Water Rights Conveyancing Documents
The operation in nature of the hydrologic cycle, commonly referred to as the water cycle, parallels in many respects the development of Texas water law. As depicted in figure 16.1 below, the natural water cycle includes the physical separation of groundwater and surface water that Texas law observes, as well as the concept of diffuse water or rainwater sheet flow across the surface of the earth.
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Figure 16.1. The Natural Water Cycle. U.S. Geological Survey, Water Science School, The Natural Water Cycle, www.usgs.gov/media/images/water-cycle-poster-natural-water-cycle. |
When rain falls to earth, the resulting diffused water flows across the surface of the planet until it either finds its way into a watercourse, where it becomes characterized as “surface water,” or infiltrates the soil to become percolating groundwater. Whether surface water or groundwater, however, as in the natural hydrologic cycle, water does not remain stagnant. Surface water, even as it flows down a watercourse, saturates the bed and banks of the watercourse, or finds itself diverted by crevasses and fractures in the riverbed, transferring the surface water to underlying geologic formations and aquifers. At that point, the surface water becomes groundwater. Similarly, the rainwater that found its home initially in those underground formations and aquifers moves through the soils and porous rock formations to discharge points we call springs and seeps. At this point in the hydrologic cycle, the flow once again takes on the physical and legal character of surface water. Just as the molecules take on different physical characteristics depending on whether they are groundwater or surface water, the applicable laws and the application of those laws is dependent on the characterization of water as groundwater, surface water, or diffused water. For a more in-depth discussion of the hydrologic cycle and its connection to the development of Texas water jurisprudence, see Gabriel Eckstein and Amy Hardberger, “Scientific, Legal, and Ethical Foundations for Texas Water Law,” in Essentials of Texas Water Resources, eds. Mary K. Sahs and Holly Heinrich, State Bar of Texas (7th ed. 2022) § 1.5 (“Understanding the Hydrologic Cycle”).
Texas real estate transactions increasingly involve issues of water resources and supply. These issues affect the use and valuation of the land. In addition, transactions involving the purchase or lease of existing water rights (surface or groundwater) are becoming increasingly common. Surface water in Texas is owned by the state, but groundwater is privately owned. While both are interests in real property, the law applicable to surface water and groundwater is different. The issues in transactions involving the same are different too. This chapter provides an overview of Texas water law and some basic forms for the sale, lease or assignment, permitting, and mortgage of surface water and groundwater rights.
Surface water is the property of the state. Once surface water has been appropriated, and the permittee has perfected the appropriation, the holder of the water right has superior title to all the world except the State. See, e.g., Texas Water Rights Commission v. Wright, 464 S.W.2d 642 (Tex. 1971); South Texas Water Co. v. Bieri, 247 S.W.2d 268 (Tex. App.—Galveston 1952, writ ref’d n.r.e.) (state owns the corpus of the water, appropriator owns a usufructuary right). The permittee’s rights, and the transfer or conveyance of those rights, are subject to the prior appropriation doctrine and the police powers of the Texas Commission on Environmental Quality (TCEQ). See Texas Commission on Environmental Quality v. Texas Farm Bureau, 460 S.W.3d 264, 266 (Tex. App.—Corpus Christi–Edinburg 2015, pet. denied); Tex. Water Code § 5.013, ch. 11; 30 Tex. Admin. Code chs. 295, 297. For additional in-depth discussion of Texas surface water law, see Mary K. Sahs and Holly Heinrich, eds., Essentials of Texas Water Resources, pt. B, “Surface Water,” State Bar of Texas (7th ed. 2022).
Groundwater in place under the land is the property of the owner of the surface estate. Tex. Water Code § 36.002(a); see, e.g., Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53, 58 (Tex. 2016); Edwards Aquifer Authority v. Day, 369 S.W.3d 814, 817, 831 (Tex. 2012); Edwards Aquifer Authority v. Bragg, 421 S.W.3d 118, 137–38 (Tex. App.—San Antonio 2013, pet. denied); City of Del Rio v. Clayton Sam Colt Hamilton Trust, 269 S.W.3d 613 (Tex. App.—San Antonio 2008, pet. denied). Groundwater production, as well as its sale or lease, may be regulated by a local groundwater conservation district generally operating pursuant to chapter 36 of the Texas Water Code and, if applicable, its respective enabling legislation. See Tex. Water Code ch. 36. These local districts are the state’s preferred method of groundwater management to provide some regulation of the withdrawal and use of groundwater within their jurisdictions. See Day, 369 S.W.3d at 817, 835 & n.119; Tex. Water Code § 36.0015; cf. Sipriano v. Great Spring Waters of America, Inc., 1 S.W.3d 75, 81 (Tex. 1999) (Hecht, J., concurring) (“Actually, such districts are not just the preferred method of groundwater management, they are the only method presently available.”). For additional in-depth discussion of Texas groundwater law see Mary K. Sahs and Holly Heinrich, eds., Essentials of Texas Water Resources, pt. A, ch. 5, and pt. C, “Groundwater,” State Bar of Texas (7th ed. 2022).
As of March 2021, ninety-nine confirmed groundwater districts were operating across Texas, as well as two subsidence districts and one pending groundwater district. Thus, parties to real estate transactions must carefully consider whether they are dealing with issues of surface water rights, groundwater rights, or both, and they must also consider which regulatory entities have jurisdiction over those rights.
The TCEQ and the Texas Water Development Board (TWDB) are the two state agencies principally involved in the implementation of Texas’s surface water laws and policies. The TWDB serves as the state’s financier for major water projects. The regulation of water and sewer utilities, including the responsibility for rate and other economic regulation, and the jurisdiction over certain water supply and sewer service corporations, is under the Public Utility Commission of Texas. The TCEQ’s jurisdiction includes water rights, water pollution and water quality, wholesale water rates, dam safety, the regulation of public sewer and drinking water systems, and limited groundwater district formation and supervision. The TCEQ is the adjudicatory body for all contested surface water rights cases and has substantive and procedural rulemaking authority. See Tex. Water Code § 5.013.
The TWDB is the state agency with authority for the planning of and financial assistance for water development projects. See generally Tex. Water Code chs. 15, 16. The TWDB makes loan and grant programs available to qualifying local governments and utilities for water supply development projects and for water quality purposes. See generally Tex. Water Code ch. 15; 31 Tex. Admin. Code chs. 355, 363, 365,367, 371, 375. The TWDB is responsible for the development of the state water plan and coordination with the regional planning groups and groundwater management areas. See generally Tex. Water Code ch. 16, §§ 36.108–.1086; 31 Tex. Admin. Code chs. 355–358. The agency also has limited supervisory authority over groundwater district management plans, joint planning, and the development of desired future conditions for the state’s groundwater resources. See Tex. Water Code §§ 36.108–.1086; 31 Tex. Admin. Code ch. 356.
Groundwater is water occurring under the surface of land, including percolating water or artesian water. See generally Tex. Water Code §§ 35.002(5), 36.001(5). The underflow of a surface water river or stream or the underground flow of water in confined channels is not groundwater. See Tex. Water Code § 11.021(a). Groundwater is presumed to be percolating unless it is proven to be otherwise. Texas Co. v. Burkett, 296 S.W. 273, 278 (Tex. 1927); Denis v. Kickapoo Land Co., 771 S.W.2d 235, 237 (Tex. App.—Austin 1989, writ denied); Pecos County WCID No. 1 v. Williams, 271 S.W.2d 503, 506 (Tex. App.—El Paso 1954, writ ref’d n.r.e.). The Texas Water Code defines “groundwater” as water percolating below the surface of the earth. See Tex. Water Code §§ 35.002(5), 36.001(5).
Artesian water is groundwater confined under pressure by an impermeable geological layer, capable of flowing “above the first impervious stratum below the surface of the ground” when properly cased in a well. See Tex. Water Code § 11.201. The only significant difference between the legal treatment of percolating water and artesian water is that there are statutory provisions prohibiting the waste of artesian water and relating to artesian water produced from wells in the Edwards Aquifer. See Tex. Water Code § 11.202(d)–(e).
Underflow is that portion of a surface watercourse that flows through sand and gravel deposits beneath the surface of the bed or banks of a stream. Underflow is surface water and is the property of the state. Tex. Water Code § 11.021(a). The laws governing the allocation and use of surface water apply to underflow. Burkett, 296 S.W. at 277; Denis, 771 S.W.2d at 237; see Tex. Water Code § 11.021.
Water “confined to underground streams with definite channels” means a subsurface watercourse that has all the characteristics of a surface watercourse, including a bed, banks that form a channel, and a current of water. Denis, 771 S.W.2d at 237. Ownership rights for this type of subsurface watercourse are the same as for surface water. Tex. Water Code § 11.021(a); see Edwards Aquifer Authority v. Day, 369 S.W.3d 814, 822 & n.28 (Tex. 2012). Whether subsurface water is the underground flow of water in a defined subterranean channel or percolating groundwater is a determination that must be made on a case-by-case basis. Burkett, 296 S.W. at 277; Denis, 771 S.W.2d at 237.
§ 16.2:2Ownership: “Rule of Capture,” Theory of Absolute Ownership of Groundwater in Place, and Common-Law and Regulatory Use Restrictions
In 1904, the Texas Supreme Court applied the English common-law rule of capture to groundwater and held that the owner of land could pump unlimited quantities of water from under his land, regardless of whether his action drained water from under his neighbor’s land. Houston & T.C. Railway Co. v. East, 81 S.W. 279 (Tex. 1904) (the “East case”). Under common law, a landowner could use groundwater at a location other than his land and sell groundwater that he captured below the surface of his land for off-site use by a third party. Texas Co. v. Burkett, 296 S.W. 273 (Tex. 1927). Texas courts subsequently upheld the right of a landowner to capture and use groundwater even when doing so affects surface water supplies. Denis v. Kickapoo Land Co., 771 S.W.2d 235, 233–37 (Tex. App.—Austin 1989, writ denied). Pecos County WCID No. 1 v. Williams, 271 S.W.2d 503 (Tex. App.—El Paso 1954, writ ref’d n.r.e.). The supreme court has declined to overrule the holding of East, finding that the common-law rule of capture does not preclude ownership in place, and that duty has been delegated to the Texas legislature. Sipriano v. Great Spring Waters of America, Inc., 1 S.W.3d 75, 79 (Tex. 1999); City of Corpus Christi v. City of Pleasanton, 276 S.W.2d 798, 803 (Tex. 1955); Tex. Const. art. XVI, § 59. In Edwards Aquifer Authority v. Day, 369 S.W.3d 814, 827–33 (Tex. 2012), the supreme court reaffirmed the proposition in response to the State of Texas and the Edwards Aquifer Authority challenge to this well-established rule.
There are only two significant limitations at common law on the landowner’s right to capture and use groundwater: (1) the landowner cannot capture and use groundwater maliciously for the purpose of injuring a neighbor or in a manner that constitutes wanton and willful waste (City of Corpus Christi, 276 S.W.2d 798); and (2) the landowner may be liable for damages if he negligently pumps groundwater in a manner that causes subsidence of neighboring land (Friends-wood Development Co. v. Smith-Southwest Industries, Inc., 576 S.W.2d 21 (Tex. 1978)). These limitations are recognized in section 36.002 of the Texas Water Code. Tex. Water Code § 36.002(b)(1); see Day, 369 S.W.3d at 832.
In recent years, Texas courts have relied on the state’s more developed oil and gas jurisprudence to address issues regarding the nature and extent of a landowner’s ownership interest in groundwater under his land. See, e.g., Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53, 58 (Tex. 2016); Day, 369 S.W.3d at 817, 831; Edwards Aquifer Authority v. Bragg, 421 S.W.3d 118, 137–38 (Tex. App.—San Antonio 2013, pet. denied); City of Del Rio v. Clayton Sam Colt Hamilton Trust, 269 S.W.3d 613 (Tex. App.—San Antonio 2008, pet. denied). These questions have included not only whether a landowner owns groundwater in place under his land or actually vests only when the landowner has captured the groundwater by producing it and putting it to a beneficial use but also whether the landowner’s interest in the groundwater is a vested right that would enable the landowner to challenge groundwater regulation by a governmental authority as an unconstitutional taking of the landowner’s ownership of groundwater. The courts have also relied on oil and gas precedents to determine issues related to reservations of groundwater in place and conflicts between the severed dominant groundwater estate and servient surface estate.
In City of Del Rio, the trust, which was the owner of a large ranch, sold a fifteen-acre portion of the ranch to the city of Del Rio. In the sale the trust reserved the rights to all groundwater under the land but expressly surrendered any right to use the surface estate of the fifteen acres to access and develop the reserved groundwater rights. City of Del Rio, 269 S.W.3d at 615. The trust had never produced groundwater from the fifteen-acre tract. After the sale, the city drilled a well on the land for the production of groundwater for its municipal water supply. The trust sued the city on the grounds that the trust was the owner of the groundwater due to its reservation. The city, using an interpretation of the “rule of capture” as a theory of ownership, rather than a defense to liability for the pumping and use of groundwater in place, argued that the landowner’s interest in the groundwater under his land is not a vested right but vests only when the landowner has “captured” the groundwater by pumping it and using it. Under this argument, because the trust had never produced groundwater from the fifteen-acre tract, the trust did not have an ownership interest in the groundwater that could be reserved in the deed, and therefore the city owned the groundwater under the fifteen acres. The court rejected the city’s argument, holding instead that “under the absolute ownership theory, the Trust was entitled to sever the groundwater from the surface estate by reservation.” City of Del Rio, 269 S.W.3d at 617. The court reasoned that the trust could access the groundwater from an adjacent tract of land without the need to access the surface estate of the fifteen-acre tract. City of Del Rio, 269 S.W.3d at 618–19. The Texas Supreme Court denied the city’s petition for review.
In Edwards Aquifer Authority v. Day, the landowners sued the Edwards Aquifer Authority (EAA) on the grounds that the EAA’s denial of the landowners’ permit applications constituted a regulatory taking of the landowners’ vested rights in the groundwater. The Texas Supreme Court affirmed many aspects of the EAA’s final order regarding the permit applications at issue but remanded the case to the trial court for further proceedings on the taking claim. The supreme court affirmed the court of appeals’ key holding, stating that “land ownership includes an interest in groundwater in place that cannot be taken for public use without adequate compensation.” Day, 369 S.W.3d at 817. The court ruled that prior decisions neither recognized nor precluded ownership in place. The court noted that it had held oil and gas in place to be owned by the landowner long ago, and concluded “we find no reason to treat groundwater differently.” Day, 369 S.W.3d at 823.
In a subsequent case, Bragg, 421 S.W.3d at 137–38, the court relied on the supreme court’s ruling in Day that groundwater rights in place are vested rights, constitutionally protected from a government taking, including a regulatory taking resulting from the permitting decisions of groundwater conservation districts (GCDs), without just compensation. The Texas Supreme Court denied the Edwards Aquifer Authority’s petition for review.
In 2016, the supreme court again relied on Texas oil and gas precedents in Coyote Lake Ranch. The court held that the groundwater estate was by necessity the “dominant estate” when severed from the surface estate. Coyote Lake Ranch, 498 S.W.3d at 64. Relying on the rationale adopted by the court for the mineral estate, the supreme court also held that the accommodation doctrine applied in conflicts between the superior groundwater estate and the servient surface estate that are not expressly addressed in the agreements between the parties. Coyote Lake Ranch, 498 S.W.3d at 64.
The Texas legislature amended section 36.002 of the Water Code to address the issue of ownership of groundwater in place and the authority of GCDs to regulate the pumping and use of groundwater. To some extent this section, as amended, codifies the existing case law. See Day, 369 S.W.3d at 842.
Section 36.002(a) states that the “legislature recognizes that a landowner owns the groundwater below the surface of the landowner’s land as real property.” Section 36.002(b) provides that this ownership interest entitles the landowner to drill for and produce the groundwater “subject to” the authority of GCDs to limit or prohibit drilling and to regulate production as described in section 36.002(d). Section 36.002(b–1) also recognizes landowners’ common law rights but provides that the “groundwater ownership and rights described by this section [do not] entitle a landowner . . . to the right to capture a specific amount of groundwater below the surface of [the] landowner’s land.” Tex. Water Code § 36.002(b–1). While the term vested right is never used in the statute, section 36.002(c) expressly states that nothing in the Water Code “shall be construed as granting the authority to deprive or divest a landowner . . . of the groundwater ownership and rights described by this section.” Tex. Water Code § 36.002(c).
The common-law rule of capture in Texas, as adopted by the supreme court in the 1904 East case is being eroded. GCDs, where they exist, have the authority to adopt regulations that require permits for drilling wells and pumping groundwater and that impose limitations on a landowner’s ability to produce groundwater and to export it outside the district. Tex. Water Code §§ 36.001(1), 36.101, 36.113, 36.116, 36.122. Restrictive covenants that prohibit a landowner’s drilling of water wells have been held to be enforceable against the right of a landowner to access its groundwater. See Dyegard Land Partnership v. Hoover, 39 S.W.3d 300 (Tex. App.—Fort Worth 2001, no pet.). For more in-depth discussion of restrictive covenants affecting real property see chapter 23 in this manual.
§ 16.2:3Groundwater Conservation Districts and Groundwater Management
The state has the power to impose reasonable regulations on real property, including groundwater, to protect the public health and welfare, as part of its police powers. In addition, the Conservation Amendment (article XVI, section 59, of the Texas Constitution) declares the right and duty of the state to conserve and develop its natural resources and gives the legislature authority and duty to pass all laws appropriate to these conservation goals. See Tex. Const. art. XVI, § 59; City of Corpus Christi v. City of Pleasanton, 276 S.W.2d 798, 803 (Tex. 1955). The legislature has emphasized that groundwater conservation districts (GCDs) are the state’s preferred method of groundwater management. Tex. Water Code § 36.0015; see Edwards Aquifer Authority v. Day, 369 S.W.3d 814, 835 & n.119 (Tex. 2012); Sipriano v. Great Spring Waters of America, Inc., 1 S.W.3d 75, 79 & n.33 (Tex. 1999). For more in-depth discussion of restrictive covenants affecting real property see Mary K. Sahs and Holly Heinrich, eds., Essentials of Texas Water Resources, chs. 5 and 16, State Bar of Texas (7th ed. 2022).
GCDs may be created by special legislation or by the TCEQ on petition of landowners within the proposed district. See Tex. Water Code §§ 36.013–.021. Chapter 36 of the Texas Water Code sets out the main regulatory powers of general-law GCDs. Legislatively created GCDs may have powers and authority that differ from those of general-law districts. To the extent of any conflict between an individual GCD’s enabling legislation and the provisions of chapter 36, the provisions of the individual GCD’s special legislation controls. Tex. Water Code § 36.052(a). Although the legislation creating most districts follows closely the provisions of chapter 36, the enabling legislation of a legislatively created district must be reviewed to determine the scope of its jurisdiction and authority.
The Texas legislature has created several special-purpose districts that operate similar to GCDs but which are distinct, including the Edwards Aquifer Authority, the Harris-Galveston Subsidence District, and the Fort Bend Subsidence District. The enabling legislation of the latter two districts, originally established as special-law GCDs, was amended in 2003 to address the particularized purpose of regulating groundwater to prevent subsidence. Tex. Spec. Dist. Code §§ 8801.003, 8834.003. These districts focus on specific purposes other than simply regulating groundwater production. The regulatory requirements for transferring groundwater rights within the EAA and these subsidence districts are unique, making it important for attorneys to understand the substantive and procedural rules of each district.
Generally, most GCDs have the authority to incur debt, levy taxes, charge for services, obtain easements, and condemn property. See Tex. Water Code §§ 36.101–.124. Districts may impose fees to cover administrative acts of the district and production fees on pumping authorized in the district. Tex. Water Code § 36.205. A GCD may impose additional fees for exporting water out of the district but may not impose more restrictive permit conditions on transporters than the GCD imposes on existing in-district users. See Tex. Water Code § 36.122. A seller of residential real property must disclose whether the seller is aware (actual knowledge, without any duty of investigation) of any portion of the property being located within a GCD or subsidence district. See Tex. Prop. Code § 5.008(b)(9).
