Water is a scarce and valuable commodity in the West, and many people believe that it will soon be a valuable commodity in many other parts of the country as well. As an attorney advising financial institutions and other creditors, it is important to understand that water plays a fundamental role in assessing your client’s risk and protecting their collateral.
Every jurisdiction is different, but security interests in water rights are usually created and perfected in the same manner as a mortgage on land. Generally, the law presumes that water rights pass with the title to the underlying real estate in any conveyance. A seller, however, can sever water rights from the underlying property by express reservation, assignment or conveyance to a third party. This same principle of divisibility permits a lender to separately encumber the land and water rights. Thus, lenders may find added flexibility and additional collateral when making a loan by accepting, as additional collateral, the water rights from the property at issue or additional other properties in the borrower’s portfolio as collateral for the loan.
Creating and Protecting Security Interests in Water Rights
As water resources in the West become more and more scare, the value of these water rights will only continue to increase. Regardless of whether the collateral consists of land and water rights or just the water rights, there are steps a lender or creditor should take to minimize their risk associated with properly lending on and securing water rights as collateral:
- Hire experts: As a lender or creditor you should have in-house or external personnel who understand currently existing state water and environmental laws as well as any proposed legislation on the issue that might affect the lender’s rights to this collateral in the future.
- Review your existing portfolio: Are you properly perfected in the water rights associated with your current loans? Do you need additional collateral on an existing loan? Now is the time to review those existing loans and to make sure that you are properly perfected in the water rights that might run with the land you loaned on or that might be added as additional collateral to an existing loan.
- Protect your collateral going forward: When making new loans add checking on the status of potential water rights to the risk analysis / collateral check lists. Make sure the borrower hasn’t forfeited any water rights from non-use and require the borrower to provide evidence that the water rights are being put to full use at least once every few years to avoid future forfeiture of your collateral. Such evidence could include photographs, irrigation records, or affidavits of a certified water rights examiner.
If you need assistance assessing your collateral and protecting your rights in the same, contact the experienced litigation attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices.