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Drafting Groundwater Transfer Agreements. Thank you for your participation in the Texas Real Estate Land Institute Outlook Conference, and for attending my presentation on Groundwater Marketing. I hope you found my presentation informative and useful.

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frank z ruttenberg bracewell giuliani llp frank ruttenberg@bgllp com 210 299 3467

Drafting Groundwater TransferAgreements

Thank you for your participation in the Texas Real Estate Land Institute Outlook Conference, and for attending my presentation on Groundwater Marketing. I hope you found my presentation informative and useful.

For your convenience, I have attached a copy of my power point presentation.

If you should have any questions about my presentation or about water law issues, please do not hesitate to contact me.

Frank Z. RuttenbergBracewell & Giuliani LLP

Frank.ruttenberg@bgllp.com

210 299-3467

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Drafting Groundwater TransferAgreements

Frank Z. Ruttenberg

Bracewell & Giuliani LLP

106 S. St. Mary’s Suite 800

San Antonio, Texas 78205

Texas Realtors Land Institute

April 2008

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Drafting Groundwater TransferAgreements

Overview

  • History of Texas Water Law – Groundwater vs. Surface Water
    • Surface Water – Owned by State adjudicated and use by permit
    • Groundwater – Owned by Landowner
  • Early Legal/Regulatory Scheme – Groundwater
  • Law developed when there was generally sufficient supply of groundwater
  • Rule of Capture – law of biggest pump - A rule that addressed lack of liability for over pumping
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Drafting Groundwater TransferAgreements

Recent Trends – Regulation of Groundwater

  • Increasing demand = Increased pressure on legal system to sort out rights to this resource = Increased Legal involvement
  • Under authority granted by the Texas Constitution, the State retained the authority to regulate the conservation of our groundwater resources.
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Drafting Groundwater TransferAgreements

Groundwater Regulation

  • Major Water Bills over the last four legislative sessions
  • SB-1, SB-2 and SB-3
  • As a part of this regulatory scheme there are approximately 90 groundwater districts and 16 groundwater Management Areas now in existence in the State of Texas.
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Drafting Groundwater TransferAgreements

Result:

Cities, industry and property owners are scrambling to firm up water rights – including groundwater

Water Rights – which use to be a passing thought to property owners are now – in certain circumstances - a very valuable property right

People are searching for the right way to obtain value from these groundwater rights

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Drafting Groundwater TransferAgreements

Purpose of Outline –

To Address

FirstWhat are we trying to transfer?

Next - What issues typically arise between a buyer and seller or lessors and lessees of these rights?

Last - How might we address these issues in transfer documents?

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Drafting Groundwater TransferAgreements

Transfers of Groundwater

Beginning Questions -What is the nature and character of these Groundwater Rights we are attempting to transfer?

Real Property?

Personal Property?

Does it matter?

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Drafting Groundwater TransferAgreements
  • Transfers of Groundwater
  • Case Law:
  • Groundwater is a part of the surface estate of the land (not the mineral estate);
  • The owner of land has the exclusive property rights to the groundwater to be used at their will; and
  • The rights to this groundwater include all rights that they might have for any other species of property.
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Drafting Groundwater TransferAgreements
  • BUT
  • Regulation Relating to Groundwater Transfers
  • SB-1, SB-2 AND SB-3 – authorized groundwater districts to:
  • Regulate the production of groundwater
  • Regulate transfers of groundwater within a district; an
  • Regulate transfers of groundwater out of the groundwater district.
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Drafting Groundwater TransferAgreements

ISSUES RELATING TO THE PURCHASE SALE OR LEASGIN OF GROUNDWATER

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Drafting Groundwater TransferAgreements

Purchase and Sale of Groundwater

How do we purchase and sell groundwater?

Most Common Forms:

  • Buy the land and get the groundwater as a part of the bundle of sticks (not covered in this outline)
  • Purchase of groundwater in fee simple
  • Transfer of groundwater for a period of time
    • Fee simple determinable
    • Lease
    • License
    • Water supply agreements
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Drafting Groundwater TransferAgreements
  • Purchase and Sale of Groundwater
  • Legal Description:
  • What groundwater is being conveyed? – geological description.
  • Exclusive or non-exclusive right to develop and use groundwater.
  • If less than all is conveyed - determine the priority for use (withdrawal limitations) and access (spacing limitations).

Physical Limitations

    • Regulatory Limitations
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Drafting Groundwater TransferAgreements

Access to Groundwater from Surface Estate

Now that you have the Groundwater ? What else do you need and why???

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Drafting Groundwater TransferAgreements
  • Purchase and Sale of Groundwater
  • Legal Description:
  • What does a water right give you –
  • What does a water right NOT give you
  • O&G Distinction
  • Naked Water Right
  • DON’T BUY A NAKED WATER RIGHT!!
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Drafting Groundwater TransferAgreements

Access to Groundwater from Surface Estate

What else does the Purchaser of Groundwater need?

