Water rights can make, or break, an agricultural real estate transaction. Irrigation rights alone were appraised at over $24 million in a deal this article’s author helped to close. Even in transactions in which the water rights are not separately valued, water availability can dictate the land’s worth. Without secure water rights, land that requires irrigation may become nearly worthless.
Anyone dealing in agricultural real estate needs to understand and account for the status of water rights in their transaction. Below are best practices on what to do with water rights in an agricultural transaction.
‘Paper’ water rights
To begin, determine how water rights are administered locally. A “paper” water right states who has the legal right to use water, in what matter and when. State laws govern most water rights, and those laws principally consist of two schemes.
First is the riparian doctrine. It confers water rights based on land ownership adjacent to a watercourse. The absolute dominion, reasonable use and correlative rights rules are groundwater offshoots of the riparian doctrine.
Second is prior appropriation. An appropriator has a right from the moment they intended to apply water to a beneficial use, diverted the water from its natural course and applied the water to a beneficial use.
Complicating this picture, these schemes stem from a combination of common-law and statutory authorities. Some states also use different regimes to regulate surface water and groundwater. Most states and even some local regulators have added a further permitting scheme overlay.
The manner of due diligence will depend on the local legal source of water rights. Request copies of any permits, licenses or other paper water rights, and evaluate how much water they allow and whether they are tied to specific parcels or times of irrigation.
‘Wet’ water rights
While a paper water rights review is essential, it alone is insufficient. Due diligence turns next to the difficult task of analyzing the “wet” water itself. At issue is whether the paper right confers as much actual water as it says, or at least enough to make the transaction economical.
The first potential risk is internal: Has the seller perfected and maintained their right? In a riparian jurisdiction, ensure the land abuts the watercourse and the seller currently holds or the buyer is eligible for any necessary permits. In a prior appropriation jurisdiction, verify when the appropriator first made the beneficial use and if they have continued to do so in an adequate amount. Consult surveys, public records and any historical data; analyze public records showing crop productivity; and request pumping data and other water-use records from the seller.
External factors can also threaten “wet” water rights. Is a moratorium in place? Or, even without a declared moratorium, will competing rightsholders make the contemplated irrigation impractical? A riparian jurisdiction, in times of shortage, typically allocates a limited water body either in proportion to ownership of adjacent or overlying land or according to a reasonableness analysis. Reasonableness, in some jurisdictions, incorporates a preference for domestic and municipal uses over irrigation. During times of shortage, an appropriative jurisdiction, by contrast, will permit senior appropriators to issue calls forcing junior appropriators to stop pumping.
A wet water rights review cannot rest on public records alone. Some jurisdictions gather and publish data about a water source’s use and availability. That is a good place to start. Buyers should also consult climatic and water-use data.
Conveyance instruments
The final step, after due diligence, is conveyance. Each jurisdiction has a different procedure for transferring water rights. Some riparian states imply a water conveyance any time the attendant land transfers title. Others require the deed to separately identify any riparian rights it intends to convey.
Prior appropriation jurisdictions typically permit water rights to be conveyed separately from land. That said, statutes may limit this, for instance by prohibiting severing the water rights from land to which the water was originally applied or protecting the interests of third parties. In states with a permitting overlay, the buyer and seller may need to notify regulators or even apply for permission to complete the transfer.
Anyone dealing in agricultural real estate thus should take care to evaluate the paper and wet water rights at issue and follow local rules to effectively convey those rights. This article provides only a general overview of that process and is not a substitute for state-specific, and in some cases federal, analysis of water rights. Always involve experienced local counsel.
