time periods set for completing diversion works (by statute, no more than five years) and for proving beneficial use (by statute, generally no more than ten years).[54] Extensions of time, of one year s duration, for completing works or proving beneficial use can be obtained so long as the applicant is proceeding in good faith and with reasonable diligence.[55] Multiple extensions of time are fairly common. If the applicant fails to proceed to prove up the right with reasonable diligence, the application may be canceled by the State Engineer[56]. Once beneficial use is demonstrated to the satisfaction of the State Engineer, the applicant receives a certificate establishing the water right to the extent of the proven beneficial use.[57] The certificated right is then vested. Loss of the water right is then governed by the forfeiture and abandonment provisions discussed in Section IV. Changes in the point of diversion, manner and place of use require application to the State Engineer and may be subject to public notice and protest. This requirement applies to decreed rights as well as permitted rights.[58] E. New Mexico New Mexico follows the prior appropriation doctrine for both surface water and groundwater. N.M. Const., Art. XVI, Sec. 2. A water user obtains the right to use the water, but never acquires the water itself, which is owned by the state.[59] The State Engineer conjunctively manages the resource to ensure that the rights of river users are not impaired by groundwater pumping. The New Mexico Supreme Court in City of Albuquerque v. Reynolds, 71 N.M. 428, 379 P.2d 73, 80-81

6 (1962), recognized the State Engineer s authority to place conditions on permits for groundwater pumping that would protect the river affected by the pumping. Today, since surface water is considered overappropriated, protection of the rivers becomes important and drives many of the water transactions. Surface rights, typically from farms, must be acquired to support proposed new permits for wells and groundwater pumping. Although New Mexico follows the first-in-time, first-in-right policy, priority calls still are relatively rare. The State Engineer s office, which administers water rights, recognizes water rights perfected prior to 1907, when the Territory of New Mexico adopted its first Water Code affecting surface rights. NMSA Before that time, water rights were acquired through beneficial use. Afterward, a permit was required to begin putting surface water to beneficial use. By contrast, portions of the Water Code regulating groundwater were not adopted until 1931, and the State Engineer does not take jurisdiction over groundwater until he declares an underground basin. State ex rel. Reynolds v. Mendenhall, 68 N.M. 467, 362 P.2d 998 (1961). Some underground basins were declared in the 1930s, and declared basins covered most areas of the state by the 1980s. Under current New Mexico law, permits for either a surface or underground right require applications for a permit. NMSA and , respectively. The applications must be published in a local newspaper for three weeks, and anyone who thinks the appropriation would impair his water right may protest. In addition to impairment and whether unappropriated water is available, the State Engineer also considers whether the application will be contrary to conservation of water within the state, and will impair the public welfare of the state. These criteria also generally apply to applications to transfer or change the point of diversion, purpose or place of use, as discussed below. The impairment criteria are evaluated on a case-by-case basis by the State Engineer,[60] and the other two criteria (conservation and public welfare) have not been defined in regulations or case law. If the application to appropriate water (now almost always groundwater) is approved, the applicant must meet conditions that typically include a time limit to construct the well and put the water to beneficial use. Extensions of time for a maximum of three years[61] are common, but recently the State Engineer has indicated less willingness to approve the extensions automatically, especially if the permit holder has asked for multiple extensions. On rare occasions, the State Engineer will cancel a permit if the water user fails to put the water to beneficial use. After the water has been put to beneficial use, the permit holder can apply for a license certifying beneficial use,[62] but these also are relatively rare. Water rights can be forfeited or abandoned through non-use, as discussed below. F. Oregon[63] Prior to the enactment of Oregon s (surface) water code in 1909, the state recognized both riparian and appropriative rights. Riparian rights can now be claimed only to the extent that riparian owners were using water beneficially before (or immediately after) passage of the 1909 Water Code.[64] This hybrid system is known as the Oregon doctrine. There are three fundamental principles in Oregon water law: beneficial use, priority, and appurtenances. Beneficial use is the basis, measure, and the limit of all rights to the use of water in this state. [65] That is, a right to divert and use water is valid only to the extent that the water is applied to a beneficial use for a specified purpose. A wide variety of uses are considered beneficial.[66] However, uses may be limited if the proposed source has been withdrawn from further appropriation or has been classified by the OWRD for more limited uses or quantities of

7 use.[67] Basin plans may further limit or prioritize uses.[68] Oregon law has no explicit use preference except that in times of shortage, domestic purposes have first preference all other uses and agricultural purposes have preference over manufacturing.[69] Priority in Oregon is first in time, first in right. The person who holds the right with the earliest priority date receives all the available water, up to the total amount of his right. (The priority date is generally the time the water was first put to beneficial use, or the date of the permit application for that use.) Whatever available water is still left in the stream goes to satisfy the next oldest, or senior, right, and so on down the line until either all the water rights of use are satisfied in order of priority, or all the available water is used. The third basic principle of Oregon water law is that the water attaches to the land after it is perfected and the development completed on that land. Thus, a water right certificate is said to be appurtenant to a particular piece of property.[70] Statutes require disclosure of the existence of water right certificates, or transfer approval orders by anyone selling land that includes any surface water irrigation rights, as well as notification to the OWRD.[71] Since the water right is appurtenant to the land, the seller must specifically reserve the water rights if the seller intends to keep them.[72] Appurtenance also requires that water cannot be taken and applied to other land without application for a transfer. According to statute, all water within the state from all sources of water supply belongs to the public. ORS As outlined above, Oregon recognizes the prior appropriation doctrine and applies its unique form of the doctrine to precode claims in adjudications, and as statutorily enacted, to post code claims. Water rights of use acquired before the permit system was in place, are vested rights and are confirmed though the adjudication process. Claims for pre-1909 surface rights were required to be registered with the state by December 31, Claims not registered were forfeited. Claims for groundwater put to beneficial use prior to August 2, 1955 (the date of enactment of groundwater codes) are recognized if they were registered within three years after the adoption of the code.[73] Oregon statutes provide the mechanism for sorting out pre-code rights.[74] The OWRD is in process of conducting adjudications of streams to issue final decrees that will confirm the existence of pre-1909 rights their priority in relation to other rights.[75] Until the adjudication process is completed, OWRD can process requests to change place of use, type of use or diversion of registered pre-1909 water rights who have unadjudicated claims without affecting basin adjudications already underway.[76] With certain exceptions[77], all rights to use surface water since 1909 are acquired through the state s permit system. Groundwater rights of use are similarly acquired through a permit system in place since 1955, also with certain exceptions.[78] The groundwater system is integrated with the surface water system where a hydrologic connection exists;[79] however there must be substantial evidence of a direct and measurable hydrologic connection between surface and groundwater to support conjunctive management.[80] Although most exempt uses carry a valid right of use equivalent to certificated water rights, proof of a priority date and continuous beneficial use may be difficult without the documentation provided by a paper right.[81] Water rights in Oregon are treated as perpetual so long as they are exercised continuously.[82] Valid, perfected water rights are recognized by a water right certificate issued by the OWRD. Certificates are issued pursuant to adjudications or after final proof survey confirming to the OWRD the application of the permitted waters to beneficial use. OWRD administers water law under policy direction from the Water Resources Commission. Water

8 law is codified in chapters of the Oregon Revised Statutes cover both groundwater and surface waters. Oregon requires permits for all water appropriations. Oregon s water law has seen significant changes in interpretation effecting water rights over the past fifteen years as the competition for the resource increased. II: Identifying the Water Rights The first step is obviously to identify what water rights are to be conveyed as part of the transaction. This may sometimes not be a straight forward task. Often the parties may not have been very clear in their contract, simply using general phrases such as any and all water rights or all appurtenances or even being silent on the issue. The due diligence lawyer will need to determine what the intent of the parties was with respect to what, if any, water rights are to be conveyed. Oftentimes, the parties themselves will not know precisely what water rights are associated with the property, at least to the level required to prepare an adequate conveyancing description. Even if the parties purport to know what water rights are associated with the property, the due diligence investigations should confirm these beliefs. The means of determining what water rights are, in fact, appurtenant to the property varies from state to state. A. Arizona In Arizona, most surface water rights are evidenced with a certificate, permit or statement of claim. All of these records can be found at the DWR. Groundwater rights within the state s AMAs are evidenced by certificates or permits. All wells in the state are or should be registered with the DWR. The main DWR office is in Phoenix, and each AMA also has an office. The files in the Phoenix office are supposed to be complete, but sometimes records can only be found at the AMA office. The DWR website[83] is a good starting point for searching for information on water rights in Arizona. Some of the forms