The need for a title investigation of water rights usually comes up when one of our clients is buying water rights along with land or when we represent a developer or a municipality that needs to acquire a water supply. Sometimes our client already owns the water but needs to change the uses for the water or the point of diversion. Since title to water rights is an element to be proved in a change of use case, we need to investigate our client’s water rights to show ownership of water.
There are different ways we can investigate title to water rights depending on the specific situation. The investigation and the title opinion in any given case will be creatively tailored to meet the needs of the client. It will give the greatest degree of protection at the lowest cost possible.
In order to investigate title, it is important to consider how water rights are transferred: In Colorado, most water rights are transferred in the same manner and with the same formalities as other types of real property. See C.R.S. §38-30-102; Navaho Development Co., Inc. v. Sanderson, 655 P. 2d 1374 (Colo. 1982.) Some exceptions are mutual ditch company shares and interests in water conservancy districts. It is important to remember that water can be transferred separately from the land on which it was historically used.
Title insurance is generally not available for water rights and water rights are almost always excluded from coverage under title policies. Even in those rare instances where title insurance is available, the standard exceptions are often so broad as to render the coverage almost meaningless. Coverage exclusions often include abandonment of the water right; terms and conditions in the decree; adverse claims; lack of access to the diversion point; future administrative action by the State Engineer/Division of Water Resources; local, state or federal laws and the effects of the insured not having legal title to the historical place of use. Accordingly it is extremely important to have an attorney independently review title to water rights.
Investigation of Water Title.
In most cases, the purpose of a title investigation is to determine the status of the seller’s title to water rights. The goal is to determine that the seller is able to convey marketable title, free from liens and encumbrances. The Colorado Supreme Court has adopted the definition of “marketable title” set forth in Thompson on Real Property. The cases generally say that marketable title is title which is free from defects which appear of record and will be generally passed and accepted in the community where the real property is located. Federal Farm Mortgage Co. v. Schmidt, 109 Colo. 467, 469, 126 P.2d 1036, 1037 (1942).
a. General issues associated with water rights title.
The nature of water rights complicates the investigation of title to water rights as compared with other types of real property. Water rights are often not described at all or are described in an ambiguous manner in deeds transferring title. In most deeds there is a boiler plate provision that transfers “appurtenances” to the property. The water rights may or may not be transferred as an appurtenance.
There are many Colorado cases dealing with the issue of whether water rights are transferred in a deed that is silent as to water rights. The main case is Kinoshita v. North Denver Bank, 508 P. 2d 1264 (Colo. 1973), where the court held that if the deed is silent as to water rights, the focus of the inquiry is on the intent of the grantor. A later case suggested that the focus is on the intent of both parties to the transfer. See e.g. Bayou Land Company v. Talley, 924 P. 2d 136 (Colo. 1996). Under those circumstances, it is necessary to review evidence outside the record of what the parties intended.
b. Title Issues Associated with Specific Types of Water Rights.
1. Private Ditches. These are water rights that were created by the construction of ditches across the appropriator’s land and/or adjacent land.
Ditches that are not operated by ditch companies present some unique challenges. A common issue with private ditch water rights is that the description of the water rights is incomplete or incorrect in the transfer documents. Or the appropriation date or some other feature of the water right may be listed incorrectly. The existence of multiple interests in a private ditch may also present complications. As with all ditches, there may be problems with ditch easements which are usually prescriptive.
2. Mutual ditch and reservoir companies. These are nonprofit corporations organized by Colorado statute for the delivery of water to shareholders on a pro rata basis. Interests in mutual ditch company shares are transferred by assignment of the share certificates from the seller. There may also be a deed transferring the shares. Title is recorded in the books of the mutual ditch company and there company board must approve the transfer. It is important to review the county clerk and recorder’s records to determine if there are any liens or encumbrances shown of record. It is extremely important to review the ditch company bylaws and rules and regulations to see if there are restrictions on transfers or if the current shareholders have a right of first refusal.
3. Carrier ditch companies – are for profit ditch companies that are organized pursuant to statute to deliver water to consumers pursuant to contract. The contract rights are normally transferred by deed. Transfers must be approved by the company’s board of directors and the ditch company usually charges a transfer fee. Delivery rates are set by the County Commissioners.
4. Water conservancy districts. These districts were created by the federal 1937 Water Conservancy Act to develop water projects in Colorado. For example, the Northern Colorado Water Conservancy District approves allotment contracts for the Colorado Big Thompson Project (C-BT units) and for the Windy Gap Project. A title investigation will involve a review of the transfer rules for the district involved. Transfers are made pursuant to applications submitted to the district which must be approved by the district at its meeting. Sometimes the interests are transferred by deed also.
5. Reservoirs. Water storage rights are transferred by deed unless the right is represented by shares in a mutual ditch and reservoir company. It is important to remember that the rights to store water may be separate from the ownership of the reservoir itself. Just like for other water rights, reservoir rights can be transferred separately from the land on which the water is used.