Each GCD has the power to implement its statutory authority through rulemaking and permitting. See Tex. Water Code §§ 36.101, 36.113, 36.1131, 36.117, 36.122. District rules may include well spacing and regulation of groundwater production by well production limits, including limits based on acreage or tract size, rate of production limits, or “managed depletion” (an approach that aims to control the amount and rate of depletion districtwide over the long term). See Tex. Water Code § 36.116. Within certain constraints, a GCD may also regulate groundwater production in a manner designed to preserve “historic or existing use.” Tex. Water Code § 36.116(b).
If land is within a GCD or a subsidence district, it is important to review the regulations of the district to determine any requirements and limitations on the landowner’s ability to access and produce groundwater. All wells must be permitted, unless they are exempted by statute or the GCD’s rules. Tex. Water Code §§ 36.113, 36.117. Wells used solely for domestic and livestock purposes, wells used for oil and gas production or surface mining activities, and wells existing at the time of the creation of the district are generally exempt from the permitting process. See Tex. Water Code § 36.117. Exempt wells may be required to be registered with the district, may have production report filing requirements, and may be subject to the payment of export fees. See Tex. Water Code § 36.117.
Information and maps of groundwater conservation districts are available on the TWDB website at www.twdb.texas.gov and the TCEQ website at www.tceq.texas.gov. Copies of district rules and district management plans generally must be obtained from the individual conservation district. Contact information for GCDs may be available on the Texas Alliance of Groundwater Districts website at https://texasgroundwater.org.
Landowners also should be aware of the tools for groundwater management implemented by the Texas legislature, as these processes and their results can affect the regulation of groundwater in a specific area of the state. Each GCD is required to develop a comprehensive management plan that addresses various management goals, includes specific performance standards, details actions and procedures to carry out the plan, and includes estimates of various aspects of the groundwater resources within the district. See Tex. Water Code § 36.1071(e). However, GCDs do not follow aquifer boundaries, and more than one district may have jurisdiction over a single aquifer. The TWDB must designate “groundwater management areas” for aquifers across the state to promote coordination among GCDs. See Tex. Water Code § 35.004; cf. Tex. Water Code § 36.002(13) (defining “management area”). GCDs within a groundwater management area sharing jurisdiction over the same aquifer are required to engage in a joint planning process to determine “desired future conditions” (as adopted by the district under Water Code section 36.108) for the aquifer on a five-year recurring basis. Tex. Water Code § 36.1071(a)(8).
The TCEQ has statutory authority to designate a “priority groundwater management area” if the area is currently experiencing critical groundwater problems or is anticipated to experience them within the next twenty-five years. Critical groundwater problems contemplated by the statute include shortages or contamination of groundwater supplies and land subsidence caused by the withdrawal of groundwater. Tex. Water Code § 35.007(a). Once an area is designated a priority groundwater management area, the landowners within the area may (1) create one or more general-law GCDs, (2) have the area annexed to an adjoining GCD, or (3) create one or more GCDs through the legislative process. Tex. Water Code § 35.012(a).
§ 16.3Practical Considerations for Conveying Groundwater Rights
§ 16.3:1Severability and Marketing of Groundwater Rights
In Edwards Aquifer Authority v. Day, 369 S.W.3d 814 (Tex. 2012), the Texas Supreme Court determined that groundwater rights may be severed from the surface estate and leased or sold to a party other than the owner of the surface estate. The supreme court held in Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53, 64 (Tex. 2016), that general groundwater rights were the “dominant estate” to be treated similarly to severed mineral rights. Groundwater currently is the favored source of water for water marketers, but the purchase or lease of groundwater rights presents its own challenges, not the least of which is navigating the various regulatory regimes used by different groundwater conservation districts (GCDs). Even if the real estate or groundwater rights being considered are located outside of a GCD or priority groundwater management area, due consideration should be given to the potential for creation of a groundwater conservation district in the future.
Groundwater permitting by a local groundwater conservation district (GCD) is affected, in part, by the district’s rules and management plan. When evaluating a prospective lease or purchase of groundwater rights from property within a GCD, the permitting implications of the transaction must be carefully considered. For example:
•Is the purchase or lease only of the groundwater rights in place or production rights, or is it also of existing permitted rights?
•Are there any existing permits, such as production or drilling permits, that can be transferred to the purchaser? If so, do the permits need to be amended to meet the purchaser’s needs?
•What permits or permit amendments, if any, will the buyer need for his intended use of the groundwater, and what are the district’s applicable permitting requirements?
•How and when in the closing process should the transfer of the groundwater rights and any existing permits be completed?
•Do the district’s permitting requirements allow for the purchaser’s desired objective?
•Are the district’s water use or export fees prohibitive?
•Do the district’s rules affect the relative advantage of well-field design or amount of contiguous acreage included in the permit?
Whether there is likely to be opposition to the buyer’s intended use of the groundwater by landowners sharing the same aquifer, other permit holders, or interested organizations, and whether past permitting decisions of the GCD indicate that there may be difficulty in obtaining the required permits is an important part of the purchaser’s due diligence. This is particularly important in areas in which there has been an increase of permitting of groundwater rights for development and transportation for use outside of the GCD. In these areas opposition may lead to contested hearings or litigation. At least one GCD refused to grant in full the requested operating and transport permits, even though the application was uncontested and the GCD staff recommended approval. See Forestar (USA) Real Estate Group, Inc. v. Lost Pines Groundwater Conservation District, No. 15369, 335th Dist. Ct., Lee County, Tex., filed March 14, 2014 (this case eventually settled by issuance of a smaller permit); but see Tex. Water Code § 36.4051(d) (allowing an applicant to seek a contested case hearing following such a decision). In another instance, a water marketer’s plan to produce and transport groundwater from land not subject to a GCD, and thus not subject to production limits, was opposed by neighboring landowners who feared that the magnitude of the production would cause their wells to fail. The Texas legislature took action to give an existing GCD jurisdiction over the aquifer from which the groundwater would be produced and regulatory authority over the area previously located outside of any GCD. See Tex. Spec. Dist. Code §§ 8802.0035, 8802.1045.
Issues a purchaser or lessee of groundwater rights should consider include the following:
•What types of legal or technical (for example, hydrogeological or well-field design) advice are necessary before closing, and should the closing be conditioned on the results of such analysis?
•What method of pricing the groundwater rights is most appropriate for the transaction? For example, should pricing be based on the amount of available or permitted production, a flat price per acre, or a hydrogeological analysis estimating the saturated thickness of groundwater under the surface?
•To what extent, if any, will groundwater rights, or the right to use some portion of the conveyed groundwater, be reserved to the owner of the surface estate?
•What types of easement rights will be required to make use of the groundwater rights?
•What existing uses are being made of the surface (for example, agricultural or oil and gas production) that might affect the purchaser’s development of the groundwater rights?
•Can the water be transported to its place of use or need? Are existing infrastructure, right-of-way, and easements available?
•What is the native quality of the groundwater?
•What is the condition of any infrastructure or groundwater production, treatment, or storage facilities to be conveyed?
•What are the terms and conditions in any existing permits authorizing production or export of groundwater?
•Does the area where the groundwater rights are located have any subsidence history?
Basic information to consider throughout the contracting process to acquire the right to use or purchase the groundwater asset, including coordination with a local groundwater conservation district responsible for permitting the production and use of the groundwater, is listed in form 16-1 in this chapter.
Surface water in Texas is owned by the state, subject to the appropriation of a right to use the water. Transactions for the purchase of appropriated rights to use surface water are quite common. Individuals and entities enter into water supply contracts to meet their needs for municipal, industrial, agricultural, or other water uses. Because most stream segments in Texas are already fully appropriated or even excessively appropriated, the market relating to existing water rights is necessarily dynamic. This section of the chapter addresses the nature of surface water rights under Texas law, the requirements for obtaining a new or amended surface water right from the TCEQ, and some practical considerations in surface water rights transactions.
Surface water owned by the state is defined in Texas Water Code section 11.021(a), which reads as follows:
The water of the ordinary flow, underflow, and tides of every flowing river, natural stream, and lake, and of every bay or arm of the Gulf of Mexico, and the storm water, floodwater, and rainwater of every river, natural stream, canyon, ravine, depression, and watershed in the state is the property of the state.
Navigable streams include watercourses that are navigable in fact or meet the statutory definition in Texas Natural Resources Code section 21.001(3). Section 21.001(3) defines a “navigable stream” as one retaining an average width of thirty feet from the mouth, measured from cut bank to cut bank. Tex. Nat. Res. Code § 21.001(3). The state holds the waters of navigable streams in trust for the public, and therefore such streams are subject to appropriation. In re Adjudication of the Water Rights of Upper Guadalupe Segment of Guadalupe River Basin, 642 S.W.2d 438, 444 (Tex. 1982). The state also owns the riverbed—the lands underlying navigable streams. See State v. Bradford, 50 S.W.2d 1065, 1069 (Tex. 1932).
Under some circumstances, the landowner may have more or different rights to surface water that are exempt from state permitting requirements.
Domestic and Livestock Exemption: The use of water for domestic and livestock purposes is generally exempt from state water rights administration. Without obtaining a permit, a person may construct a dam or reservoir up to two hundred acre-feet in capacity for domestic and livestock purposes on his own property. Tex. Water Code § 11.142; see 30 Tex. Admin. Code chs. 295, 297.
Diffused Surface Water: Diffused surface water is water on the surface of the land, such as rainfall runoff, that has not yet entered a watercourse. A watercourse is a channel, with a well-defined bed and banks, in which water flows as a stream and has a permanent source of supply. Hoefs v. Short, 273 S.W. 785 (Tex. 1925). Diffused surface water is the property of the owner of the soil until it enters a watercourse, at which point diffused surface water is transformed legally to public property (state water or riparian water). Turner v. Big Lake Oil Co., 96 S.W.2d 221 (Tex. 1936); Motl v. Boyd, 286 S.W. 458 (Tex. 1926).