  • The right to use the surface estate for the exploration and development of the groundwater estate on an exclusive or non-exclusive basis;
  • The right to place infrastructure on the surface estate (through a fee interest, lease or easement); and
  • The right of ingress and egress to construct, operate and repair a water collection system.
    • Implied easement of necessity?
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Drafting Groundwater TransferAgreements
  • Purchase and Sale of Groundwater
  • Legal Description:
  • DON’T BUY A NAKED WATER RIGHT!!
  • In City of Del Rio vs. Clayton Sam Colt Hamilton Trust– Del Rio argued that a severance without access was void due to the fact that it violated the Texas Constitution Art 1 Sec 26 – rule against perpetuities
  • Implied easement of necessity?
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Drafting Groundwater TransferAgreements

Access to Groundwater from Surface Estate

  • Development Responsibility – determine who will develop and deliver the groundwater?

Withdrawal

Collection

Storage

Treatment

Delivery

  • Capital investment
  • Operating responsibility
  • Impact on Pricing
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Drafting Groundwater TransferAgreements

Access to Groundwater from Surface Estate

  • Development Responsibility –
  • Capital investment

Exploration Cost

Infrastructure cost

Right of Way Cost

Marketing Cost

Political Cost

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Drafting Groundwater TransferAgreements

Access to Groundwater from Surface Estate

  • Operating responsibility

Maintenance

Repair

Liability

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Drafting Groundwater TransferAgreements

Access to Groundwater from Surface Estate

  • Development Responsibility – Impact on Pricing

What are you selling?

Water in place or water delivered?

Alteration of price after a return on infrastructure?

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Drafting Groundwater TransferAgreements

Access to Groundwater from Surface Estate

Operating covenants or behavioral covenants relating to the Landowner’s use of the surface estate;

  • Groundwater Owner wants:
    • Flexibility as to placement of facilities at beginning and in future;
    • Access for construction maintenance and operations;
    • Restricted use by landowner that will not interfere with withdrawal of groundwater;
    • Limitations on surface penetrations (Oil and Gas);
    • Limits on environmentally harmful use - sanitary control easements;
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Drafting Groundwater TransferAgreements

Access to Groundwater from Surface Estate

Operating covenants or behavioral covenants relating to the Groundwater owner’s use of the surface estate;

  • Landowner wants –
    • Restricted use by groundwater owner
    • Construction standards
    • Limits on location of facilities - low intrusion factor
    • High maintenance responsibility
    • Preservation of development rights for other uses, and
    • Duty of mitigation.
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Drafting Groundwater TransferAgreements
  • Purchase and Sale of Groundwater
  • Mitigation:
  • Rework wells
  • Deliver groundwater to site
  • Provide access to delivery system
  • $$$$ cost to mitigate
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Drafting Groundwater TransferAgreements

Purchase and Sale or Lease of Groundwater

Consideration:

  • Lump sum
  • Payment based upon the quantity of water withdrawn.
    • Address any “growth rate escalator” on deferred payments (PPI/CPI or others).
    • Determine if there will be minimum or guaranteed payments – partial or total take or pay arrangements.
    • Where minimum water payments are to be made, address credits for excess water payments.
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Drafting Groundwater TransferAgreements

Purchase and Sale of Groundwater

  • How much will I be Paid?
  • Attend - Water Marketing Panel – Later in the Afternoon
  • When Does Payment Begin?
  • Prior to production -
  • At the time of production

Measurement and Audit Rights

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Drafting Groundwater TransferAgreements

Access to Groundwater from Surface Estate

Termination of Rights to Use Groundwater

  • Ownership of facilities after termination;
  • Condition of facilities after termination; and
  • Plugging of wells upon termination. 
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Drafting Groundwater TransferAgreements

General Contract Provisions

  • Default and Termination

Special Provisions for termination

  • Indemnity

Governmental limitations

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Drafting Groundwater TransferAgreements

General Contract Provisions

  • Insurance Provisions
  • Lender Non Disturbance and Subordination Agreements
  • Release Provisions
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Drafting Groundwater TransferAgreements

General Contract Provisions

  • Force Majeure

Physical Limitations

Regulatory Limitations

Temporary Interruptions

Permanent Interruptions

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Drafting Groundwater TransferAgreements

Issues relating to due diligence in connection with the purchase and sale of groundwater

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Drafting Groundwater TransferAgreements

Due Diligence Issues - Water

  • Review or investigative period;
  • Investigate groundwater hydrology and geology;
  • Investigate water quality;
  • Determine infrastructure needs and costs (wells, pipelines, etc.); and
  • Determine the limitations on withdrawal and transfer of groundwater set by the groundwater district or other regulatory body, if any.
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Drafting Groundwater TransferAgreements

Due Diligence Issues Real Property

  • Determine that no prior severance has occurred;
  • Review title for effect of prior liens and encumbrances. Remember, security instruments may encumber the groundwater estate; and
  • Review mineral interests which may have a claim on the water rights. Mineral estate owners may own implied surface easements and rights to use groundwater in exploration.
  • Title Insurance
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Drafting Groundwater TransferAgreements

General Contract Provisions

WATER SUPPLY AGREEMENTS

Need reliability

Quality Control

Priority Commitment

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Drafting Groundwater TransferAgreements

Frank Z. Ruttenberg

Bracewell & Giuliani LLP

106 S. St. Mary’s Suite 800

San Antonio, Texas 78205

Texas Realtors Land Institute

April 2008

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