6. Ground water. The type of ground water involved determines the rules governing transfers. Groundwater can be tributary or nontributary or “not nontributary” or it may be located in a designated ground water basin. It is necessary to review the well permit, the decree, if any, and make sure there is an easement associated with any wells that may be located on other property.
7. Water right easements. Colorado constitution and statutory provisions guarantee the right to transport a water right across intervening lands. Easements for the carriage or storage of water are usually prescriptive easements. Easements associated with water rights may be transferred separately from the water rights. They may also be abandoned even if the water rights are not abandoned. Water rights easements have been held to be appurtenant to the water right and can be transferred as an appurtenance to the water right even if the deed is silent as to the easement. See e.g. Cleary v. Skiffich, 28 Colo. 362, 65 P.59 (Colo. 1901).
c. Resources. We rely on many resources in our investigation of water rights title, including:
- Basic real estate law, probate law, future interests, real estate “curative statutes” and the Colorado real estate title standards.
- Another important resource is the historic use evaluation. The evaluation is performed by a water engineer who does field work and interviews the users of the water rights to determine where and how the water rights were used historically. The engineer also reviews aerial photos showing irrigation patterns, water diversion records maintained by the state and other documents. The engineer’s site visit helps us determine if there are other water rights associated with the property that we should include in the title investigation or if certain water rights have not been used.
- If we find recorded documents from a court case in the grantor’s chain of title, we examine the actual court files for any rulings that could affect the title to the water rights. We always review the file in quiet title actions, mortgage foreclosures, partition suits and estates of decedents, minors and mental incompetents.
- We also review water court decrees and/or well permits for the water rights since they will define the parameters of the water rights and will identify important features of the rights such as the date of appropriation.
d. The scope of the title investigation
We always weigh the value of the water rights versus cost of the investigation in deciding how extensive the investigation should be.
Other factors that affect the scope of the investigation include: the amount of time allocated in the purchase contract for due diligence, the availability of title records, the complexity of the chain of title, and whether there has been a previous quiet title action affecting the water rights being investigated.
e. Methods of Investigating Title to Water Rights. There are two general approaches in Colorado, the office title exam and the record title exam. Sometimes we use a combination of both if circumstances warrant it.
1. Office Title Exam-- as the name implies, is primarily an office review of chain of title documents or summaries of title documents for the real property associated with the water rights. Sometimes we rely on abstracts for the land on which the water rights were historically used. Abstracts are official documents prepared and certified for accuracy by a title company. They consist of a series of entries summarizing documents in the chain of title which constitute an index and summary of the record title to a particular piece of property from the beginning of the abstract to the last date of certification. But since abstracts often exclude coverage of water rights, it may be necessary to review other documents.
In some cases it makes sense to have a title company provide an ownership and encumbrance list of all recorded documents and Colorado Secretary of State UCC Art. 9 security interests. The title company will usually provide copies of the documents.
The office title investigation method is useful when we are researching liens and encumbrances and not title. It may also be warranted when we are looking at junior rights where the relative value of the water doesn’t justify a more in-depth title exam. Otherwise, we generally recommend a record title examination for clients who are buying water rights.
2. Record Title Examination. This approach involves a complete review of all documents recorded in the clerk and recorder’s office of the county where the real property and the water rights associated with the property are located. Such documents include may include deeds, maps, plats, court orders, liens or any other recorded documents found in the chain of title. The examination of record title will entail a full review of the grantor/grantee index either online if available or by conducting research at the clerk and recorder’s office. Then it is necessary to obtain copies of all documents that potentially transfer or encumber the water rights. This approach generally allows us to determine that there are no deeds transferring the water outside the chain of title for the land.
Water Title Opinion
After we have completed the title investigation, we will draft a legal opinion to the client summarizing our research and making recommendations for further action. The opinion will tell our client whether there are defects in title and make sure the client is fully informed about the state of the title. The opinion will describe with particularity the water rights and associated real property that were investigated and reference the decrees and any well permits. It will define the scope of the title investigation on which the opinion is based, including the dates covered by the investigation and whether the opinion is based upon an office examination of abstracts or other sources or a record examination or a combination. It will identify specific documents we reviewed and where they were obtained. The opinion will identify the name or names of the persons in whom the title stands and the nature of their interest. It will list all liens and encumbrances that affect the water rights. The opinion will include a list of recommendations, if any, for improving the state of the title and a list of any exceptions or disclaimers.
Although interests in water rights are considered to be interests in real property, it is not sufficient to follow the rules for researching real property title. Rather, it is necessary to carefully investigate water rights according to the specific rules for each type of water right. We have seen many instances where a client would have had major problems with their water rights purchase without a title investigation. We strongly recommend that anyone who is purchasing water rights have an attorney investigate title to determine if the seller can transfer marketable title at closing and identify steps to cure any defects in title.