Developed Water: “Developed water” refers to water augmenting the natural streamflow that has been made available to the receiving watercourse through artificial means, such as imported surface water or groundwater pumped to the surface, including treated wastewater effluent. Generally water that is legally reduced to possession and still under the physical control of the owner of an artificial conveyance system is subject to sale or further use by the owner of the system, as long as the water does not escape his control and rejoin a watercourse. See Guelker v. Hidalgo County WCID No. 6, 269 S.W.2d 551 (Tex. App.—San Antonio 1954, writ ref’d n.r.e.); cf. Tex. Water Code § 11.042 (bed and banks authorization).
§ 16.5General Types of Surface Water Rights
§ 16.5:1Appropriative Water Rights
In Texas, the appropriation doctrine has developed over more than a century of legislation. The water right, documented in the form of a permit, certificate of adjudication, or certified filing, is a “usufruct” or right of use. The appropriative use is precisely defined, with the state authorizing the use of water in a specific amount, by diversion from a watercourse at a definite location, for a particular purpose, and for a use within a particular area or tract of land. It is unlawful to willfully take, divert, impound, or appropriate state water for any purpose without first complying with all applicable requirements of chapter 11 of the Water Code. Tex. Water Code §§ 11.081, 11.121; but see Tex. Water Code §§ 11.142–.143. Violators are also subject to civil and administrative penalties. See Tex. Water Code §§ 11.082, 11.0842–.0843.
Under the prior appropriation doctrine, seniority, or “first in time, first in right,” each water right is assigned a specific priority date. During times of shortage, this system determines the allocation of water among appropriators by use of relative priority dates. Tex. Water Code § 11.027; cf. Tex. Water Code §§ 11.023–.024. Senior rights holders are entitled to fully exercise their rights before those holding junior rights receive any water. The TCEQ promulgated rules in 2012 attempting to circumvent the prior appropriation system by exempting junior water rights from suspension or adjustment “based on public health, safety, and welfare concerns.” 30 Tex. Admin. Code § 36.5(c); see Tex. Water Code § 11.053. These rules were challenged by the Texas Farm Bureau and individual landowners as contravening the prior appropriation doctrine prescribed by section 11.027. The court found the TCEQ’s rulemaking, pursuant to section 11.053, ignored the prior appropriation doctrine codified in section 11.027 and concluded that the rules exceeded the TCEQ’s authority. See Texas Commission on Environmental Quality v. Texas Farm Bureau, 460 S.W.3d 264 (Tex. App.—Corpus Christi–Edinburg 2015, pet. denied). The TCEQ has filed notice of intention to review the chapter containing the challenged rules. TCEQ, Notice of Intention to Review, 44 Tex. Reg. 5153, 5153 (2019). Texas’s prior appropriation seniority system does not apply to water in the Rio Grande River Basin below Lake Amistad. See Tex. Water Code § 11.3271. There, the type of water right (for example, municipal, industrial, Class A irrigation, Class B irrigation) governs who is entitled to water during times of shortage. Beneficial use is another fundamental concept in the appropriation doctrine. See Tex. Water Code §§ 11.023–.024. A permit authorizing use of state water under the appropriative system is a license. To the extent the appropriator actually puts the water to beneficial use, the appropriation is perfected and becomes a vested property right. See Tex. Water Code §§ 11.025–.026.
Even within the framework of appropriative rights, there are various limitations on a landowner’s rights to use surface water, including the following.
Damage to Other Property: No person may divert or impound the natural flow of surface water in the state in a manner that damages the property of another because of the overflow of the diverted or impounded water. Tex. Water Code § 11.086(a). If property is injured by such a diversion or impoundment, the owner of the injured property may recover damages from the liable party. Tex. Water Code § 11.086(b).
Eminent Domain for Municipal Use: Section 11.033 of the Texas Water Code provides that municipalities and other governmental agencies can exercise the power of eminent domain to acquire water or property devoted to uses other than municipal and domestic purposes. Although this eminent domain provision has not been repealed or amended, the Texas Property Code imposes various additional requirements on condemnation of water rights by municipalities and provides for separate valuation of groundwater rights in excess of the market value of the fee simple estate. See Tex. Prop. Code §§ 21.0121, 21.0421.
Cancellation of Water Rights: Although a perfected water right is considered a vested property right, with notice and hearing the TCEQ may cancel a water right in whole or in part based on ten years of nonuse immediately before the cancellation proceeding. See Tex. Water Code §§ 11.172, 11.173(a); Texas Water Rights Commission v. Wright, 464 S.W.2d 642 (Tex. 1971). There are now certain statutory exemptions from cancellation, including exemptions for water rights dedicated to certain conservation programs, and the TCEQ may find “justified nonuse” in cases in which the water right is being made available for private marketing or reserved for environmental use. See Tex. Water Code §§ 11.173(b), 11.177(b).
A riparian water right is a right recognized at common law that entitles the owner of property adjacent to a watercourse to make “reasonable” use of the normal flow of the stream. This right is not quantified. A riparian property owner may impound and use any amount of water that is reasonably necessary for any reasonable purpose; however, the owner may not unreasonably interfere with the use of water by others. A riparian landowner may sell the water for use off-site of the riparian property, provided that the off-site use does not prejudice other riparian water users. Riparian rights holders may separate, by express conveyance, their riparian water rights from the riparian land. See Watkins Land Co. v. Clements, 86 S.W. 733 (Tex. 1905). On rivers for which the state has completed the water rights adjudication process, the distinction between riparian rights and appropriative rights has been removed, and riparian rights have been converted into appropriative rights for all practical purposes.
§ 16.5:3Civil-Law Water Rights
Before the Republic of Texas adopted the common law, land grants from the sovereign were governed by civil law—either of Mexico or of Spain. These laws therefore determine the water rights relating to property originally granted from the sovereign under civil law. If a civil-law grant expressly includes a grant of water with the land, there is a legally recognizable water right. If the water right was not expressly granted, it is presumed that the sovereign retained the water rights when it made the land grant, and thus those water rights ultimately pass to the state of Texas. See State v. Valmont Plantations, 346 S.W.2d 853 (Tex. App.—San Antonio 1961), opinion adopted, 355 S.W.2d 502 (Tex. 1962). Like riparian rights, civil-law water rights are subject to the water rights adjudication process and thus have been quantified and merged with appropriative rights through that process.
§ 16.6Water Rights Adjudication and Administration
The Texas Water Rights Adjudication Act provides the mechanism for the state to quantify and compile the various sorts of water rights, such as civil-law water rights, riparian water rights, certified filings, and permits. See Tex. Water Code §§ 11.301–.341. The final decree in each water rights adjudication is final and conclusive as to all existing and prior rights and claims to the water rights in the adjudicated stream or segment and is binding on all claimants to water rights outside that stream or segment. Tex. Water Code § 11.322(d). This statute is the exclusive means by which water rights may be recognized in Texas, and thus courts cannot recognize equitable water rights based on good-faith prior use. In re Adjudication of Water Rights of Brazos III Segment of Brazos River Basin, 746 S.W.2d 207 (Tex. 1988). Nearly all of the general stream adjudications for Texas have been completed.
For river basins in which a watermaster program has been established, the TCEQ administers adjudicated water rights through a watermaster and a watermaster advisory committee appointed for each water division. See Tex. Water Code §§ 11.326, 11.3261. Watermaster programs are intended to ensure compliance with water rights by monitoring stream flows, reservoir levels, and water use. The watermaster divides the water of the streams (or other sources of supply) in the division based on the adjudicated water rights. Tex. Water Code § 11.327(a). The watermaster also regulates controlling works and diversion works in times of shortage to protect existing water rights, prevent waste, and prevent practices in excess of adjudicated rights. Tex. Water Code § 11.327(b). Currently, there are watermaster programs only for South Texas, the Rio Grande, the Concho River, and the Brazos River. See 30 Tex. Admin. Code chs. 303, 304. More information on watermaster programs, including a map of the locations, can be found on the TCEQ website at www.tceq.texas.gov.
An attorney representing a purchaser or lender acquiring an interest in water rights that are subject to a watermaster program should become familiar with the applicable statutory and program provisions at Tex. Water Code §§ 11.325–.3291, 30 Tex. Admin. Code §§ 304.1–.63 (Watermaster Operations), and the TCEQ website. Water rights in the Rio Grande below Lake Amistad are allocated on an account basis based on the use of the water, such as municipal and irrigation, instead of on a seniority basis, with priority being given to municipal use. See 30 Tex. Admin. Code ch. 303. If, in any given month, surplus water is identified over the water needed for municipal use, the water is allocated to the other accounts, such as irrigation. In purchasing water rights, the buyer should determine whether an allocation has been made to the seller, and if so the purchase contract should address how the water allocation will be divided between the parties at closing. The cost of administration of water rights by watermasters is allocated among the adjudicated water rights holders, and assessments are made by the TCEQ. In general, no water may be diverted, taken, or stored by or delivered to a person while he is delinquent in the payment of his assessed costs. See Tex. Water Code §§ 11.329, 11.455. Purchasers should determine the amount of any assessments that have been made against a seller and the payment status as part of their due diligence. The purchase contract should address the manner in which these assessments will be allocated at closing, if appropriate.
Attorneys dealing with water rights within the Rio Grande should be aware of recording requirements applicable to the Rio Grande watermaster in addition to those presented in section 11.136 of the Texas Water Code. There are two subsections (j) to section 11.3271 of the Texas Water Code adopted by the legislature in 2003 that have never been reconciled. See Tex. Water Code § 11.3271. Under one subsection (j), the watermaster with jurisdiction over the Rio Grande is made the official recorder for all instruments, including deeds, deeds of trust, financing statements, security agreements, and liens that the TCEQ authorizes or requires to be filed in connection with a water right relating to water in the lower, middle, or upper basin of the Rio Grande and that are subject to a permit, certified filing, or certificate of adjudication, and the filing will have the same legal effect as filing under other law for the same type of instrument. Under the other subsection (j), the watermaster is required to maintain a central repository that includes certified copies of all instruments, including deeds, deeds of trust, and liens that the TCEQ requires to be filed in connection with the same type of water rights as are described in the first-referenced subsection (j), and it is expressly stated that on and after September 1, 2003, a lien against a water right shall not be effective against third parties unless a certified copy of the instrument is filed with the watermaster and all requirements under other law are met. It would be prudent when conveying rights or interests in water rights in the Rio Grande to record a duplicate set of original documents with the Texas watermaster, as well as in the real property records of the county or counties in which the documents are otherwise authorized to be recorded, and to also file a certified copy of the documents recorded in the county real property records (at least with regard to liens) with the watermaster.
