Water Rights Title and Conveyancing

• Publication year: 1999
• Pages: 69

28 Colo.Law. 69 Colorado Lawyer 1999.

1999, May, Pg. 69. Water Rights Title and Conveyancing

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69

Vol. 28, No. 5, Pg. 69

The Colorado Lawyer
May 1999 Vol. 28, No. 5 [Page 69]

Specialty Law Columns
Natural Resource and Environmental Notes/Real Estate Law Newsletter
Water Rights Title and Conveyancing
by Star L. Waring, Christina A. Fiflis, David L. Kueter

Although water rights are generally to be transferred in the same manner as other forms of real property, there are many aspects of water rights that complicate the title to and the conveyancing of interests in water rights. This article examines those unique features of water rights that affect the transfer process and offers practical advice to attorneys representing parties to transactions involving water rights Because the topic of water title examination has not been addressed in this publication since 1980,1 the focus of this article is on the many developments since that time affecting this area of law

Basic Principles

Colorado's Constitution provides that the water of all natural streams is the property of the public, dedicated to the use of the people, subject to appropriation.2 A water right is defined by Colorado statute as "a right to use in accordance with its priority a certain portion of the waters of the state by reason of the appropriation of the same."3

A conveyance of a water right is considered a conveyance of an interest in real property under Colorado law.4 Water rights may be conveyed separately from the land where the water is used.5 Water rights are conveyed or otherwise transferred in the same manner as real property. Water is a real property right, generally not tied to land ownership All the formalities of a conveyance of real estate are required to be observed in the conveyance of water rights.6

The effect of a water court decree is to confirm an appropriation and establish the priority of the subject water right.7 The decree does not create the water right.8 Pursuant to the Water Rights Determination and Administration Act of 1969 ("1969 Act"),9 priority of a water right is established by judicial decree and derived from a combination of the adjudication date and the appropriation date.10 The date of appropriation, defined as the date on which the appropriation was initiated,11 controls priority of a water right adjudicated in a given year. Water rights adjudicated in a given year are junior to those adjudicated in previous years.12

Once water is diverted and applied to beneficial use, it becomes an absolute water right.13 Colorado law also recognizes conditional water rights, which are assigned a priority based on the date the appropriation was initiated, as long as the appropriation is completed with reasonable diligence.14

Evaluating Water Rights to be Conveyed

When a client decides to purchase water rights, either in connection with land or independently, the buyer's attorney should follow basic steps to insure that the client knows what he or she is purchasing. The purchase contract should include a complete description of all water rights to be conveyed and broad language to allow the conveyance of any unidentified water and water rights. The purchase contract also must allow sufficient time for the buyer's attorney to review the seller's title and for a water engineer or other expert to determine the historic use and sufficiency of the water rights to be conveyed. The contract should allow the buyer to cancel the contract if the seller is unable to convey marketable title or if the water rights are found to be insufficient for the buyer's purposes.

The buyer's due diligence should include a visual inception of each water right structure. A visual inspection will reveal any defects that may prohibit taking the full decreed amount of water. It also may reveal the presence of any adverse use or abandonment of the water rights. In some cases, water rights not described in the contract may be discovered.

The water rights evaluation also should include a review of all decrees for the water rights, the State Engineer's tabulation of water rights,15 and the State Engineer's abandonment list;16 interviews with the Water Commissioner; and a review of state diversion records. It is often helpful to review aerial photographs to determine what areas have historically been irrigated. The evaluation of the historic use and the sufficiency of the water rights may provide useful information for the investigation of title.

Water Title Investigations

All investigations of water rights title are complicated by issues related to the unique character of water rights as a separate real property interest. The decree adjudicating a water right does not establish ownership of the right, it merely confirms that a water right exists that may be used for specific purposes, in a fixed amount, and with a certain priority.17 The decree is not equivalent to a patent as a beginning point from which later record ownership may be traced. There is no root source of title for water rights as there is for other real property interests.

Further, to a far greater extent than for other real property interests, references to water rights in recorded conveyancing documents are notoriously imprecise. There are frequently only general references to "all appurtenances" or "all appurtenant water rights," leaving it to later title investigators to determine what water may or may not have been appurtenant to a particular tract. In addition, water rights may be named incorrectly or inadvertently omitted from the legal description (as discussed below), or the percentage of ownership may not be correctly identified in ditches that have multiple ownership interests. In these instances, it is often necessary to rely on parol evidence to determine what water, if any, was intended to be conveyed.

Investigations of water rights title are further complicated because record ownership of water rights can be affected by numerous factors outside the record.18 Water rights are subject to divestiture or reduction by abandonment,19 by prescriptive use,20 and by failure to use the full amount of the right in accordance with the decree.21

The only way to conclusively establish title to water rights in most cases is by obtaining a quiet title decree under Colorado Rules of Civil Procedure ("C.R.C.P.") 105. This remedy is recommended where title is unusually complicated and the value of the water rights justifies the high cost of the quiet title action.

Because of the problems associated with water right conveyances, title companies have historically refused to extend coverage to interests in water rights. Therefore, the role of the lawyer representing the buyer of water rights is especially critical. However, notwithstanding the inherent limitations in reviewing title to water rights, research into record ownership can be extremely valuable. Examination of record title can reveal curable title defects and defects that are not curable. Alternatively, the title examination can assure the buyer that the seller has marketable title.

Conveyances Silent as to Water Rights

One crucial aspect of the law concerning title to water rights is that water rights may be transferred under a deed or other instrument that does not specifically mention water. Water rights have been found to pass merely under the term "appurtenances" in a deed.22 Therefore, it is imperative to have a basic understanding of the law concerning the transfer of water under conveyances silent as to water.

Prior to 1973, there was considerable inconsistency in the standard applied by the courts in deciding whether water rights were transferred under a deed that was silent as to water. Some courts held that the water would pass if it was the grantor's intent that it should so pass.23 Others indicated that it was the intent of the parties to the transfer that was determinative.24 Still other cases found a transfer of water on the basis that the water was essential to the beneficial use of the property.25

In the 1973 case of Kinoshita v. North Denver Bank,26 the Colorado Supreme Court attempted to clear up the confusion. In Kinoshita, the court acknowledged the inconsistencies of the prior opinions on the subject, and followed the ruling of Hastings & Heyden Realty Co. v. Gest:

It is recognized in this state that water may or may not be appurtenant to land. The provisions of the deed control, and if the deed is silent on the subject, then the intention of the parties is to be determined from all the circumstances of the case, including the fact as to the use of the water and whether it is necessary and essential to the beneficial use of the land.27

The Kinoshita court then concluded, however, that the focus of the inquiry is the intention of the grantor, rather than the intent of the parties.28

In 1993, some of the confusion was resurrected by the opinion in In the Matter of the Estate of Palizzi.29 Palizzi addressed the question of whether water rights were transferred with land conveyed under a will that failed to mention water. The Supreme Court in Palizzi ruled that Kinoshita and prior cases allowed a court to find that water rights were conveyed under a silent will if the water was necessary for the beneficial use of the property conveyed. The court read the pre-Kinoshita cases as indicating that if the water rights are appurtenant to the real property conveyed, a presumption arises that a transferor intended to include the water rights among the rights conveyed.

However, while Palizzi relies on cases involving deeds, it should not be used as authority for the transfer of water rights by instruments other than...