Water, water everywhere? Nope. Not out West, anyway. So what can clients do about that?

The availability of water is an aspect of almost every purchase agreement in the West, whether it is in the buying and selling of real property or the buying and selling of a business interest. Sometimes, the water question is merely the provision of utility services for drinking and is of no consequence to the transaction. Other times, water can make or break the deal and significantly alter the value of the transaction.

Take, for instance, the client that falls in love with a piece of property to start a vineyard. He or she may be disturbed to find that despite the river running through it, the property has no entitlement to take and use the water. In such a situation, the business lawyer must be aware of the special constraints on identifying, defining and valuing property and any right to use water that may (or may not) come with the property. However, advising the client on the time, costs and risks involved if the property does not have adequate water does not have to be a deal killer either. As development in the West continues at full speed, finding new and innovative ways to locate, use and protect our water resources is becoming more common and more necessary.

A water right in the West is the right to take a quantity of water either from a surface water body such as a lake or river, or from the ground, and to use that water for a beneficial purpose. Once used for a beneficial purpose, a water right becomes vested to the property on which the water is used. Once vested, the use can continue on the property in perpetuity, regardless of ownership, provided the use remains unchanged and continues without abatement. This is known as the prior appropriations doctrine.

The prior appropriations doctrine of the West differs quite significantly from the riparian doctrine followed in the East. Under the riparian doctrine, the right to use water is enjoyed incident to land-ownership; the right to its use arises from the ownership of the source and cannot be severed from the land title. In the prior appropriations scheme, water can be moved from its watercourse to the place of use. The water right becomes appurtenant to this place of use irrespective of whether the source itself is on the property. Once appurtenant, the water right becomes a property right and one of the "bundle of sticks" of property ownership. As such, a water right is presumed to convey with changes in ownership but may also be severed from the "bundle of sticks" and conveyed separately.

Among those foundational principles are "first in time, first in right" followed closely by "use it or lose it" and "beneficial use is the measure of a water right."

The second difference between the riparian doctrine and the prior appropriations doctrine is known in the West as "use it or lose it." Because riparian rights arise from land ownership, the failure to use a riparian right does not effect a forfeiture. Under the prior appropriations scheme, a water right exists in perpetuity provided the use continues unabated as it was originally established.

Every water right has its own unique characteristics of source, place of use, point of withdrawal or diversion, purpose of use, quantity of use in annual and instantaneous limits and season of use. Each of these attributes must be maintained and becomes a limitation to changing the water right in the future. To fail to use water for a statutory period of time, or to use the water in a different way without prior authorization can effect a forfeiture.

Finally, the most significant difference between the riparian doctrine and the prior appropriations doctrine is in how shortages are shared, or not shared. In a pure riparian system, a water user has the right to divert and consume water provided it does not diminish the water flow unreasonably. All users on a watercourse are subject to reasonable use and if supplies are limited, all users share proportionately in the pain.

In contrast, the prior appropriations scheme abides by the principle known as "first in time is first in right." This is where the "prior" or the priority scheme in prior appropriations comes in. In a prior appropriations system, those who developed their water use first take precedence over later users. Water users do not share in times of shortage, but rather junior water users are curtailed or cut off entirely when there is otherwise insufficient water available to meet the authorized uses.

What happens if your client in the West wants to buy property that will require water but the property is without water rights? Historically, water rights in the West were developed by providing notice to others on the watercourse by nailing a notice to a tree and filing a notice with the county land office and putting the water to beneficial use.

As development increased and more landowners established water rights, this method of establishing water rights became cumbersome. As conflicts over water use became more common, eventually all western states adopted some form of a permission system, where instead of nailing a notice to a tree, new water users applied to the state.

Under an application process, the applicant files an application identifying the proposed attributes: place of use, purpose of use, season of use, source and quantity. The state provides notice to other landowners and conducts a review to see if water is available for a new use — that the water is not being taken by anyone else or needed for in-stream uses — and grants a water right. Initially, the water right is in the form of a permit or license until the applicant puts the water to beneficial use, after which the water right becomes vested and appurtenant to the property. Water rights granted by the state become part of the priority scheme of first in time, first in right.

In most areas of the West, obtaining new water rights for lands where water has not been used before can be extremely challenging. The West is already characterized as arid. Naturally occurring, fresh water supplies are hard to come by in most areas. Add the demands of agriculture for irrigation, industry for jobs, residences for people, and free-flowing streams for fish and the availability of water becomes ever tighter. This makes existing water rights more and more valuable.

However, that does not mean a project without water is a client without a project. Strategies for obtaining new water supplies without creating new water rights are becoming the norm.

Finding "new" water supplies is a case of taking what was old and making it new again. Think retro. Think recycling. Where new water rights are not being created — most frequently because of already declining availability to others including more increasingly unmet in-stream needs such as fisheries, recreation or aesthetics — it is necessary to find existing water rights that are no longer required for their historic uses. Those existing water rights are then changed in their essential attributes to allow for the new use of water.

Water rights in the West are a real property interest, which can be severed from the land title and moved to become appurtenant to a different property. Water rights are increasingly treated as fungible property with the creation of markets for buying and selling water rights developing in many areas. Property without water rights can often buy and transfer water rights from another location to allow use on the property.

However, moving a water right requires that the water not change in its source — the right to take water from one river cannot be changed to a different river if that would result in a changed source. Nor can changing a water right result in an expansion in the amount of water taken from the watercourse in excess of what was authorized under the previous authorization. Furthermore, changing a water right cannot cause injury to other water rights from that same source, irrespective of priority date.

Moving a water right often requires changing its essential attributes including the place at which the water is taken — often referred to as the point of diversion or withdrawal — the place where the water is put to use, and the purposes to which the water is put to use. Some essential attributes of a water right cannot be changed, which means the new use becomes limited by the historic use of the water right. That is an important factor to consider when buying water rights. The attributes, which most typically cannot be changed, are the source from which the water can be taken, the priority date of the water right and the quantity of water and the rate at which water can be used.

When buying a water right to change, the buyer must conduct an independent review of the water right. This independent review must include identifying the water rights, determining how much water has been historically used and so protected from forfeiture, determining whether the water is physically available for the proposed source to satisfy the project needs, and ensuring the clear legal title to the water rights.

Most western states keep some form of a registry of water rights, whether recorded with the local land record office or with the state water resources agency. That agency will supply copies of the documents related to the water rights on any particular piece of property. Since the continuing validity of a water right is use-related, the state's documentation of that water right is just the beginning. Also, many states have adopted more than one process for establishing new rights since water was first used.

Provided the water has remained in use, a valid water right in your state may come in many forms. As a result, check your labels. Confirm that the filings or certificates are appropriate for the era in which the water right was first put to use. In states with multiple steps to establishing a water right, the water right is treated as personal property at some stages, real property at others.

While the water right is still a permit or license, it is often still considered personal property. When personal property, ownership of the right must be assigned and the state kept on notice of the current owner. Once the water right becomes vested and appurtenant to the property, it is presumed to transfer with the property and the state may not have the most up-to-date ownership information.

Once the existence of a water right has been established through records on file with the state, the second step is to determine the historic use of the right to determine whether the right remains valid. Every water right has a number of attributes: place of use, purpose of use, point of diversion or withdrawal. It is important to document that use has been consistent with all the attributes of the authorized use, and that this use has been consistent throughout the life of the water right.

That means ensuring that the rights were not unused for your state's statutory forfeiture period. Documenting the historic use can be done in a variety of ways including landowner and neighboring affidavits, aerial photographs, power records, etc. At this stage, most business lawyers are well served to find a local hydrologist or hydrogeologist to assist with this process.

