Buying and Selling Water Rights

Buying and Selling Water Rights

SALE, TRANSFER, AND AMENDMENT OF AN EXISTING WATER RIGHT PERMIT

Individuals seeking to acquire a water right in the State of Texas will, more often than not, seek to purchase or transfer an existing water right rather than attempt to apply for a new appropriative right from the Texas Commission on Environmental Quality (TCEQ). State owned water rights (i.e., permits or certificates of adjudication) may be transferred as a property interest that passes with title to land or may be transferred separately from the land itself. Accordingly, before a potential purchaser decides to purchase or transfer a specific water right, or assume one is attached to a tract of land, a thorough search of a County’s property records and TCEQ’s water right database is warranted. In doing so, potential purchasers will want to address the following questions:

(1) Does the holder of the water right own a certificate of adjudication, permit, or riparian right? Is the existing right valid and properly perfected?

(2) Was the water right severed from the land, sold to a third party or reserved for use by the land owner?

(3) How much water is needed for the proposed project versus how much is allowed for deviation from the water course?

(4) Can the priority of the water right be determined in the county records or water right database?

(5) How do other water rights in the same stream segment impact the proposed appropriation?

(6) What easement rights will be required to make use of the surface water rights? Is there access to the diversion point? What about irrigation and containment/storage requirements?

When first considering the acquisition of all or part of an existing water right, attorneys for the potential applicant should first conduct a due diligence investigation on the right to be acquired in order to avoid unsuspecting consequences once the right has been assumed. Some of the recommended due diligence items include: (1) examining the existing permit or certificate of adjudication (typically on record in the official public records of the county or available from the TCEQ), (2) identifying all regulatory agencies with jurisdiction over the water right (e.g., is there a Watermaster involved?), (3) obtain copies of all rules and regulations pertaining to the right in question, and (4) obtaining a title commitment on any appurtenant land to determine whether or not the water right had been previously severed from the land or if any liens impair the use of the right.

If, after conducting an assessment of a water right, the potential purchaser still desires to acquire the appropriative right, the purchaser will next have to determine the necessary permits and applications to file with the TCEQ. While the necessary forms and documents applicable to water right transfers can be acquired from the TCEQ’s website, purchasers wishing to avoid potential pitfalls in the application process should meet directly with TCEQ water permitting staff members to discuss the application requirements applicable to their specific purchase prior to completing any forms or executing a bill of sale with the permit holder. It should be noted that the application and permitting process is not quick or easy. For example, a water right amendment will typically take 300 days from the date the application is received by the TCEQ until the water right is officially amended.

Once a due diligence investigation has been concluded, water right purchasers are advised to make their purchase conditional upon the TCEQ’s approval of the necessary applications and forms involved in amending the water right; i.e, change of ownership form, amended diversion point location, and amended uses. If a potential purchaser acquires a water right before the necessary forms and applications are approved by the TCEQ, the purchaser may take a significant loss on their investment if the TCEQ does not recognize and approve the new diversion point location or the specified amount of water allowed for appropriation under the original permit.

When purchasing a water right, purchasers are recommended to complete and execute the following applications and contracts:

(1) Surface Water Sales Contract: The surface water sales contract allows the parties to enter into an agreement regarding the purchase of the water right, conditioned upon the TCEQ’s approval of the acquisition. Once TCEQ approval is received, a closing is conducted in order to finalize the sale. Typical sales contracts will identify the buyers and sellers, outline obligations relating to title commitments and policies, identify the water authorities involved, identify the specific right to be acquired, and the specifics of earnest money, purchase price, and liquidated damages if agreed upon.

(2) TCEQ Change of Ownership Form – Form TCEQ-10204: The Form TCEQ-10204 is used to change the owner of record for a specific water right. The form can be used to change the owner completely or to add additional owners to a list of existing owners. If the new owner(s) have not previously owned/operated a regulated entity within the jurisdiction of the TCEQ, the Applicant will also have to complete a “TCEQ Core Data Form,” which will provide the new owner(s) a “Customer Number” to be tracked in the TCEQ’s database. In most instances, the Core Date Form and Change of Ownership Form will be submitted together.

(3) TCEQ Application for Amendment to a Water Right – Form TCEQ-10201: If any aspect of the existing water right will be changed in anyway due to the sale or acquisition (other than the owner), the new owner(s) will have to prepare and submit a TCEQ “Application for Amendment to a Water Right.” The Application for Amendment to a Water Right will be used to change any number of the following details of the existing water right permit: (a) Authorized Use; (b) Diversion Point Location; (c) Place of Use; (d) Rate and Amount of Diversion; and (e) Discharge Information.

If, after completion of the aforementioned documents and applications, the TCEQ issues its approval of the water right change of ownership and/or amended use, the parties involved in the transaction will want to proceed with closing in accordance with the executed water rights sales contract.

It should be noted that when amending a water right or changing its designated owner, the Texas Water Code states the TCEQ is required to transfer the amended certificate of adjudication or permit to the County Clerk for recordation in the county in which the appropriation is made. In reality, however, the foregoing is typically not true. Instead, new owners/applicants can expect to receive the certificate of adjudication, permit, or amendment from the TCEQ along with a card for transmittal to the County Clerk in the mail. Upon receiving the final documents from the TCEQ, it is the new owner’s/applicant’s responsibility to send the revised document and card to the County Clerk for recordation. In general, documents should be recorded in each county in which the points of diversion are located and in each county where the land on which the water is used. If the surface water right is also subject to the jurisdiction of a Watermaster, the Operation Rules applicable to Watermasters require the new owner to promptly inform the Watermaster of the change of ownership and provide the appropriate ownership documents, post recording in the respective county.

Gregory Klipp, Attorney at Law

October 2017

DISCLAIMER: The foregoing information is not legal advice and is general in nature and not applicable to all situations. The reader should not rely on these general statements and should consult with knowledgeable persons before taking any actions.

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