§ 16.7Obtaining Surface Water Rights
A person desiring to appropriate surface water must obtain a permit from the TCEQ. See Tex. Water Code §§ 11.022, 11.121. The permit or amendment may be granted only if—after the proper application is filed, the required fees are paid, and notice and hearing are held—the applicant shows that (1) unappropriated water is available in the source of supply; (2) the proposed appropriation is intended for a beneficial use, does not impair existing water rights or vested riparian rights, is not detrimental to the public welfare, considers various environmental and water quality assessments required by statute, and addresses a water supply need in a manner consistent with the state water plan and the relevant approved regional plan or plans; and (3) reasonable diligence will be used to avoid waste and achieve water conservation. Tex. Water Code § 11.134(b). Each of these requirements is discussed briefly below. The TCEQ also issues several types of more restrictive permits, such as seasonal permits, temporary permits, and emergency permits. Tex. Water Code §§ 11.137–.139.
§ 16.7:1Availability of Unappropriated Water
“Unappropriated water” must be available in the source of supply for a permit to be granted. Tex. Water Code § 11.134(b)(2). The Texas Supreme Court has held “unappropriated water” to mean the amount of water remaining available for appropriation within a river basin after taking into account complete satisfaction of all existing uncanceled permits and filings valued at their recorded levels. Lower Colorado River Authority v. Texas Department of Water Resources, 689 S.W.2d 873 (Tex. 1984). The TCEQ’s water availability models, sometimes referred to as “WAMs,” for each river basin in the state and the TCEQ’s regulatory criteria determine how frequently water must be available to support a finding that unappropriated water is available for appropriation.
The Texas Water Code recognizes various purposes for which state water may be appropriated, stored, or diverted and ranks those uses by preference for permit issuance: domestic and municipal, agricultural and industrial, mining, hydroelectric power, navigation, recreation, public parks, game preserves, recharge into certain aquifers, and “any other beneficial use.” Tex. Water Code §§ 11.023(a), (b), 11.024. The TCEQ may grant a water right application only if the proposed appropriation “is intended for a beneficial use.” Tex. Water Code § 11.134(b)(3)(A).
§ 16.7:3Nonimpairment of Existing Water Rights
The TCEQ may grant a water right (or amendment) application only if the proposed appropriation does not impair existing water rights or vested riparian rights. Tex. Water Code § 11.134(b)(3)(B). To the extent the proposed appropriation would impair water availability for existing downstream rights, the commission may include restrictions on the diversion and use of water in the new permit. Examples of such restrictions include minimum streamflow, maximum diversion rates, and seasonal restrictions intended to protect both water rights holders and the environment.
The TCEQ may grant a water right only if it finds that it would not be “detrimental to the public welfare.” Tex. Water Code § 11.134(b)(3)(C). Under the commission’s rules, this very broad requirement includes consideration of environmental, social, and economic impacts of the proposed appropriation. See 30 Tex. Admin. Code ch. 297; cf. Railroad Commission of Texas v. Texas Citizens for a Safe Future & Clean Water, 336 S.W.3d 619 (Tex. 2011) (TCEQ must consider public welfare factors related to its authority in water rights permitting).
§ 16.7:5Conservation and Drought Contingency Requirements
The TCEQ may grant a water right application only if the applicant has provided evidence that reasonable diligence will be used to avoid waste and achieve “water conservation,” as that term is defined by Tex. Water Code § 11.002(8)(B). Tex. Water Code § 11.134(b)(4); see 30 Tex. Admin. Code ch. 288. With few types of exceptions, such as applications for emergency use, temporary use, or to impound water solely for in-place use, an applicant for new or amended water rights must submit a water conservation plan and adopt reasonable conservation measures, with varying criteria for such plans depending on the water use. See Tex. Water Code § 11.1271. In addition to developing conservation plans, wholesale and retail public water suppliers and irrigation districts must develop and submit drought contingency plans, relating to their water rights, to be implemented during periods of water shortages and drought. Tex. Water Code § 11.1272(a); see generally 30 Tex. Admin. Code ch. 288.
The TCEQ may grant an application for a water right or amendment only if the proposed appropriation addresses a water supply need in a manner consistent with the state water plan and any relevant approved regional water plan, unless the commission waives this consistency requirement. Tex. Water Code §§ 11.134(b)(3)(E), 11.1501. Information regarding each of the sixteen regional water plans can be found on the “Planning” page of the TWDB’s website, www.twdb.texas.gov.
Various other statutory provisions require the TCEQ to consider the environmental and conservation impact of water rights applications, including the effects, if any, of the issuance of the permit on groundwater or groundwater recharge (Tex. Water Code § 11.151); the effects, if any, on the bays and estuaries of Texas (Tex. Water Code § 11.147(b)); and permit conditions necessary to maintain existing instream uses, the water quality of the river or stream to which the permit would apply (Tex. Water Code §§ 11.147(d), 11.150), and fish and wildlife habitats (Tex. Water Code §§ 11.147(e), 11.152).
The Texas Parks and Wildlife Department also has significant authority relating to certain environmental aspects of water rights applications. The TCEQ must send a copy of every water rights permit application to the department, which is entitled to participate in hearings on such applications. Information and evidence presented by the department must be considered by the TCEQ in making a final decision on a water rights application. Tex. Water Code § 11.147(f).
A prospective buyer or seller of water rights as part of a real estate transaction must take special note if the water is intended to be taken or diverted from one watershed or river basin to another, because special TCEQ authorization must be obtained before any such “interbasin transfers.” See Tex. Water Code § 11.085. There are criminal penalties for taking or diverting water in violation of this statute. See Tex. Water Code § 11.085(q), (r). The legislature has sought to balance the interests of the basin of origin and the receiving basin. See Tex. Water Code § 11.085(k)–(l); San Antonio v. Texas Water Commission, 407 S.W.2d 752 (Tex. 1966). Because newly authorized interbasin transfers have junior priority to all other water rights granted before the filing of a transfer application, the feasibility of an interbasin transfer from existing water rights can be severely limited. See Tex. Water Code § 11.085(s). There are five narrow exceptions to the limitations imposed by section 11.085, which should be reviewed. See Tex. Water Code § 11.085(v).
§ 16.8Practical Considerations for Conveying Surface Water Rights
§ 16.8:1Severability and Marketing of Surface Water Rights
Water rights may or may not be appurtenant to a specific tract of land. State-owned surface water rights, arising from either permit or certificate of adjudication, may be transferred as an easement that passes with title to the land or may be transferred separately from the land. Tex. Water Code § 11.040(a); Strayhorn v. Jones, 300 S.W.2d 623, 634 (Tex. 1957). In general, title to private water rights will pass automatically with title to the land unless the water rights have been previously sold or conveyed to some third party or are specifically reserved by the grantor. See Graham v. Kuzmich, 876 S.W.2d 446 (Tex. App.—Corpus Christi–Edinburg 1994, no writ); Fleming Foundation v. Texaco, Inc., 337 S.W.2d 846, 850 (Tex. App.—Amarillo 1960, writ ref’d n.r.e.); see generally 30 Tex. Admin. Code § 297.81. See the discussion at sections 16.5:1 and 16.5:2 above distinguishing private water rights from state water.
For marketing of surface water rights in Texas, there are significant restrictions on interbasin transfers, as discussed at section 16.7:6 above. Within a river basin, water transfers and marketing by regional suppliers such as river authorities are relatively straightforward. Difficulties may arise, however, when these transactions require amendment of an existing water rights permit, particularly if there are potential issues of impairment of existing senior water rights or environmental impacts. Nonetheless, there is an active market for surface water rights in some parts of Texas, particularly in the Rio Grande Valley. It should be noted that the transfer of water rights in the Rio Grande Valley is governed by TCEQ rules that are unique to the Rio Grande basin and administered by the Rio Grande watermaster. See 30 Tex. Admin. Code ch. 303. Practitioners should fully understand those rules before beginning negotiations for the sale or purchase of surface water rights in that area.
In cases in which an applicant is seeking a new or amended water right, the requirements outlined generally at sections 16.7 through 16.7:6 above will govern the substantive and procedural aspects of the TCEQ’s consideration of the application. Even in cases of transactions to sell or lease existing water rights, however, there may be commission requirements that must be satisfied, which could include the following:
•Do the TCEQ rules require actual amendments of the water right as a result of the transaction (for example, diversion point, place, or purpose of use)?
•If so, will notice and hearing be required? If so, is there any potential for opposition from other interests within the basin?
•Must the contract or the deed for the transaction be submitted to the TCEQ for its records?
•Do any special rules or procedures apply (for example, for transactions within the jurisdiction of a watermaster program)?
Issues the purchaser or lessee of surface water rights should consider include the following:
•What types of legal or technical advice are necessary before closing on the transaction, and how should the closing be conditioned on the results of such analysis?
•How much water is needed for the proposed project, in terms of firm yield requirements over the relevant time period?
•Are the existing rights valid and properly perfected?
•Can the relative priority of the water right be determined through examination of county deed records and the TCEQ’s records?
•What do the TCEQ’s records of existing water rights in the stream segment or basin reveal that might impact the desirability of the transaction?
•What types of easement rights will be required to make use of the surface water rights?
•Can the water be transported to its place of use or need?
Basic information to consider throughout the contracting process to acquire the right to use or purchase the surface water asset, including coordination with the TCEQ, responsible for permitting the production and use of the surface water, is listed in form 16-19 in this chapter.