are on the site, as well as an online bookstore catalog, descriptions of the AMAs, and the Active Management Plans. Another useful resource are the maps the DWR produces on CD. Separate CDs (approximately $20 each) are produced for surface and groundwater rights in the state. After entering a legal description using section, township and range, the CD produces a map with file numbers for all the ground or surface water rights around the land described. In Arizona, it is important to confirm that the water right can be used for the intended purpose. Groundwater rights are heavily regulated (as detailed below), and some rights can be used only for particular purposes. For example, irrigation grandfathered groundwater rights can be conveyed only with that land,[84] but they may be extinguished, in some cases, to be used toward proving an assured water supply.[85] B. California Appropriative, riparian, and groundwater rights each emerge from unique geographical and physical characteristics, and as such, each holds a unique status in the law. Identifying these rights requires a basic legal understanding of how the rights are created by law, along with the appropriate investigation for each type of water right. In addition to these real property-based rights to water, there are also contract-based rights to water, such as the water delivered by the federal Central Valley Project or the California State Water Project. Identifying these contract-based rights can be done through a review of the seller s files. Appropriative Rights As discussed above, an appropriative right is a real property right that allows one to take surface water, or water in subterranean streams flowing through known and definite channels and put it to a beneficial use. This right is not contingent upon ownership of the land through which the water

9 flows, or even necessarily to which the water will be applied. The first place to start in identifying an appropriative right is the SWRCB. There, one can begin by looking at the SWRCB filings under the name of the seller, subsidiaries of the seller, part owners, predecessors in interest, etc for applications, permits, or licenses which have been filed or granted to appropriate water. One should also look at the SWRCB maps to determine if there are any recorded water diversions, for applications, permits, or licenses, associated with or near the property. If relevant applications, permits, or licenses are located, one can look at the applications, permits, or licenses themselves to find if the place of use identified corresponds with the location of the property.[86] If the water right has matured into a license, proof of the license can also be found in the records of the county in which the diversion occurs.[87] In the context of a real estate transaction, an appropriative right might accompany the parcel being purchased, or it may be held by a mutual water company, irrigation district, or other type of district, that serves the parcel in question. Therefore, the next step in searching for an appropriative right is to find out if there is a mutual water company, irrigation district, or other special district which serves water to the area. The amount of water available and the purposes for which the water may be used will be determined by the water service provider based on legal and physical restrictions of that service provider. Because water rights established prior to 1914 are not governed by the SWRCB, the SWRCB may not have anything in its files to signal the existence of a pre-1914 right. One may, however, sometimes find recordings of these rights at the county recorder s office or in other historical references. Prior to the permitting system administered by the SWRCB, an appropriator would provide notice of the proposed diversion by posting or publishing actual notices or by filing for the right in the county recorder s office. The existence of a permit, license, application, or pre-1914 right, however, does not end the inquiry as to the existence of a legally valid water right. As explained above, all water rights in California must be put to reasonable and beneficial use, and if not, can be forfeited under law. See section IV, infra. Additionally, the courts may have adjudicated the water right as well. Riparian Rights As discussed above, a riparian right gives the owner of land contiguous to a natural watercourse a right to beneficially put the water to use on the riparian land. The first step in discovering the existence of a riparian right is to physically investigate the property for signs of a natural water source running through or adjacent to the property.[88] The riparian water source may be ephemeral in nature, so it is important to look not only for water, but other indications of the temporary existence of water such as a gully or dry streambed. Even if a riparian water source is present, the riparian rights to that property may have been severed from the property. If the property was subdivided at some point in time, the riparian right attaches only to the smallest parcel still contiguous to the water source.[89] Changes in the riparian right are almost never reflected in the deed. Additionally, one should check filings with the SWRCB because the SWRCB accepts riparian right filings which are often made so as to be able to prove up a riparian right later in time. If a riparian right is found, it is not necessary to do the same follow-up investigation as required of appropriative rights because a riparian right is not based upon use, and hence it is not lost by disuse. However, the best way to know if a riparian right still exists is to obtain a title opinion from a competent water counsel.