A water right on paper is only paper if the source from which the water right draws is not available when the need for the water exists. Many areas of the West have far more water rights on paper than can be satisfied from the source. This is where the priority scheme becomes relevant to evaluating water rights. The practical effect of the priority scheme is that junior water users are subject to curtailment. Curtailment means that junior water users must refrain from using water to ensure that there is enough water for senior water users.

Curtailment can have drastic consequences for the junior water user. For instance, in one part of Washington State, the federal water project has water rights that are senior to one near-by city that draws from the same source. During the last several years of lower than average rainfall, the city's water supply has been restricted and they have been forced to find alternate water rights during those years so as to not intercept water that is due to downstream irrigation districts with senior rights.

Often, the state will have records of formal curtailment actions because these often involve an action by the state agency or a court proceeding. Copies of farm production records can also tell the tale of insufficient water availability. If none of these sources is available, the local fish and wildlife agents are another good source of availability since if the water is not available for the junior water users, it likewise is not available for the in-stream resources.

More often in the West, properties with or without water rights are being acquired with the intent of changing the historic use of the property. Examples include changing resource lands to residential developments, raw land to golf courses, or a hilly mound to a water park. Often the new use involves changing when and how water will be used on the property. The most common example of this occurs in the acquisition of agriculture lands or industrial lands for conversion to residential development.

As a real property interest, most states allow water rights to be severed from the existing property and used elsewhere subject to several constraints. Typically, any new or changed uses of water cannot increase the amount of water used, the water use must draw from the same or connected source, and no other water rights can be injured as a result of the changed use.

When advising a client on a project that will require changing a water right, or acquiring and changing additional water rights, it is important to assess the time, costs and uncertainty in changing water rights. The first step is conducting a needs assessment. How much water will the changed use require? How will that water be provided — from a local purveyor or from the water rights either already at the property or which will be obtained and transferred?

The next step is to determine if there will be any limitations on changing certain water rights. Typically, the state water resources agency must review any proposed change to the attributes of a water right. That review usually requires verifying the validity of the water right, but is also very concerned with whether other water rights or in-stream values will be injured because of the changed use. A change in use typically must not affect another water use's ability to draw water, regardless of whether that water right holder is junior or senior to the right being changed.

The state review process varies from state to state throughout the West. The one constant is that the process is often lengthy, costly and complicated. Changing water rights is likely one of the more complex environmental permitting arenas because of the importance of past actions by the water right holder and the interplay and effect that future actions will have on neighboring properties.

Increasingly, buying and moving a water right has geographic limitations that prevent this option from being a useful response. This is often the case where development is happening upstream from historic water use patterns in the area, or where the available "trading stock" of underused historic water rights is limited. Further, the transaction costs of transferring water rights can be burdensome. In response to the constraints on the traditional water right transfer, many regions are moving to a growing recognition of water banking as a larger scale approach to water supply solutions.

Water banking as a defined practice is different in each of the areas that have adopted it as a concept, but most generally, it is the retirement of a water right in one area in order to entitle another to use water in another area. Some of the constraints of a traditional water right change are present — the new water use cannot use more than the retired water use, and the neighboring water rights cannot be injured. In water banking, the source restrictions are often more flexible, as is the institutional response. In this way, the new use need not come from the same narrowly defined source as the old use but can come from elsewhere in the basin.

For instance, in some parts of Washington State, water users have pushed for an informal form of water banking in which water rights formerly used for irrigation are changed to in-stream flow purposes and conveyed to the state Trust Water Program to be protected in the tributary of origin to the mainstream. In the mainstream, these tributary water rights become available for use by others many miles away or can be used to replace the diversions taken by the junior water uses elsewhere in the basin. This water banking approach is also used to obtain supplies for new developments, replacing water in one location to compensate for withdrawals in another.

Not every project needs a new water supply. Not every dream is going to be able to find the water necessary. Nevertheless, with knowledge and creativity, projects without the necessary water supply can find that supply and flourish. The business lawyer involved in water dependent transactions has a dual purpose — nurture the dreams of the entrepreneur while helping the entrepreneur identify how to make it a reality.