Co-Author: Caroline Young
Recently, the Colorado Real Estate Commission made some important changes to its Contracts for Buying and Selling Real Estate. One of those changes affects how water rights are treated once the parties are under Contract and could lead to more frequent disputes over water title issues that may arise.
Why are water rights in real estate transactions important?
First, it is important to review why water rights are important when purchasing real property. For a more general discussion about the importance of water rights when purchasing property, please see Water Rights Considerations for Buyers and Sellers of Colorado Real Estate. Worth highlighting now is that in Colorado, most water rights are treated as real property under the law, rather than personal property. Traditionally, objections concerning water rights have usually been coupled with the Record and Off-Record Title Objection Deadlines later in the contract process. However, it is worth noting that most title insurance policies do not cover water rights, and often the conveyance documents for water rights are drafted by the seller and buyer and are not very specific. Nor are these water rights documents always recorded, which can make it difficult to ascertain what exact water rights a seller has to convey to a buyer.
Changes to THE CONTRACT TO BUY-SELL:
Paragraph 2.7.6 was added under the Inclusions section in the Contract to Buy-Sell and adds a new “Water Rights Review.” Under this new provision, the buyer must check one box that either indicates Buyer does or does not have a right to terminate if examination of the water Rights is unsatisfactory to the Buyer on or before the new “Water Rights Examination Deadline.” Accordingly, by checking does have a right to Terminate…, the buyer will preserve their right to potentially terminate the contract. If buyer checks does not have a right to Terminate, they would likely be deemed to have waived their ability to terminate based on any potential water title issues that may pop up.
Potential Challenges with this new change
Unfortunately, some confusion may arise from this recent change to the Contract. First, confusion may arise as to what is included in this new Water Rights Review. Some questions spring to mind, such as: What falls within the scope of this review? Who is to conduct the review (answer: an attorney)? Do title and ownership objections to the water rights fall under this review? Or does the review relate to physical nature (quantity, quality, point of diversion) of the rights?
Second, deadlines become a point of confusion and potentially contention. As mentioned above, historically a buyer could terminate a contract based on water rights by making a title objection. However, the new “Water Rights Examination Deadline” blurs the line as to whether a buyer may terminate if the buyer is not satisfied with the water rights once the water rights review deadline has lapsed but before the title objection deadline. Further, the Water Review deadline is adjacent in the form’s dates and deadlines table to the Inspection Deadline, which could result in many buyers having a deadline to object to water rights issues that is too early in the life of the Contract to obtain proper legal analysis of the water rights. So if a buyer were to discover issues with the water rights after the Water Rights Review Deadline but before the Title Objection Deadlines, there may be a dispute by both parties if the Buyer wants to back out of the Contract based on water rights.. Already, it is difficult to determine why a buyer may terminate. By adding more categories of deadlines, the seller may allege bad faith if the Buyer is able to potentially terminate the contract based on the title deadline, but the title is actually over water rights despite the water deadline having lapsed. This confusion could lead to earnest money disputes and litigation.
Another change worth noting is the location of water title objections. Water rights are treated as real property under the law in Colorado. Water rights associated with the property therefore have generally presented as a title issue. Yet now, water rights are under section 2, which deals with personal property inclusions. This relocation could cause buyers to gloss over water as an inclusion and pay less attention to the legal ownership and transferability of water rights, which is a critical issue when buying property.
Another potential point of ambiguity arises if the buyer should fail to check a box. It is incredibly important that buyers check the correct box to preserve their water rights. Yet the contract forms remain ambiguous as to whether the buyer could potentially waive their crucial water rights by failing to check a box. Should they fail to check the box preserving their rights, the Buyer could still potentially object later under Title, but again, in this scenario, a seller could allege bad faith and refuse to release the earnest money.
Due to these changes, it is critical that the parties pay close attention to the Water Rights Review Deadline during the Contract phase. Ideally, the deadline for Water Rights Review would be the same as the title objection deadlines. This could help avoid Buyer objecting later to water title issues because they simply did not have time to investigate the water rights, and avoid a Seller alleging bad faith if a buyer terminates pursuant to title but the seller suspects it’s really about water. Lastly, it is very important to consult an attorney who understands the implications of these Contract changes and their potential impact on your water rights. Please contact us (Ben Daniels or Caroline Young) to discuss the specifics of your situation and get a better understanding of your water rights.