Water is becoming an ever more important commodity, especially in the Western United States. In this episode, we dive in to the world of water rights (sorry, I couldn’t resist ;). From the different systems that govern water rights across the country, to whether or not they can be bought or sold, to the similarities and differences between water rights and mineral rights, we cover what you need to know.
As water law is complex and always changing, we are sharing this information for informational purposes only and you should consult with an attorney experienced in water law should you need help.
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What Are Water Rights?
Water rights in terms of water law refer to the right of a user to use water from a given source, like a river, stream, lake, groundwater, or surface water.
Do water rights only come into play where water is relatively scarce like the western US or does it apply to where water is plentiful too?
Water rights can apply to areas where water is plentiful but in those cases you usually don’t hear much about it because the right to use water is not usually challenged and often the water rights are concurrent with the ownership of the land upon which the water flows. In the areas where water is more plentiful, often what are called riparian principles apply. Riparian refers to things that exist alongside a river or stream. Where riparian legal principles exist, you may have the right to remove water for reasonable use from the stream or river. Some examples of reasonable use may include watering livestock, water for drinking, watering a garden, and may also include artificial uses like using water to irrigate crops or water for industrial uses. Check the laws in your state and consult an attorney if you have questions.
In the Western half of the US where it is more arid and where irrigation is more prevalent, it is a different story. In that case, the use of water is governed by what is called the “Prior Appropriation System”. This system spells out who can use the water, the types of uses that are allowed, and when they can use the water. A Common saying for this system is “first in time, first in right”. In other words, water rights are on a first come first serve basis. So if you can imagine the first person to appropriate the water and start using it, to water crops, for example, has the first right to use that water within that particular watershed. A court decree may be obtained that confirms their priority status and they become what is called a “senior water rights holder”, and their water right must be satisfied before any other water rights come into play.
In Western states like Colorado, there is a division of water resources and district courts called “water courts” what only hear matters related to water.
Can Water Rights be Bought and Sold?
The short answer is yes. Water rights are conveyed as real property interests using the same formalities as real estate, with certain exceptions. Transfers are done typically with a deed, which is recorded in the clerk and recorder’s office, just as with deeds for land or for mineral rights. Conveyance of a groundwater right may require that a “Change of Ownership” form for the well permit be submitted to the State Engineer’s Office.
How to Figure Out What Water Rights Come With Your Land?
In most states, there isn’t an ownership registry for water rights and the Office of the State Engineer does maintain ownership records. If you are wondering what water rights go with your land, you have to perform a title search of the records for your county. If you are in the process of purchasing land with a well or surface water right, the water right must be clearly identified so that both seller and buyer can agree on what rights are to be conveyed in the transaction. Like with mineral rights, a prospective buyer should obtain as much information as possible about the water right to ensure that the seller actually has title to the water right that they purport to own. Unfortunately, the most recent recorded instruments don’t always reveal the full chain of title or conditions of use. Research into the records of the State Engineer’s Office and Water Court is often required. A skilled water law attorney may be required to locate the necessary documents or and to issue an opinion regarding chain of title and use restrictions for a water right.
Are Water Rights Usually Included With Land?
For example, if I buy a farm, are the water rights usually included in these types of transactions?
It depends, like we mentioned, you have to do your due diligence and understand if the previous owner has title to the water rights and again, it may depend on where the property is located. It is a good idea to hire an attorney to help locate and review the title to the property to ensure that you understand what you are getting.
Am I Always Entitled to Use the Water that Runs Through My Property?
You may think that you have the right to use the water that runs through your property but that may not necessarily be the case. In some cases, the non-use of a water right for a period of time as determined by state law, may result in the water right considered abandoned. There may be necessary steps you need to take, e.g. if you have a conditional water right, in order for the water right to not be declared abandoned. In Colorado for example, Every ten years, the Division Engineer prepares an abandonment list which contains water rights that are believed to be either completely or partially abandoned.
What are the Different Types of Priority Around Water Rights? How is Priority Established With Water Rights?
The first person who puts the water to beneficial use has the first right to use the water. That said, many local governments often have the most senior water rights. Those who have a lower priority over the use of water are called junior water rights holders. This priority system affects who has the right to use the water. In years where there is a water shortage like a drought, there may not be enough water to satisfy the junior water rights holder’s needs after the senior water rights holder takes their share.