§ 16.8:4Transfer and Recording of Permits
Transfers of ownership of surface water rights must be reported to the TCEQ. See Tex. Water Code § 11.122. The change of ownership form, TCEQ Form 10204, may be downloaded from the commission’s website, www.tceq.texas.gov. This form initiates the transfer process at the TCEQ, which is not complete until an approval letter, amended certificate of adjudication, or amended permit is issued to the new owner.
The permit or amended permit must be recorded with the county clerk of the county or counties in which the appropriation will be made. Tex. Water Code § 11.136. This would include at least the county or counties in which the point of diversion is located. In most cases, a certificate of adjudication or amendment must be similarly recorded in each applicable county. See Tex. Water Code § 11.324. For more discussion on recordation, see part IV. in this chapter.
[Sections 16.9 and 16.10 are reserved for expansion.]
II. Groundwater Transaction Guide for Sale of Groundwater Rights for On-Site Production
§ 16.11Sale of Groundwater Rights in Place for On-Site Production
The rights to explore for, drill for, produce, and transport groundwater can be sold under a contract of sale and conveyed by deed and easement agreement. These rights can also be leased under a groundwater lease. (But see section 16.1 above for a discussion of ownership of groundwater rights.) This part of this chapter applies to the sale and conveyance of groundwater rights for on-site production, that is, to a transaction in which the groundwater is intended to be produced from wells located on the seller’s land. It does not cover the sale or conveyance of permitted groundwater for off-site production, which is addressed in part III. in this chapter, nor does it apply to the sale of surface water rights, which are addressed in part IV. Financing documents for use in transactions in which the groundwater rights, easement rights, and permit, if any, constitute the collateral, are discussed in part V.
The forms discussed in this part of the chapter are for general use. Users should be aware that modifications may be required for specific transactions. For all groundwater sales, it is imperative that the attorneys involved in the transaction identify the regulatory agencies with jurisdiction over the groundwater rights (referred to collectively in this transaction guide as the “groundwater authority”) and obtain copies of all rules and regulations pertaining to groundwater as early in the transaction as possible. The rules may contain requirements that have an important bearing on the transaction, such as minimum acreage requirements for production, limitations on production, and requirements for the issuance and transfer of permits. It may be necessary for the practitioner to make modifications to the forms based on the rules of the groundwater authority. Forms 16-1, 16-2, and 16-3 in this chapter, as described in this part of the chapter, are not generally used in the sale of groundwater rights subject to the rules of the Edwards Aquifer Authority.
§ 16.12Groundwater Rights Sales Contract, Deed, Easement, and Related Forms; Place for Recordation
If the seller is the owner of both the surface and groundwater estates in the land and is selling the groundwater and the right to use the surface estate for drilling, production, and transportation of groundwater on-site, the groundwater sales contract, form 16-2 in this chapter, should be used in the transaction. If the seller owns only groundwater rights that have already been severed from the land, together with easement rights to use the surface of the land for drilling, production, and transportation, the groundwater sales contract may be used if appropriately modified. At closing, the deed would describe both the groundwater rights and the easement rights. If the seller acquired the easement rights through a separate easement agreement, the deed would reference the recorded easement agreement. Alternatively, a separate assignment of easement rights could be used.
If the groundwater is subject to regulation by a groundwater authority, the attorney should determine whether the seller has obtained a groundwater permit. If so, the information regarding the permit should be set out in the contract, and the seller should request a transfer of the permit from the groundwater authority as part of the sale transaction. See section 16.17:5 below regarding permits.
All recordable documents should be recorded in the county or counties in which the land from which the groundwater and easement rights are obtained is located. Many groundwater districts do not require the recording of the permits issued in connection with groundwater rights for on-site production. If a groundwater permit is issued to the buyer in a form that may be recorded, the permit should be recorded in the real property records in the same county or counties as the deed is recorded. See part III. in this chapter.
The contract anticipates that a memorandum of contract will be recorded in the real property records when the contract is signed. The memorandum will put the public on notice of the buyer’s contract rights in the event there is a significant period of time between signing the contract and closing. See form 16-17.
The basic sales documents include the following:
1.Checklist for Acquiring Groundwater Right (form 16-1).
2.Groundwater Rights Sales Contract (form 16-2).
3.Groundwater Rights Warranty Deed (form 16-3).
4.Blanket Easement Agreement for Groundwater Rights (form 16-4).
5.Permit Transfer Request (form 16-13) or a transfer form promulgated or approved by the groundwater authority if a permit has been issued to the seller or another form promulgated by the groundwater authority, if it has a particular form for transfer. In the absence of a form promulgated by the groundwater authority, the applicant may choose to use the detailed application template included as form 16-28 in this chapter.
6.Partial Release of Lien (On-Site) (form 16-9) if the seller has an existing lien on the land and only the groundwater rights are being released from the lien at closing.
7.Release of Lien (form 10-2 in this manual) if the seller’s entire lien will be released at closing.
8.Lienholder Consent and Subordination to Easement Agreement (form 16-8) if the seller has an existing lien on both the surface estate and groundwater, which will not be released as to the surface estate at closing.
9.Bill of Sale (form 5-16 in this manual) if personal property will be conveyed at closing and a more detailed description is required than the description in the deed.
10.Form UCC3 (form 9-14 in this manual), a form promulgated by the Texas secretary of state, if there is a security interest that covers or that could be construed to cover the groundwater rights, the permit, or personal property to be conveyed at closing.
11.Assignment and Assumption of Lease (form 16-15) if there is an existing lease of the groundwater.
12.Lessee Estoppel Certificate (form 16-16) used to assure the buyer that the groundwater lease is valid and is not in default and that the lessee understands the lease is being assigned.
13.Affidavit of Debts and Liens [and Indemnity] (form 16-14) (if this form is not being provided by a title company) used to provide additional protection to the buyer, especially in instances in which no title insurance will be obtained or title insurance is not available.
14.Loan documents required by the lender.
The groundwater deed, easement, and other recordable documents should be recorded in the real property records of the county or counties in which the land is located. If the buyer has applied for a new or amended production permit from a groundwater conservation district, the permit, when issued, may not be in recordable form. While it has generally not been the practice to record these types of production permits in the real property records, recording is recommended. If the permit is not issued in a recordable form, the permittee may seek to record it as an exhibit to another recordable instrument such as an affidavit or memorandum of permit duly authorized.
The groundwater rights sales contract for on-site production, form 16-2 in this chapter, is drafted as a neutral form of contract, intending to favor neither the buyer nor the seller. For each contract, the basic elements of the transaction are, in general, stated in the sections to be completed at the beginning of the form. Some provisions, however, are required to be completed throughout the contract. The general terms that follow in the form may be used for many transactions. However, the sale of groundwater rights is an emerging area of law, and there are no well-established terms of sale. Contracts for the purchase and sale of groundwater rights are diverse, and additional drafting may be necessary to tailor the forms to the transaction.
§ 16.14Special Surface Use Considerations
In the sale of groundwater rights in which the groundwater will be produced using the surface estate, it is possible for the deed to convey not only an interest in the groundwater but also easement rights in the surface of the land for exploration, drilling, production, and transportation of groundwater. However, it is advisable to use a separate easement or surface use agreement to describe in detail the easement rights that the owner of the groundwater estate will have in the surface estate. The parties may also want to provide for payment terms and use restrictions that are too detailed to include in the deed. Although form 16-2 in this chapter and the groundwater warranty deed, form 16-3, provide for the sale and conveyance of groundwater rights, which include surface use rights, these provisions are intended as safeguards to ensure that surface use rights are included in the sale and conveyance. It is recommended that the optional provision for the execution of a separate easement or surface use agreement at closing be used. This additional level of effort may avoid the subsequent development of disputes creating a necessity for the courts to apply the accommodation to resolve the issues. See Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53, 64 (Tex. 2016).
§ 16.15Groundwater Rights Sales Contract
The following sections describe the provisions and terms of form 16-2 in this chapter and include considerations for the attorney in drafting or reviewing a contract, assisting the client during investigation of the groundwater rights, and closing the transaction. This commentary is organized in the same order as the sections of the contract.
§ 16.16Introductory Paragraph: Offer and Acceptance
The introductory paragraph of the contract states what the parties must do to form the contract of purchase and sale. If the buyer’s earnest money cannot be collected, the buyer will be in default.
There are sections for the names of and other information concerning the seller, the buyer, and their respective attorneys. Proper identification of the parties is important, and the seller and the buyer should be identified as fully as possible. Capacity and authority should be considered, especially if a party is not an individual acting on his or her own behalf. See chapter 3 in this manual for a discussion of party designations.
§ 16.17:2Title Company/Escrow Agent
Title insurance to insure title to severed groundwater rights in Texas is not generally offered by title insurance underwriters in Texas, although currently there is at least one insurer that offers title insurance for water rights. The contract designates a title company or escrow agent to act as the escrow and closing agent to address the situation in which the property will close through a title insurance company and the situation when it will not. The title company or escrow agent will be responsible for closing the transaction and receiving and disbursing funds under the terms of the contract.
It is advisable to have a written escrow agreement between the title company or escrow agent, the buyer, and the seller that defines the rights and duties of the title company or escrow agent. Form 4-4 in this manual is an escrow agent receipt and escrow agreement. It can be modified for use with an escrow agent other than a title company. The escrow agent should be responsible for getting signed at closing the affidavit of debts and liens (form 16-14), the settlement statement, and similar documents typically provided by a title company.
This section of the contract should be completed if a surveyor has been designated for the transaction. See section 16.21:3 below regarding survey requirements.
§ 16.17:4Groundwater Authority
If the real property is located within a groundwater conservation district or other groundwater authority, the authority should be identified. It is imperative that the buyer’s attorney consult the rules of the groundwater authority to determine all restrictions on the use and production of groundwater, requirements for sale of groundwater, and rules regarding the issuance or transfer of a permit. Generally, copies of the rules can be obtained only from the groundwater authority. The buyer’s attorney should also obtain, and personally review, copies of all documents maintained by the groundwater authority pertaining to the groundwater being sold. The attorney should note all relevant information from the file, such as yearly allocations, if applicable, and should determine the feasibility of meeting all conditions of the groundwater authority’s approval of the sale within the buyer’s required time frame.