10 Groundwater Rights Also as discussed above, a property owner whose land overlies a groundwater basin has a right to withdraw water from the basin, correlative with other property owners whose property also overlies the basin. A groundwater right may cause special concern because not only is it unnecessary to file notice with the SWRCB, the availability of water for extraction is not readily apparent if there are no physical signs of groundwater, such as wells or springs. Currently, the Department of Water Resources is preparing a map of California s groundwater basins. When completed, a person may be able to start their research with that database, checking the location of their property against the map. However, such a map will likely not be detailed enough to determine the actual presence of groundwater. Until such time as detailed maps exist, if it is suspected that the property overlies a groundwater basin, one should hire a hydrologist to test for groundwater. Additionally, investigation into whether a water master has been appointed by the court may reveal the existence of an underlying groundwater basin. If it is determined that the property does in fact overlie a groundwater basin, one must do further research to determine if the basin has ever been adjudicated. The Department of Water Resources keeps tabs on such adjudicated basins. The presence of such an adjudicated basin can be good if you find the property holds an adjudicated right. Absent such a right, however, the acquisition of a new right may be challenging, if not impossible. Additionally, a call to a local water district to find out the status of the basin may uncover whether or not there has been an adjudication of rights to the basin. Additional Investigative Tools One cannot underestimate the value of a visual inspection of the property. The existence of pipelines, ditches, or wells or the presence of a surface stream on the property can alert one to the existence of a water right which should be investigated. Additionally, using a historical research firm to investigate the history of the property or prior owners of the property may help discover whether water rights are associated with the property, and if so, their status. This research covers newspapers, construction documents, and other sources which are always left out of the standard title search. Finally, water right engineers are another source for the investigation of water rights. Hiring the right expert can be very important in identifying the water right. C. Colorado In Colorado, the State Engineer maintains a computer listing of all decreed water rights in the state known as the Water Rights Report and commonly referred to as the tabulation. [90] The tabulation comes in three versions one sorted alphabetically by the name of the decreed structure, one sorted by order of priority within a stream system, and one sorted by the section, township and range of the decreed structure s point of diversion. A review of USGS maps of the area often reveal the presence of reservoirs or ditches. Conversations with the manager of the property and local water officials normally will reveal additional useful information. Finally, the field investigations undertaken as part of other due diligence investigations discussed below will help identify the ponds or ditches, irrigated fields, wells, or other evidence of the existence of water rights. Once the rights are identified, copies of the relevant decrees, well permits and other evidence of the water rights involved should be obtained and reviewed. Most of these documents can be found at the State Engineer s Record Section in Denver. Unfortunately, most of these documents are not yet available on line. However, the State Engineer maintains an extensive web site that includes stream flow records, rules and regulations, policies, diversion records and other material helpful in due diligence investigations. The web site is located at

11 D. Nevada In addition to determining what the parties intend with respect to water rights appurtenant to the property in question, the due diligence team will need to ascertain whether additional or different water rights are needed to serve the property and project in question. In Nevada, water may be available from a local water purveyor or governmental authority. However, even within the service territory of an existing water purveyor, a developer may be required to obtain water rights and dedicate these to the purveyor or local government in order to obtain water service. In Washoe County, for example, satisfaction of these requirements is a condition for obtaining a building permit or subdivision approval for new developments. The requirements for obtaining service commitments varies widely throughout the state. The water rights to be dedicated need not be appurtenant to the property in question, but restrictions as to the appropriate type of water right will apply. Usually it is necessary to obtain and dedicate a larger volume of water than will actually be needed to serve the property, as a hedge against drought conditions. The water purveyor or governmental entity will undertake a due diligence review before accepting the right. A water right is not required for a domestic well that draws no more than 1,800 gallons per day.