February 17-March 1, 2016 —
COLORADO REAL ESTATE JOURNAL
— Page 29
Law & Accounting
T
his is the fifth in a series
of articles that come from
some years of experience
using the Colorado Real Estate
Commission-approved Contracts
for Purchase and Sale of Real
Estate. Thisis the first of two articles
about water rights.
The contract addresses the
water supplies associated with the
property in the section on prop-
erty. Water rights are not, however,
included in the contract’s defini-
tion of “property.” Water supplies
may include water rights, which
are rights to use water that have
beendecreedby thewater court for
a specific beneficial use, ina specific
amount, under a determined pri-
ority. Under Colorado law, water
rights are considered real property
and should be conveyed as such.
(SeeC.R.S. §3830102.)Water rights
in Colorado are, however, separate
and distinct property rights from
land and live in their own legal
world. Hence, Colorado has water
courts, water judges, water engi-
neers and a lot of water lawyers.
In Colorado, water rights are
generally administered by the Col-
orado Division of Water Resources
according to a priority system. In
most locations, onemust have legal
authorization prior to diverting,
storing or pumping any amount
of surface water or groundwater
for any purpose. The legal autho-
rization can come in many forms,
including: 1) taps or extra-territorial
service agreements from munici-
palities, special districts or other
central water systems (e.g., home-
owners’ associations); 2) shares in
mutual ditch or reservoir compa-
nies that entitle the owner to deliv-
ery and use of a pro rata share of
thewater rightsheldby the compa-
ny; 3) various types of well permits
issued by DWR to authorize the
use of groundwater; and 4) vari-
ous types of water court decrees
that serve to confirm water rights
priorities.
Common types of well permits
include: 1) exempt well permits
that generally serve to authorize
small-capacity residential or com-
mercialuseofgroundwaterexempt
from the priority system; 2) nonex-
empt well permits that authorize
amounts and types of groundwa-
ter use from tributary aquifers pur-
suant to the priority system; and 3)
“nontributary” well permits that
authorize amounts and types of
use of groundwater from certain
designated groundwater basins
(e.g., the Denver Basin) that are
administered separate from the
priority sys-
tem.
Water
court decrees
can include
approvals of
surface, stor-
age andunder-
ground water
rights, as well
as plans for
augmentation
or exchange
that can facili-
tate
out-of-
priority water
use during times of shortage.
Tip:
Unless the property’s water supplywill
come from a tap, consider getting pro-
fessional advice from a water lawyer or
other water rights professional.
Tip:
The contract should specify the
water supply and thewater rights asso-
ciatedwith the property that are includ-
ed in the saleusing the same description
that is contained in the vesting deed (or
other instrument of conveyance) for
the water supply.
The water rights
may have been conveyed in the
vesting deed for the property, but
often they are not, in part because
water rights are more commonly
conveyed without warranties by
quit claim or bargain and sale
deed, whereas land is conveyed
by general or special warranty
deed. And some interests in water
rights might not be conveyed by a
deed at all, as discussed below. The
important thing for purposes of the
contract is to identify the convey-
ance document, and include the
original descriptions of the water
rights and well permits, if known,
together with a statement that any
other water rights historically asso-
ciated with or utilized upon the
property also are included. If all of
those water rights are not included
in the sale, add a reservation of the
water rights that the seller does not
intend to include. Then, during the
inspection and title reviewperiods,
the buyer should develop a com-
plete understanding of what water
rights or other rights towater are to
be conveyed to it and include accu-
rate descriptions in the deed, and
any other necessary conveyance
instruments at closing.
Trap:
Although water rights may be
an appurtenance to the land, if a deed
merely recites “all appurtenant water
rights,” it may not covey all the water
rights owned by the seller.
Whether
or not that language conveys a
particular water right depends on
the intent of the parties. See Arnett
v. Linhart, 40 P. 355 (Colo. 1895).
Tip:
Include a complete description
of the water rights that are included
in the sale, and any water rights that
are being reserved by the seller, in the
contract and the deed and in any other
necessary conveyance instruments at
closing.
Tip:
Part of the review of title to the
property by a buyer should include
title research into the water rights
being conveyed and their ownership.
There is no central registry for the
ownership of water rights. Water
courts do not determine title to
or ownership of water rights. Title
insurance companies do not insure
title to water rights, and they pro-
vide little assistance in this task as
water rights are expressly excepted
from the title insurance policy for
the property. Title research is best
accomplished by an experienced
water lawyer. Though few lawyers
will issue title opinions for land,
water lawyers do issue title opin-
ions for water rights.
Trap:
The contract does not contain
a specific procedure to address title to
water rights.
Because water rights
are not included in the definitions
of the “property,” they are not part
of the title review procedure in §
8 and they would be only inci-
dentally covered in the Inspection
provided for in §10.§8.3, which
suggests that title to water should
be addressed as an Off-Record
Matter. §8.7 advises that “water
on or under the property” might
“affect the title, ownership and use
of the property.
Tip:
When the pur-
chase includes significant water rights,
supplement the contract so the buyer
has the right to do proper due diligence
about the water supply, including as
to title, quantity and quality, and to
raise issues with the seller in the same
way as the buyer can with respect to
the property.
Tip:
Consider adding a provision to
§10.6.1 (Due Diligence Documents)
that the seller provide relevant informa-
tion regarding water and water rights.
Useful information would include
all documents related the water
rights and rights to use water on
the property, including water court
decrees and other filings from the
water court proceedings, maps,
permits, copies of any water share
certificates together with mutual
ditch or reservoir company articles
and bylaws, any contractual rights
to use water, irrigation or other
historical use affidavits or records
from the seller, diversion records,
well pump test reports and water
quality test results.
In the next article in this series,
we will address the conveyance
of water rights by the buyer to the
seller.
s
Beat U. Steiner
Partner, Holland &
Hart LLP, Boulder
370 17th Street, Suite 480
o 80202
303.825.080
James L. Kurtz-Phelan - Real Estate Practice Chair
Real
Estate
Attorneys
with
Rea l
Experience