It is important for the buyer to determine whether the seller has a production or other permit issued by a groundwater authority in connection with the groundwater, whether the permit will allow the use of the groundwater contemplated by the buyer, and what requirements the groundwater authority imposes for the transfer, amendment, or issuance of a permit. If the seller has been issued a permit, the permit information should be set out in the contract and a copy of the permit and all amendments provided to the buyer as part of the seller’s records. If there is an existing permit, the buyer generally will want to obtain a transfer of the seller’s permit, and the seller should be required to submit a request for transfer of the permit in connection with the sale transaction. If the buyer needs a modification to the permit, such as a change in the type of groundwater use permitted, the buyer can file the appropriate documentation for a request with the groundwater authority, with any transfer of the permit and change in permit terms taking effect after closing. Because the rules and procedures for groundwater authorities vary, the attorney should contact the groundwater authority to obtain information on the forms and procedures required by the specific groundwater authority. In many instances the local groundwater district will not have a form specific to the desired purpose. Form 16-28 in this chapter is an example of an application to the groundwater authority to transfer permits in the absence of a form promulgated by the authority.
Paragraph G.5. of form 16-2 addresses the buyer’s right to evaluate the seller’s permit during the inspection period and contains an optional paragraph if the purchase of the groundwater is contingent on the buyer’s ability to obtain required permits.
The amount of earnest money is negotiable and depends on several factors, including the purchase price, the type of financing, and the relative financial strengths of the parties.
§ 16.17:7Independent Consideration
If the buyer terminates the contract before the end of the inspection period, and the buyer is otherwise entitled to have the earnest money returned, the contract provides that a stated amount should not be returned to the buyer but should be paid to the seller, because that amount is the independent consideration to the seller for the buyer’s right to terminate the contract.
The real property is the land from which the groundwater is to be sold and is described in exhibit A. Any fixtures and personal property to be conveyed with the groundwater rights at closing also should be described in exhibit A. The contract should describe the real and personal property with legal specificity. If the property is not described sufficiently, the contract may be unenforceable because of vagueness. See chapter 3 in this manual for a discussion of property descriptions. Attention should also be given to the conveyance of appurtenant rights, such as permits, licenses, access easements, access to utilities, and similar rights. Because it is not clear whether some types of property, such as the components of a well, are personal property or fixtures, if wells or similar items are being conveyed at closing, it is advisable to treat them as both real and personal property in the conveyance documents.
The definition of groundwater is derived in part from Pecos County WCID No. 1 v. Williams, 271 S.W.2d 503, 505–06 (Tex. App.—El Paso 1954, writ ref’d n.r.e.).
The contract defines groundwater rights to include the right to use the surface of the land for the exploration, drilling, and production and any governmental licenses or permits to so use the groundwater.
§ 16.17:11Reserved Groundwater
If the seller intends to reserve ownership of or the right to use groundwater, the reserved rights should be described with specificity, including any limitation on the purpose or place of use of the groundwater or the quantity of groundwater that may be pumped. In general, it is customary for the seller to retain a right of usage to accommodate the seller’s needs, without retention of an undivided ownership interest in the groundwater. Form 16-2 reserves the seller’s right to use groundwater. The form should be amended if the parties intend for the seller to reserve an undivided interest in the groundwater and should specify the percentage interest reserved. The reservation should be carefully drafted to protect the buyer’s rights in the groundwater without unnecessarily curtailing the surface owner’s right to use its property. If the buyer is acquiring the groundwater for commercial use, the buyer will want to prohibit the seller from using the reserved groundwater for commercial uses or production, as well as enhanced or secondary recovery methodology. The restriction on the seller’s use may include restrictions on using groundwater for oil and gas exploration or production. The seller’s water production may be limited in various ways, as by specifying the amount of groundwater that can be produced from the real property on a per-year or other basis or by limiting the number of seller’s wells that may be maintained in operation on the real property at any one time. The parties may wish to specify whose right to the groundwater is paramount in the event of an extreme drought or production limitations. The following is a sample reservation provision for a deed:
Grantor reserves for itself and Grantor’s successors and assigns the right to utilize Groundwater, at no cost, solely for domestic and livestock use on the Real Property. The term domestic and livestock use means use of the Groundwater on the Real Property solely for household uses by Grantor, Grantor’s employees, and their respective families for the watering of domestic and grazing animals and for Grantor’s limited oil and gas use permitted by this deed. The right to utilize Reserved Groundwater includes the right to drill, use, and operate domestic-type wells or windmills but does not include the right to drill, use, or operate any industrial-type or irrigation-type wells on the Real Property or to use Groundwater for the creation or maintenance of ponds. No Reserved Groundwater may be used for the operation of crop irrigation, feed yard purposes, dairy operations, confined animal feeding operations, mining operations, or other industrial or commercial purposes, except that Grantor will have the right to use one existing well, or to drill and use one well, for each oil and gas well drilled as reasonably necessary during the drilling, completion, recompletion, reworking, remediation, and revegetation process (but not for water flooding and secondary recovery operations). After these processes have been completed, Grantor will have the right to use these wells for domestic and livestock purposes subject to the limitations set forth in this deed. The aggregate number of wells for the production of Reserved Groundwater existing at any time on the Real Property may not exceed, on the average, one well per [number] acres. If at any time Grantor fails to pump all the Reserved Groundwater to which Grantor is entitled, Grantee will have the right to pump all Groundwater not pumped by the Grantor without additional consideration or compensation.
The parties may wish to provide that the seller’s right to use groundwater will terminate if water sufficient to meet the seller’s needs becomes available to the property from some other source, such as a public water supply system, or from other land owned by the seller. If the seller reserves the right to use groundwater for domestic purposes, the parties may wish to specify, or otherwise limit, the number of households that may use the groundwater for such purposes, the number of wells used for such purposes, or the total volume per year that can be pumped for such purposes.
§ 16.17:12Hydrogeological Testing
Paragraph G.3. of form 16-2 authorizes the buyer to perform hydrogeological testing during the inspection period to determine the quality of the groundwater, to estimate the quantity of the groundwater, to establish well locations, and to form the basis for establishing the purchase price of the groundwater as described in section 16.17:13 below.
There is no standard method of determining the purchase price for groundwater rights. For example, the purchase price may be based on a dollar amount per acre of land from which the groundwater rights will be obtained, on a dollar amount per acre-foot permitted, on a dollar amount per acre-foot per acre allocated, or on the value of the groundwater rights as determined by an appraiser. The field of groundwater rights appraisal is still evolving. In areas where there are numerous groundwater sales or leases, it is possible to obtain an appraisal of groundwater rights based on comparable sales. In areas where there are few sales or lease transactions or where the water quantity or quality is highly variable, it may be difficult to obtain a reliable appraisal of groundwater rights without obtaining hydrogeological information on the groundwater. Where groundwater is obtained over a large area that may exhibit variability in water quality, volume, or sustainability, the calculation of the purchase price in the contract may be based on an estimate of these variables as determined by a hydrogeological study, so that the purchase price for groundwater in lands with a higher quality or greater volume of groundwater will be higher than the purchase price for groundwater in lands with lower quality or less sustainable groundwater.
Exhibit I may be used if the parties agree to seller financing of the purchase. If obtaining third-party financing is a condition to the buyer’s obligations, that fact and the terms of the complying financing should be addressed in the contract. See chapters 6 and 8 in this manual for further discussion of financing.
§ 16.17:14Buyer’s and Seller’s Liquidated Damages
These sections of the contract are provided so that the parties can agree on additional liquidated damages to be paid by the defaulting party to the nondefaulting party on default.
§ 16.17:15Title Commitment and Title Information
Only a few underwriters in Texas offer title insurance for severed groundwater rights. If the seller is not required to provide a title commitment, or if a title commitment is not available for the groundwater rights, the contract should require the seller to provide the buyer with an abstract of title. The contract provides that the buyer may have the abstract of title reviewed by an attorney of the buyer’s choice, at the expense of the seller or buyer as specified in the contract. If the buyer obtains an abstract of title, the buyer should have it reviewed by an attorney who is experienced in land titles and knowledgeable about groundwater rights.
In addition to traditional title instruments, such as deeds, leases, and easements, the contract defines title documents to include the seller’s permit and instruments affecting title to the groundwater and the real property referenced in the title commitment or title information, survey, or UCC search or to be provided as part of the seller’s records. Title documents may include probate records, marital records, and birth and death certificates. Under paragraph F.7. of the contract, title objections can be made on the basis of the title documents. This provides the buyer with the ability to make objections to title based on the seller’s permit or unrecorded documents provided as part of the seller’s records.
Section A of the contract groups most of the deadlines for ease of reference and provides two alternate ways to determine most of the deadlines: either a stated date or a specified number of days after the effective date of the contract or another specific date. The contract provides that time is of the essence. The contract provides that closing will occur a certain number of days after the expiration of the inspection period, but closing may also be specified to occur a certain number of days following a different event or on a certain date. The closing date may also be specified as “on or before” a certain date or event.
Section B of the contract lists the documents to be signed and delivered to close the transaction and serves as a checklist to prepare for closing. Section C contains a number of exhibits. The attorney should choose the specific exhibits appropriate for the sale.
§ 16.19:1Exhibit B—Representations; Environmental Matters
Exhibit B contains the parties’ representations. These items are always negotiated by the parties and will vary from transaction to transaction.
§ 16.19:2Exhibit C—Seller’s Records
Exhibit C is a list of the seller’s records of the property that will be delivered or made available to the buyer for review during the inspection period and also delivered to the buyer at closing.
§ 16.19:3Exhibit D—Notices, Statements, and Certificates
Exhibit D lists notices, statements, and certificates required by federal and state law and regulations to be delivered when common real estate contracts are executed. The items applicable to a specific transaction should be selected. See chapter 2 in this manual for brief discussions of each law and regulation and for references to other laws and regulations that require notices, statements, and certificates for less common transactions. Some of the statutory provisions would appear to include the sale of groundwater, simply because they apply to a sale or conveyance of real property, and no exemption is made for the sale of groundwater.