[91] Such a well may not be constructed within the service territory of a water purveyor, and, in the event a service territory expands to encompass property served by domestic wells, there are statutory provisions encouraging, and in some cases requiring, the abandonment of such wells.[92] E. New Mexico In New Mexico, some water rights have been adjudicated, and a new automated system for identifying water rights is called W.A.T.E.R.S. [93] However, not all rights are even permitted. Surface water rights developed before 1907 do not need a permit, nor do groundwater rights developed before the State Engineer declared and took jurisdiction over the particular groundwater basin where the wells are located. Most prudent water rights owners, however, have filed declarations of their surface or groundwater rights with the State Engineer s office, which is the first stop for learning about the water rights. The files in the main State Engineer office in Santa Fe are supposed to be duplicates of files in the district offices around the state,[94] but that is not always the case. Sometimes a check in both the Santa Fe and District office is warranted. Under New Mexico law, the declaration is prima facie proof of the validity of the water right,[95] but the State Engineer often challenges a declaration based on many of the same sources outlined in the due diligence checklist. The due diligence, therefore, should only begin with the permit or declaration, not end there. F. Oregon Most water use in Oregon is documented by a decree tabulation, statement of claim, permit, or certificate kept with the OWRD. Unfortunately, the large remainder are not documented and fall generally into the following categories: (1) Exempt uses; (2) Federal reserved rights; (3) Wild and Scenic River flows; and (4) Reservations for future appropriation which are not recorded. If the transaction considered might fall within state exemptions, the investigator must also consider whether the local land use planning agency (usually county or city) has its own limiting restrictions. To begin the identification process of documented water uses, the investigator should start with the OWRD s website[96] by entering the appropriate section, township, and range data. The website should produce a plat card for the appropriate section with identifying numbers entered by quarter/quarter sections. Since OWRD indexes its files by the application number, research from the plat card may include determining the permit and certificate numbers both of which will be different

12 than the application number. The website may also include a copy of the pertinent right. However, associated file documents are not included on the website at this time requiring the investigator to travel to the state files in Salem or to the regional watermaster s office. While the state and regional files are intended to be exact duplicates, this is rarely the case. A wise investigator should start by retrieving a complete copy of the pertinent State file(s). Obtaining copies of these files, usually requires the legal practitioner to earlier submit a Public Records Request. It is advised to ask for all related files as OWRD often maintains several files for the same water use. The regional files may also yield additional information. Important documents to retrieve from the file include copies of easements and contracts. Because ownership of the paper right is determined by its property appurtenancy, the name on the paper right[97] will not likely be the name of the appurtenant land owner but will name the initial applicant for the resulting water use. Therefore, the investigator may need to review the county records to first determine land ownership. This step is often a good idea to make determinations of existing easements. Often, a title company may be used for this purpose. G. Conclusion Once the water rights to be conveyed have been identified, a second question should be raised. Are the water rights adequate for the purchaser s intended purposes? The amount, reliability, transferability and other attributes will be determined as part of the ongoing due diligence investigations described below. However, the due diligence lawyer needs to understand what the client s intended use of the property is, so that a determination can be made whether the water rights will be adequate to meet the client s needs. If the existing water use is to be continued, this is normally fairly easy to determine. However, if