Use of Colorado Water Rights in Secured Transactions
| Publication year | 1989 |
| Pages | 2307 |
1989, December, Pg. 2307. Use of Colorado Water Rights In Secured Transactions
In Colorado, water rights have been characterized as real property and, perhaps most accurately, as "usufructuary rights."(fn1) When conveying water rights, an owner must observe the same formalities as when conveying real estate, except where the water rights are represented by the ownership of stock in a ditch company or other company.(fn2) Because the formalities for the execution of a deed of trust are identical to those for the execution of a deed,(fn3) water rights must be encumbered and conveyed with the same care and formality.
When preparing the documents necessary to evidence a security interest in water rights, counsel initially must determine the category of water rights involved. In view of the host of amendments to the Water Right Determination and Administration Act of 1969(fn4) ("1969 Act") and to the Colorado Ground Water Management Act,(fn5) water rights can no longer be categorized simply as surface or ground water rights. Colorado now recognizes a variety of water rights, including rights to surface water (either for direct flow or storage), underground storage,(fn6) tributary ground water, designated basin alluvial ground water, non-tributary ground water within a designated basin, non-tributary ground water
In a typical surface rights transaction, a farmer might own the right to divert 2.5 cubic feet of water per second out of the Lone Tree Ditch for farm irrigation. To encumber those water rights under a deed of trust involving a sale of the farm, the rights should be described with particularity in that deed of trust. Any failure to describe the water rights adequately could make it difficult to determine the intention of the grantor, which is the controlling factor in the encumbrance of the water right.(fn8)
Before attempting to describe any water rights of interest, counsel should determine whether those rights have been adjudicated. Although water rights may exist without adjudication, the lack of an adjudication will adversely affect their priority and, hence, their usefulness and value.(fn9) Assuming that the water rights of interest have been adjudicated, it is relatively simple to obtain the information from the decree which resulted from the adjudication. This information includes the amount of the appropriation (described as a flow rate or, for storage rights, as a volume), the name of the stream or other source from which the water is diverted, the date and case number of the adjudication, the decreed use and the priority number or appropriation date. This information is generally available at the Colorado State Division of Water Resources, Records Section, located in Denver at 1313 Sherman Street, Room 823.
This decretal information ordinarily should be set forth in the deed of trust as part of the property description, to identify unambiguously the water rights being encumbered. Typically, this information is gathered by a purchaser's attorney, who also investigates whether the water rights had previously been lost through abandonment.(fn10) However, a lender's counsel is well advised not to rely exclusively on purchaser's counsel with regard to water title matters. Instead, lender's counsel should make a separate inquiry, preferably with the aid of an experienced water lawyer.
Although disputes and unintended consequences become more likely when
Although less detailed descriptions will sometimes suffice, the only safe practice---after completion of a water title examination---is to describe in detail the water rights involved.(fn13) A water title examination is imperative before concluding any loan transaction which will include water rights as a significant part of the lender's collateral. A lender's counsel ordinarily will require assurance that the water rights to be encumbered by the lender's deed of trust are owned by the grantor, and are not subject to other encumbrances. Unfortunately, this assurance usually must be provided through an additional water title examination, because in Colorado a title insurance company will not issue an owner's or mortgagee's policy with respect to water rights. Further, most abstract companies will not certify their abstracts as to water rights.
Decreed water storage rights should be identified in the same careful manner as surface rights; namely, by incorporation of the pertinent decretal information into the security instrument.
If the Lone Tree Ditch mentioned above is owned by a mutual ditch company, the farmer's water rights will be represented by stock certificates in the company.(fn14) Although shares of stock in a mutual ditch company are personal property,(fn15) an owner of such shares is also deemed to own a distinct and proportionate interest in the water rights and other real property held in the company's name.(fn16)
CRS § 38-20-102 may serve as a dangerous trap for the unwary because its wording suggests that ditch company stock certificates, and the water rights they represent, need not be identified specifically in a deed of trust intended to encumber those rights. A deed purporting to convey all water rights appertaining to a particular parcel of land has been held...
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