Water Rights in Real Estate Contracts: What You Need to Know

The standard Colorado Real Estate Commission form “Contract to Buy and Sell Real Estate” covers water rights under Paragraph 2.7 (“Water Rights, Well Rights, Water and Sewer Taps”).  It’s important for real estate attorneys and brokers to understand what these provisions mean, and when the advice of a water attorney could be helpful (and maybe even save some time and money).

A water right is a conveyance in real property, generally conveyed in the same manner (see CRS 38-30-102). However, water rights records in my experience are notoriously unreliable.  Title insurance companies DO NOT INSURE water rights, so the conveyancing documents are up to the seller or their attorney, and are often not specific.  Sometimes they aren’t recorded at all, and often they contain vague language such as “any and all water rights.” It can be difficult to know what you are getting based on the language in a real estate contract or even the seller’s deed.

So what do attorneys and brokers need to be aware of in a typical real estate transaction?  Let’s start with Paragraph 2.7.1, “Deeded Water Rights.”  I advise broker clients to call me if they see deeded water rights, especially ditch company rights (all of the following information/recommendations regarding Paragraph 2.7.1 are equally applicable to paragraph 2.7.4, “Water Stock Certificates”).  For deeded water rights you want to verify title in the seller with the ditch company’s records (or records of the managing entity – irrigation district, water company, etc.) and the county clerk and recorder’s records.  Remember, ditch stock conveyances do not have to be recorded, and because they aren’t insured, they will not be included in your title commitment – nor will they be insured by your title policy!  I have had remorseful buyers and even agents tell me, “but this water issue didn’t show up in the title commitment!  How could we have known!” and the answer is, you should have performed your own due diligence or hired an attorney to do it for you.  Always independently verify title to deeded water rights and investigate any decrees associated with the rights.  You’ll also want to review the bylaws/rules/regulations of any ditch company or special district that may have administrative authority over the rights, and make sure any requirements of those entities are met during the conveyancing process. 

An attorney specializing in water rights can be helpful in this situation because they have experience doing this work (and should be efficient), and also are familiar with specialized case law on title standards for water rights.  What does it mean if a deed is silent as to the water, or if a historically irrigated parcel is split and the water rights are only deeded with one parcel?   How do you find a water court decree or a well permit?  What does it mean if the buyer’s deed simply says “any and all water rights?”  These are issues a water attorney deals with regularly and can help you resolve quickly.  Any conveyancing of deeded rights will need to be very specific as to what rights are being conveyed or retained, and a water attorney or knowledgeable real estate attorney can help you ensure your investment is protected and there is no question as to which rights, if any, were conveyed with the property sale.  For sellers, having a professional review and provide an opinion regarding your ownership and allowable usage of the water rights on your property can make your property much more attractive and valuable to buyers, as well.

Other rights relating to water under paragraph 2.7.2 can be augmentation plans (a type of plan required in some circumstances by the state Division of Water Resources to protect other water owners from injury that could be caused by your water use), carriage or transfer agreements, well sharing agreements, or any other agreements affecting the use of water on the property being purchased/sold.  With augmentation plans, it is important to investigate whether they are in compliance with their water court decree, especially if the plan is operated by a homeowner’s association or other volunteer organization.  I have run across augmentation plans for residential supply based on 10-20 year leases of water that is no longer available, and plans for which the state’s required accounting procedures have not been followed for years.  The state technically can shut down water supplies dependent on an improperly operating (or non-operative!) augmentation plan, so it’s important to know before purchasing a property if its residential supply is subject to an augmentation plan and if so, whether the plan is being properly administered. 

