It’s not uncommon for a water lawyer to receive a panicked call from a new property owner after discovering they have insufficient water to support their proposed use of the property. This nightmare can arise when:
- there’s a moratorium on new water service connections;
- the connection to a water supply is cost prohibitive;
- the cost of purchasing water rights or supply is too high to support a new use;
- the existing on-site surface water diversion is unpermitted; or
- a well permit is denied because the local groundwater basin is in overdraft or the landowner has no rights to pump groundwater.
Water rights are complex. Adding to that complexity is the new climate reality. Longer droughts, more volatile weather, political uncertainties, increased groundwater regulation, water quality concerns and infrastructure-funding gaps are exacerbating tensions over local and statewide water supplies.
In many areas of California, landowners can no longer rely on public water suppliers to meet their needs. It’s now imperative that buyers consider water supplies before purchasing land for commercial or residential development, recreational uses (golf courses, resorts or parks) or agricultural use (vineyards, orchards or ranching).
A robust due diligence of the property must consider water supplies. Because a property’s water supply is dependent on water rights, local ordinances, politics and hydrology, it’s important to consult a water lawyer (and in some instances a hydrologist) before closing. Such a consultation can confirm there is a sufficient water supply for the property. A bit of foresight can prevent a landowner from being unable to realize their dream.
The following checklist provides a roadmap to conduct a water rights’ due diligence.
Step 1: Identify Available Water Supplies and Consider Potential Limitations on Use, including Potential Future Changes
Conduct a site visit to identify existing water infrastructure, natural water features and existing or potential water service options. The next step is to determine if the property is served by a public water supplier (city, water agency/district, mutual water company or irrigation district), or if potential water service exists, costs and whether existing use of the property can be converted to other uses.
For example, historic agricultural water credits may not always be used to support development. The buyer should also examine other potential water supplies, such as recycled water and local groundwater and surface water. This includes identifying surface waterbodies on topographic maps and the local groundwater basin via the Department of Water Resources’ Bulletin 118. A potential buyer should also ask:
- What are the opportunities for recycled water application, and what are the costs associated with utilizing recycled water?
- Is the water clean enough to support proposed uses or does it require treatment?
- Is the groundwater basin adjudicated or governed by the Sustainable Groundwater Management Act (SGMA)?
- Is the groundwater basin overdrafted or subject to possible cutbacks or new pumping assessments?
- Are there endangered species that may be impacted by water diversions?
Step 2: Identify Target Property and Neighboring Properties
Identify neighboring land and water uses with a focus on uses that could impair water quality or interfere with the full use or development of water supplies.
Step 3: Identify Water Supplies Used on the Property, including the Basis of Right, and Quantify Historical Use
Review information on historic and existing water use (surface and groundwater). This may include past water bills and water assessments. If there is a well on the property, the seller may have metering data, electrical records and crop data that can establish historic groundwater use.
If surface water is available, the purchaser should review the State Water Resources Control Board eWRIMs database for water rights permits, licenses, stock pond registrations and certificates, decisions and orders. The purchaser should also identify surface water diversion structures and review annual filings (statement of diversion and use, and report of permittee/licensee) to determine compliance with all terms and conditions of the water right.
Lastly, the purchaser should request all documents and contracts pertaining to water rights.
Step 4: Confirm Ownership of Right and Assess Any Limitations on Water Right
Determine whether the right has been abandoned, lost to prescription or forfeited. Evaluate the seniority of the water right, availability of the right, adequacy of place of use, purpose of use, season of use and quantity of permitted or licensed post-1914 right. Determine whether historical diversions pursuant to an appropriative right support the full amount of the claimed right, and whether any changes to the water right are needed to support the proposed new use.
Step 5: Reconcile Water Demand with Available Supply
Realistically estimate water demand for all proposed potable and nonpotable (irrigation, construction and some industrial) uses. Check with the local public water provider and local municipality for standards, which can vary substantially. Determine if an engineer can provide project-specific calculations, which may vary from “one size fits all” standards. Develop a water use plan to optimize water efficiency (low-flow fixtures, drip irrigation, smart meters, graywater, rainwater harvesting or water monitoring) regardless of supply sufficiency. Determine whether available supplies can meet all proposed demands. If not, consider whether additional supplies are available for use on the property.
Step 6: Determine Water Supply and Water Quality Compliance Obligations
The rights associated with water supplies are defined by their source, the time frame during which supplies can be taken, the quantity of water to which the right attaches and any limitations on the purpose of use of the water supply. If the supply is anything other than a delivery of water from a retailer, there may also be reporting requirements associated with taking and using the supply — these can include requirements to report the quantity of water used as well as information regarding the use to which the water was put (e.g., acres irrigated or number of dwellings to which water was provided). The failure to timely report can have serious consequences and, in some cases, can even be considered to establish “non-use” of the water supply. Certain water uses, like irrigation, may also carry with them water quality regulations and restrictions.
The water supply and water quality compliance obligations associated with the historical and desired use of the property should be determined in order to both ascertain whether there is any historical failure of compliance that might affect the ability to use water on the property in the future, as well as any inability to put the property to its desired use.
Step 7: Negotiate Deal and Draft Conveyance Documents
After obtaining an understanding of the water supply associated with the property, the property conveyance documents may be drafted to incorporate the transfer of rights associated with the property’s water supplies. These may include the assignment of contracts pursuant to which water supplies are obtained, the transfer of permits or licenses as to the water supplies, or the transfer of water rights arising out of a judgment or decree.
Step 8: Consider Unused Water Supply Assets that Could Be Monetized
To the extent the water supply rights associated with the property may allow for the use of more water than is needed for the desired use of the property, it may be possible to monetize these unused or excess water supply assets through their transfer to others.
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