March 2-March 15, 2016 —
COLORADO REAL ESTATE JOURNAL
— Page 25
Law & Accounting
T
his is the sixth in a series
of a dozen or so articles
that come from some
years of experience using the Col-
orado Real Estate Commission-
approved contracts for purchase
and sale of real estate for commer-
cial real estate transactions. Previ-
ous articles addressed the buyer,
the seller, the seller’s name, the
property and water rights. This
article continues the discussion of
water rights with a focus on the
documents required to convey
water rights from the seller to the
buyer.
Trap:
One of a number of short-
coming in the water provisions of
the contract is the failure to contain a
complete description of the documents
required in order to convey the water
supply and water rights included in
the sale.
Consider supplementing
the contract to add what types of
documents the seller needs to sign
in order to convey the water sup-
ply and water rights included in
the sale to the buyer.
As to “legally described water
rights” (which are typically under-
stoodto includeanydecreedwater
rights), the contract calls for a deed
and contains a blank to allow the
parties to specify the type of deed
–whichwould be a quitclaim, bar-
gain and sale, special warranty or
general warranty deed, depend-
ing on the what title warranties,
if any, the seller is willing to give.
As to the conveyance of rights
to use water from wells, §2.7.3 of
the contract explains at length the
change in ownership form that
needs to be filed with the Colo-
rado Division of Water Resources.
Section 2.7.6 provides for convey-
ance of the rights to use water
from the well by the “applicable
legal instrument.” The customary
practice is to convey a right to use
water from a well with a deed in
one of the four customary forms.
But to the extent that a well is
permitted for a specific use by
the DWR, the well permit should
also be assigned by the seller to
the buyer.
Several subsections of §2 of the
contract call for water rights to
be conveyed to the buyer by the
“applicable legal instrument,” but
do not specify what that might
be.
Trap:
By leaving uncertain what
instruments are required to convey
the water rights included in the sale to
the buyer, the contract invites disputes
and may lead to an unwanted termi-
nation of the contract.
As to the
conveyance of
“rights related
to water” not
o t h e r w i s e
described in
§2.7,
§2.7.6
also provides
for their con-
veyance by
the
“appli-
cable
legal
instrument,”
without speci-
fying the type
of instrument. Kent Jay Levine,
chair of the Colorado Real Estate
Commission Forms Committee,
in his useful Levine’s Bible for
2016 Colorado Real Estate Trans-
actions, published by Bradford
Publishing Co., indicates the type
of rights that may be included in
§2.7.2. These would include rights
needed to use the water rights
themselves, such as “infrastruc-
ture, easements, ditch rights, etc.”
Section 2.7.2 can also be used to
describe things like “Colorado-Big
Thompson contracts, water leases,
water service agreements, etc.”
The “applicable legal instrument”
depends on what is described in
§2.7.6, and could include a bill of
sale, a transfer of a stock certificate,
or a water contract assignment
or a particular transfer document
requiredby the grantor of the right
to water.
As to water stock certificates
to be described in §2.7.3, §2.7.6
again merely provides for their
conveyance by the “applicable
legal instrument.” Customary
practice would require the seller
to deliver to the buyer a deed,
and most important, the original
stock certificate(s), which must be
properly endorsed. Often a stock
assignment is provided in place of
endorsing the original stock certifi-
cate. If an original stock certificate
has been lost, the seller should be
required to comply with C.R.S.
§7-42-113 through 117. In any case,
the buyer should confirmwith the
ditch or reservoir company what
that company requires in order to
issue a newcertificate to the buyer.
The contract should require the
seller to deliver those items to the
buyer at closing.
As to “other rights relating to
water,” the contract also provides
for conveyance by the “applica-
ble legal instrument.” What the
contract needs is a more precise
requirement that assures the seller
will provide what the buyer needs
to fully acquire the water right,
any rights to water, and those
rights associated with the use of
the water.
Tip:
Any water right,
since it is an interest in real property,
should be conveyed to the buyer, at a
minimum, by a deed.
The contract no longer addresses
water taps (except inadvertently in
the caption to §2.7). For developed
real property generally nothing is
required to convey a water tap
other than to change the name on
the account with the municipality
or special district that provides the
water service. For undeveloped
real property, the buyer needs to
investigate the right to the taps,
their probable cost, the regulations
that pertain to use of water from
the system, and the proper means
to convey them. The buyer may
need a deed, a bill of sale, and
sometimes specific assignment
documents, notices and approv-
als in order to satisfy the issuer of
the taps.
Trap:
If the contract leaves open
what water rights are included in the
sale of the property, or how they are
to be conveyed, both the seller and the
buyer are given the opportunity to get
out of the contract if they want.
I once
had a client who sought to buy
property with significant water
rights lose the deal because the
seller got a better offer and, to get
out of the contract, limited what
water rights the seller was willing
to convey. The seller also limited
the conveyance documents it was
willing to sign. With that “poi-
son pill,” the seller thwarted the
buyer’s purchase of the property.
The only recourse for the buyer
was to sue for breach of the cove-
nant of good faith and fair dealing,
which is not an easy or inexpen-
sive undertaking.
CRS §38-35.7-104 requires the
seller to give a potable water dis-
closure to the buyer on a formpre-
scribedbytheColoradoRealEstate
Commission, but this requirement
is for residential transactions only.
It is important that a legally and
physically adequate domestic
water supply is confirmed for
any property during the inspec-
tion process. Often water quality
issues in rural properties can be
addressed at the location of use;
however, it is important to test the
quality at the source of the water
to fully understand any concerns
that need to be addressed.
s
Beat U. Steiner
Partner, Holland &
Hart LLP, Boulder