The other interesting thing about water rights in states with a prior appropriation system, is you don’t have to own the land adjacent to the body of water to own the water rights to that land. So, this is where it can get really complicated. This is similar to mineral rights in that mineral rights can get severed from the surface rights and while you may own the surface land, you might not own the mineral rights and vice versa.
That said, if you own a tract of land and want to drill a well, there are still steps you have to follow but generally speaking most states follow what is called the “reasonable use doctrine” which says that you are entitled to use the use of the groundwater below your property as long as that use does not unreasonably interfere with neighboring property owners or other water right owners.
Can water rights be considered abandoned if they are not used?
In states that follow riparian rights, landowners don’t usually have to use the water to keep their right. This is because the right is attached to the riparian land. That said, some states may have a system for allocating water use to help them plan for the future. Again, check with your state law and contact a water attorney for assistance.
In states that follow the “prior appropriation doctrine”, the water right holder must “continually use” the water, otherwise it may be deemed to have been abandoned. This is similar to the dormant mineral statute that applies to minerals in some states.
In Colorado, a water right may be terminated in whole or in part as a result of the failure of the owner to put the water right to beneficial use when the water was available for a period of ten or more years. As a result, every 10 years, the division engineer is required to present to the water court a list of water rights that they have found to be abandoned. The burden is then on the owner of the water right to prove that they did not intend to abandon the water right. The process and timeline for the abandonment of water rights are governed by state law. Here’s the link to the abandonment timeline and statutes for Colorado.
Water Rights vs. Mineral Rights – Similarities and Differences
Since this show is about mineral rights so we’d like to compare them to water rights.
To review what we covered so far, if you are in a state where the prior appropriation doctrine is followed, the owner of the water right can be anyone. This is very similar to severed mineral rights where anyone can own the minerals below a given tract of land even if they don’t own the surface rights.
In states that follow the riparian doctrine, the owner of the land adjacent to the watercourse also owns the water rights associated with that land. This is similar to fee simple ownership of a tract of land where the surface owner also owns the mineral rights below that land.
So, if water rights can be bought and sold, if you own water rights can you lease them to someone to use?
The answer to this question may depend on the state, but many states (especially those that follow the prior appropriation doctrine) allow the water rights to be severed from the land and leased to another party for a beneficial use. The sale or lease may require approval by the state water agency to ensure that the right steps are followed and to ensure that the new proposed use does not adversely affect other water rights holders.
Are Something that Oil & Gas Operators Have to Deal with?
Generally speaking, the answer is yes. Water is very important for the drilling and completion of new wells, especially in unconventional oil & gas plays. Operators may look to buy water rights to be able to access it directly if it is cost effective to do so.
How do I know what my water right might be worth?
Like any property transaction, the compensation associated with the sale or lease of water rights is up to the affected parties. Like with mineral rights and probably more so in this case, the market for water rights is opaque and there isn’t a Zillow for water rights to say, this senior water right on this waterway is worth X dollars per acre-foot.
That said, there are firms out there that provide valuation services for water rights. Like I tell all mineral and royalty owners, you should get an appraisal of your property if you are thinking about buying or selling mineral rights and the same advice would apply to water rights owners. An expert in this area can help you understand the likely fair market value and marketability of your water rights and may also be able to help you find a buyer or lessee.
If you are interested in selling or leasing your water rights, there may be brokers who work in your state who can help market your rights for sale or lease. Check with your state laws and your water attorney as they can also help ensure that the necessary steps are followed when transferring the rights.
Interesting Developments in Water
In 2020, the water futures began trading for the first time. The water futures are limited to CAlifornia and allow farmers and municipalities to bet on future water availability in California. These water contracts are the first of their kind in the US. The futures are tied to the Nasdaq Veles California Water Index which has been around for two years and is a measure of the average price of water.
So if you are a farmer and you want to lock in water at current prices because you think there will be a drought next year, you could buy a futures contract for that time period and in theory if the price of water goes up so will the value of your contract. Assuming you could sell that contract and pocket the difference, it would help offset the increased cost of water in the future. Of course, if the cost of water goes down then your effective cost is still what you paid for the contract which might be higher than what you could buy water on the spot market for.
The difference between the futures contract for water and other commodities like crude oil or soybeans is that they are financially settled as opposed to requiring the physical delivery of water. Each contract represents 10 acre-feet of water which is equal to around 3.26 million gallons.
Resources Mentioned in This Episode:
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