Carriage agreements can be especially important when purchasing property with irrigation rights – it’s not uncommon for ditches in the same vicinity to share capacity with one another, or for water rights in ditches that have fallen into disrepair to be transferred to another nearby ditch, or for larger water management organizations to share infrastructure with one another.  Depending on your plans for the water rights, it’s important to know how they are actually transported and delivered – and if there are ever situations in which they cannot be delivered to your location.  A key point about use agreements such as augmentation plans and carriage agreements is to make sure they can be assigned to the buyer, and further make sure the conveyancing language in the deeds is specific enough so as to leave no question regarding the buyer’s ability to rely on the subject agreements or restrictions.  I recommend consulting with legal counsel ensure any water use agreements are assignable, and also to ensure that the existing parties to the agreements are currently in compliance from a legal standpoint.

Paragraph 2.7.3 pertains to purchases of property on which a well is located.  If you see a well permit number listed here, there are a few things you can do to help your buyer ensure they are buying a usable, valid water source.  Key points to remember before even submitting your buyer’s offer – wells are not cheap to replace/repair, so I recommend getting a well drilling company to inspect the well, including the pump, as part of your due diligence.  To that end, I always include language in the purchase contract asking seller to allow such inspection, including potential scoping or removal of the well casing, pump mechanisms, etc. to verify the well is in working order and will need not major repair or replacement in the near future.  Always review the well permit information on the Division of Water Resources website.  You can pull the complete original well permit file to review, and this will tell you when the well was drilled and any conditions on use.  When reviewing a well permit file, you want to make sure you note the date the well permit was issued, the expiration date, and the conditions of approval.  Are the permitted uses enough for your buyer’s needs?  Be especially cautious with a purchase of property historically used for agricultural purposes – a 50 gpm well might seem like more than enough water for your dream home and swimming pool at first glance, but if the well is only permitted for feedlot use, your buyer might be left high and dry after the deal closes!  You want to also make sure there are no procedural errors in the file – was the well completed during the permitted period?  Did the well driller file a completion report, and did the owner at the time file a statement of beneficial use within the required time frame?  If the seller is not the same party that drilled the well, was the well properly transferred into the current seller’s name with the state?  If the well was completed and operational, was the proper paperwork filed with the state to register it as an active, functioning well?  If the well was not completed or was completed and is no longer operating, was the proper paperwork filed to abandon the well or replace it with a new one?  Most well permit defects are relatively easy to fix, but it’s better to know what might need to be addressed before your due diligence deadlines have passed, so the seller can correct if possible. 

Your well permit file should also tell you if there are any decrees for the wells.  If there is a decree, you want to make sure the location, pumping rate, total annual appropriation, owner, and allowed uses match the permit and also fit your water needs.  Again, if you are planning on building a tree farm but the well is permitted for household use only, you may need to budget for a new well permit and well.  Discrepancies between the decree and the well permit file are not necessarily a deal breaker, but it’s better to talk with an attorney about any discrepancies you find BEFORE your due diligence deadlines have passed.  As far as conveying well permits, specificity is still key – you want to reference the well permit number, the decree number (if any) and you want to make sure you have a bill of sale for any personal property associated with the well (pumps, well house, sprinklers) and documents relating to any easements that might exist for use of or access to the well by any third parties.  For sellers, having an attorney review your well permit file information and put all of the documents into a nice little package with an explanatory letter can make potential buyers feel more confident in their purchase, as well.

Hiring a water attorney to review your transaction documents does not have to break the bank!  For a typical real estate transaction involving a well, I’ve personally been able to give buyers in some instances a basic rundown on the permitted uses, whether the allowable pumping is enough to meet their needs, and whether the permit or decree raises any red flags for me in 1-2 hours.  Of course any such review is entirely dependent on the individual circumstances.  But I’ve seen too many buyers unhappy after closing with the water rights they got vs. the rights they thought they were getting, to not recommend consultation with an attorney any time you see water rights in a contract, and to remind buyers that the small investment in an attorney on the front end may save them substantially more money in obtaining an alternative water supply down the road.

Happy house/water hunting!

Kara N. Godbehere is of counsel with Dietze and Davis, P.C., where her practice focuses primarily on water rights litigation and assisting brokers/buyers/sellers with the purchase and sale of water and real estate.