the client desires to make a new use of the water e.g. converting farmland into a residential development the due diligence lawyer will need to help the client determine exactly how much water the new land uses will require. For instance what are the average and peaking water demands of a residential development, what water dedication requirements will local service providers or authorities require, what amount will industrial uses require? If the buyer is a conservation entity such as a land trust, the due diligence lawyer will also need to evaluate whether the water rights are adequate to protect the conservation values sought to be protected. For example, if a conservation value is a wetland or irrigated meadow for waterfowl habitat, are the water rights in place that are required to maintain such values? This may require additional scientific due diligence regarding the amount and timing of water required for these specific land uses. III. Water Right Ownership and Title Examination A. Arizona In Arizona, there are several different types of surface and groundwater rights, with several different types of proof of the rights. In general, except for decreed rights, the DWR has ownership and assignment records. However, for surface rights in particular, due diligence should include a title search of the land associated with the water right. Title to groundwater rights can be held separately from the land, and title can be searched through DWR records only. Arizona state law provides for four types of surface water rights.[98] All types of surface water rights should be conveyed by deed, not a bill of sale.[99] Notice of the conveyance should be filed with DWR using the DWR s forms, except for decreed rights.[100] The first type of a surface water right is one acquired before June 12, 1919, which is evidenced with a statement of claim filed with DWR.[101] The second type of surface right is one acquired after June 12, 1919, pursuant to an

13 application and permit to appropriate water. DWR issues a Certificate of Water Right as evidence of these rights.[102] The third type of surface water right is a stockpond right. DWR evidences these rights with a Registration of Stockpond filed with DWR and, on rare occasions, with a Certificate of Stockpond Right.[103] The fourth type of surface water right is a decreed right. These rights have been adjudicated and confirmed by a court.[104] No readily accessible repository exists for these rights, although DWR often has information regarding decreed rights. Groundwater in Arizona is heavily regulated, even though the state generally follows the reasonable use doctrine[105] instead of the prior appropriation doctrine for groundwater. The Arizona statutes designate AMAs in areas where groundwater aquifers are at risk of being rapidly depleted and provide stringent regulations in those areas.[106] The AMAs include the Phoenix AMA, the Pinal AMA, the Tucson AMA, the Prescott AMA, and the Santa Cruz AMA.[107] Elsewhere in the state, areas have been designated as irrigation non-expansion areas.[108] In these areas, groundwater use is not as heavily regulated as in the AMAs, but new irrigated acreage cannot be developed.[109] Within the AMAs, all the types of water rights should be conveyed by deed,[110] and the Notice of Conveyance must be filed with the DWR.[111] The first type of groundwater right is an irrigation grandfathered groundwater right, which allows the right holder to withdraw and use groundwater for irrigation purposes on a specific piece of property.[112] The DWR issues a certificate of irrigation grandfathered groundwater right as evidence of the right. Irrigation rights are appurtenant to the land that was historically irrigated and can be conveyed only with that land.[113] In some circumstances, irrigation rights can be retired and converted into Type I non-irrigation rights (discussed below) or can be extinguished to obtain credits that can be used in proving an assured water supply.[114] Type I non-irrigation grandfathered groundwater rights originate from retired irrigation acreage. [115] The DWR issues a certificate of Type 1 non-irrigation grandfathered groundwater right for a specific amount of water. The right is appurtenant to the historically irrigated acres, but it can only be used for non-irrigation purposes.[116] In limited circumstances, the water withdrawn pursuant to a Type 1 right may be used on land other than the appurtenant acreage.[117] Type 1 rights sometimes can be extinguished to obtain credits that can be used for proving an assured water supply.[118] The use of Type 2 non-irrigation grandfathered groundwater rights is less restricted than other groundwater rights in an AMA. The DWR issues a certificate of Type 2 non-irrigation grandfathered groundwater right for a specific amount of water for non-irrigation purposes. Type 2 rights are freely transferable within the AMA subject only to well spacing requirements. The right can be leased in whole or in part.