FEATURE ARTICLE, SEPTEMBER 2005

A TITLE THAT HOLDS WATER
With the West’s continued development growth, title insurance for water rights is an increasingly necessary safeguard.
Joe Knox

Knox

The availability of water rights can literally make or break a deal. This reality has forced professionals in all sectors of the real estate industry to become aware of the impact that water rights can have on a transaction.

For example, developers are faced with potential requirements to provide a reliable water source for their projects. As the population in the West continues to grow, city planners are reluctant to approve developments that will place additional strain on the existing municipal water systems. Lenders also recognize the value of water rights in loans that are granted. A commercial farming or ranching operation could not be successful without a stable water source. In the event that the lender acquires title to the ranch, the water rights can be a significant factor in its valuation. Power plants, commercial bottling operations and golf courses all rely on the availability of water rights for their success.

Water rights for new projects are not always readily available, however. Some western states have become closed to new water appropriations, and, in these areas, existing water rights must be acquired to develop new uses. Acquisitions can be done in conjunction with or independent of land transactions. Just as with the purchase of a home or piece of land, ownership of the water rights being acquired should be verified.

Water rights are generally considered real property and are extremely valuable. They can be severed from the land, leased, mortgaged with or without the land, or reserved by the seller in a real estate transaction. The most important questions to answer when buying, financing or leasing land with water rights or water alone is: does the seller, borrower or lessor have title? Also, are there encumbrances that may affect title?

Inconsistencies in the title to water rights can occur just as they can with land titles. However, these discrepancies are more likely to occur in the title to water rights due to the lack of historic attention to ownership and search methods. Thus, it is essential to confirm legal title to water rights.

Land would not be purchased, leased or mortgaged without a title insurance policy. What about the water rights? Prior to the availability of title insurance, purchasers of water rights either relied on an attorney’s title opinion or simply left the ownership of the water rights to chance. The information in a title insurance commitment provides assistance with due diligence in the negotiation and acquisition phases of water rights ownership. Furthermore, additional security for the investment is provided through the issuance of owners and loan policies that insure water rights ownership. And unlike a title opinion written without warranty, the underwriter of a title insurance policy has the duty to defend in the event that a claim against the ownership of the water rights arises. A water rights title insurance policy insures the ownership of water rights. It provides for the protection of consumers — the purchasers and mortgagees of water rights interests.

The publicity of large transactions by various public and private entities has increased the awareness of and the demand for water rights ownership. As the public becomes aware of the value of its water rights and ways to protect them, conveyances, reservations and severances of water rights will become increasingly significant in the western United States. Water rights ownership will continue to be a controlling factor in urban and industrial development in the future.

Joe Knox is director of water rights services for Stewart Title Guaranty Company and president of Stewart Water Information LLC.

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.