[119] In some circumstances, Type 2 rights may be extinguished to obtain credits that can be used to prove an assured water supply.[120] Within an AMA, it also may be possible to obtain permits to withdraw and use groundwater for the following purposes:[121] general industrial use, dewatering, mining, poor quality groundwater use, temporary electrical generation or dewatering, drainage, and hydrologic testing. These permits generally are of a short (less than 50 years) duration and are, in most cases, transferable. The final type of groundwater right in an AMA is a withdrawal from an exempt well. An exempt well is a well with a maximum pump capacity of 35 gallons per minute.[122] Exempt wells drilled (or in progress) before April 28, 1983, can be used to divert up to 56 acre feet per year for nonirrigation purposes.[123] Exempt wells drilled after April 28, 1983, can be used to withdraw up to 10 acre feet per year for domestic and stock watering purposes.[124]

14 B. California Issues associated with water right ownership and title examination go hand-in-hand with those discussed in identifying the water rights (see section III, supra). The very act of identifying a right may address all or most questions of title examination and ownership, such as when a title opinion is performed to determine the existence of a riparian right. This work is painstakingly detailed and full of traps for the untrained and should only be attempted by a competent water counsel with the help of an experienced title investigator. Where water has been appropriated for use upon certain land which cannot be used advantageously without it, the water right is an adjunct to the land and passes in a conveyance of the land as appurtenant thereto, unless otherwise provided.[125] Of course, the appropriative right may be sold as real property, separate from the underlying land, subject to the statute of frauds.[126] But even after such a sale, the normal restrictions on change of place of use and purpose of use would still apply. (See section VII, infra). In terms of title insurance, while California title insurers will insure easements relating to the conveyance of water across property (for example, providing insurance that the dominant tenement does hold the right to convey water through a pipe or ditch across the property of the subservient tenement), title insurance for the underlying water right itself is rare if not non-existent. C. Colorado In Colorado most water rights are evidenced by judicial decrees of the Water Courts (one of seven district courts throughout the state whose primary docket is water related matters), rather than by administrative permits.[127] The State Engineer maintains a tabulation of such water in a computerized data base.[128] Groundwater rights both within and outside of designated groundwater districts are normally evidenced by well permits issue by the State Engineer, copies of which are available from his office and searchable in a computerized data base.[129] Title insurance cannot be obtained in Colorado on water rights. Water rights are normally transferred by deeds recorded in the local real property records.[130] Water rights represented by stock in mutual ditch and reservoir companies are normally evidenced by share certificates issued by such ditch companies, in which case the company s stock transfer records must be examined and any bylaw restrictions observed. Some water rights are evidenced by allocation contracts with water conservancy districts, which may or may not be recorded, which case the district s records must be examined. For valuable water rights, it is common to conduct a stand-up title examination in the real property records of the county in which the water right was historically used. This consists of a manual search of the grantor/grantee records to develop a chain of title from the person to whom the water right was initially decreed, to the present owner. For water rights decreed in the 1800 s which in Colorado is the norm for water rights of any decent seniority it is common for the title search to be limited to 20 or 30 years back from the current apparent owner to avoid the considerable cost of developing a complete chain of title. Unfortunately, such title searches are often not conclusive because Colorado courts have held that water rights can be conveyed under such vague terms as all water rights appurtenant to the property or even a general appurtenance clause. Whether specific water rights are conveyed by such general language is dependent on the intent of the parties based on all the facts and circumstances surrounding the transaction.[131] Thus, where one or more instruments in the apparent chain of title do not specifically describe the water rights in question, but do contain such