Copies of the seller’s permits should be attached to the contract as an exhibit. If copies cannot be attached for some reason, they should be described with specificity, including any permit numbers.
§ 16.19:5Exhibit F—Leases and Contracts to Be Terminated
This exhibit lists the seller’s leases and contracts affecting the real property or groundwater that will be terminated at or before closing.
§ 16.19:6Exhibit G—Leases and Contracts Not to Be Terminated
This exhibit lists the seller’s leases and contracts affecting the real property or groundwater that will be assumed by the buyer or taken subject to.
§ 16.19:7Exhibit I—Seller Financing
Exhibit I contains seller-financing terms.
§ 16.19:8Exhibit J—Easement Agreement
The deed conveying the groundwater should grant basic surface use rights for access to, and development of, the groundwater. Forms 16-2 and 16-3 in this chapter accomplish this by defining “Groundwater Rights” to include these basic surface use rights. It is advisable, however, that the parties agree on more extensive surface use rights and surface use restrictions for both the surface owner and the groundwater rights owner and set out these rights and restrictions in a separate easement agreement. The owner of the groundwater estate has easement rights implied by law to use as much of the surface estate as is reasonably necessary to produce groundwater. Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53 (Tex. 2016). However, many issues can arise when the surface owner and the groundwater rights owner both use the surface estate for their respective purposes, and it is important for the parties to consider and agree on specific terms that will establish their respective rights, priorities, and limitations with regard to the use of the surface estate. It is advisable for these terms to be set out in a separate easement or surface use agreement, rather than in the deed, so that they can be described in detail, along with indemnifications and other terms that are not customary in deeds. Failure to detail the rights and obligations of the parties may result in the application of the accommodation doctrine. Coyote Lake Ranch, 498 S.W.3d at 64.
The easement documents included in this chapter consist of a blanket easement agreement for surface use (form 16-4), with three optional addenda that impose surface use restrictions (form 16-7, surface use restrictions addendum), require payments for use of the surface estate (form 16-6, surface damage payment addendum), and require the groundwater rights owner to limit its use of the surface estate to specific locations over time (form 16-5, easement location addendum). In light of the Texas Supreme Court’s decision in Coyote Lake Ranch, attorneys using the easement forms should modify them as necessary to detail the respective surface use rights of the parties. Consideration should be given to incorporating into the easement documents the concept that the owners of the surface and groundwater estates will each make reasonable accommodations to the other in the use of the surface estate. Any obligation to make accommodations should be expressly stated, and the action required to fulfill this obligation should be clearly set out. The court’s analysis of when the accommodation doctrine applies, discussed below, can be used as a template in drafting this language.
In Coyote Lake Ranch, the court held that the owner of the groundwater estate has implied easements for access and use over the surface estate as reasonably necessary to develop the groundwater and that these easements are dominant to the surface use rights of the surface owner. Despite the broad surface use rights granted to the city, the court found that the language in the deed did not address all of the surface use issues raised by the ranch owner. The court held that when the documents creating the surface use rights do not fully address questions on surface use, the accommodation doctrine can be applied to limit the surface use by the owner of the groundwater estate.
Under the Coyote Lake Ranch holding, to successfully assert a claim that the accommodation doctrine applies, the surface owner must prove that—
1.the groundwater rights owner’s use completely precludes or substantially impairs the existing use; and
2.there is no reasonable alternative method available to the surface owner by which the existing use can be continued; and
3.there are alternative reasonable, customary, and industry-accepted methods available to the groundwater rights owner that will allow recovery of the groundwater and also allow the surface owner to continue the existing use.
Coyote Lake Ranch, 498 S.W.3d at 64. The court’s decision in this case underscores the importance of drafting surface use rights in a manner that is clear and unambiguous about the nature and extent of the authorized use.
Form 16-4 includes the grant of a 150-foot-wide sanitary control easement around each groundwater well as required by the TCEQ for wells that are part of a municipal water supply system. See 30 Tex. Admin. Code §§ 290.38(75), 290.41(c). The purpose of the easement is to create an area around each well in which uses that could adversely affect the quality of the groundwater are prohibited. The requirement for a sanitary control easement is included in the form because a grantee acquiring groundwater for domestic and livestock use may want this protection for its well. The blanket easement agreement also contains a provision requiring the grantor to execute a separate sanitary control easement in the form promulgated by the TCEQ at the grantee’s request. The TCEQ easement form requires the specific location of the well and easement to be identified. The grantee may not know the location of future wells at the time it acquires the easement, but the grantee can have the separate sanitary control easement executed when the location of each well is established. TCEQ Form 20698 (Sanitary Control Easement) can be obtained from the TCEQ website at www.tceq.texas.gov.
§ 16.19:9Exhibit K—Memorandum of Contract
If it is anticipated that there may be a significant amount of time between the date the contract is signed and the date of closing, it is advisable to have the memorandum of contract signed and recorded in the real property records to provide notice to the public of the buyer’s contract rights. See form 16-17 in this chapter.
§ 16.19:10Exhibit L—Notice of Termination of Contract
If the memorandum of contract is used, the parties should execute the notice of termination of contract form at the same time and deliver it to the title company or escrow agent for recordation in the event the contract is terminated before closing. See form 16-18 in this chapter.
§ 16.20Investment of Earnest Money
The contract provides that the buyer may direct the title company or escrow agent to invest the earnest money in an interest-bearing account in a federally insured financial institution. If the earnest money is to be invested, the title company will require the buyer’s tax identification or Social Security number so that accrued interest may be reported to the Internal Revenue Service.
The contract incorporates the statutory notice that the Texas Real Estate License Act requires real estate brokers and real estate salespersons to give to a buyer, advising that the buyer should either have title examined by an attorney or obtain a title insurance policy, if available. See Tex. Occ. Code § 1101.652(b)(29). If a broker or salesperson is not involved, the paragraph may be deleted.
The contract requires that the seller provide to the buyer by the deadlines stated in the contract the title commitment or title information, the survey (if required), the UCC search, and legible copies of each document referred to in these instruments.
The contract follows a typical procedure under which the buyer reviews the title commitment or title information, the survey, the seller’s permit, the documents provided by the seller, and the UCC search and notifies the seller of any objections. After notice, the seller may elect to cure the buyer’s objections but is not required to do so. If the seller does not agree to cure, the buyer may either proceed to close the transaction and accept the groundwater rights subject to the uncured matters or terminate the contract. However, the seller is obligated to resolve all items listed on Schedule C of the title commitment at or before closing and to cure title matters that arise by, through, or under the seller after the contract is signed.
Attorneys reviewing title should look for contracts or for provisions in existing oil and gas leases that allow injection or disposal into or onto the land of saltwater or other substances that can adversely affect the quality of the groundwater. In the absence of a limitation or restriction in the deed or lease, owners of the mineral estate, including oil and gas lessees, can use as much of the groundwater as is reasonably necessary to produce minerals, including using groundwater for hydraulic fracturing (“fracking”). See Sun Oil Co. v. Whitaker, 483 S.W.2d 808 (Tex. 1972); Fleming Foundation v. Texaco, Inc., 337 S.W.2d 846 (Tex. App.—Amarillo 1960, writ ref’d n.r.e.).
It is unlikely that the seller will be able to modify or terminate existing oil and gas leases, so it is important to evaluate their effect on the groundwater estate. If the surface owner is also the owner of the mineral estate, the buyer can negotiate restrictions on the mineral estate limiting the use of groundwater for fracking and other forms of enhanced and secondary recovery, such as prohibiting the injection or disposal of saltwater and other substances in or on the land. Such negotiations could eliminate or limit these practices in future leases and contracts.
§ 16.21:1Review of Title Commitment
The contract provides that the condition of title will be established by either a title commitment or an abstract of title, as agreed to by the buyer and the seller. If an abstract of title is furnished, the buyer may have the abstract of title reviewed by an attorney and obtain the attorney’s written opinion of the abstract of title. The benefit of obtaining title insurance, if available, over an attorney’s opinion of title is that title insurers are required to maintain reserves to cover claims that are greater than the malpractice coverage maintained by most law firms. Consequently, there is an increased likelihood of recovery if an error is made by the title company in its determination of title.
An essential reference on title insurance is the Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas, available from the Texas Department of Insurance at www.tdi.texas.gov/title/titleman.html. The manual contains Texas rate and procedural rules; the text of title 11 of the Texas Insurance Code, relating to title insurance; and various bulletins of the Texas State Board of Insurance dealing with title insurance practices.
The attorney should review the signature and effective date of the commitment.
The attorney should confirm that the commitment is signed and that the issuance date is not more than ninety days before the closing; otherwise, a new or revised commitment should be ordered.
Schedule A: The attorney should confirm that the proposed insured parties are correctly named, the amounts of insurance are correctly stated, and the correct estate is insured. The commitment should list two estates to be insured, the fee ownership of the groundwater estate, and the buyer’s easement estate. Record title should be vested in the seller. The attorney should confirm that the property description is correct and conforms to the description in the contract and in the survey (if applicable).
Schedule B: The attorney should review the following matters:
•Item 1, relating to covenants and restrictions, should be noted as either “Covenants, conditions, and restrictions (other than any restrictions indicating preference, limitation, or discrimination based on race, color, religion, sex, handicap, familial status, or national origin) as set forth in [recording data] of the real property records of [county] County, Texas” or “Item 1 of Schedule B is hereby deleted in its entirety.”
•Item 2, relating to the standard survey exception, may be amended and partially deleted to read “any shortages in area” if a current survey approved by the title company is obtained. An additional 5 percent premium is charged to amend the owner policy for a residential transaction; an additional 15 percent premium is charged to amend the owner policy for a commercial transaction. No additional premium is required to amend the mortgagee policy. The responsibility for paying the extra premium for the survey modification in the owner policy of title insurance is often negotiated between the parties, although the pertinent provision in the contract form provides for the extra premium to be paid by the buyer.
•Item 3, relating to homestead or community property or survivorship rights, and item 4, relating to tidelines, lands comprising the shores and beds of waterways, lands beyond the line of the harbor or bulkhead lines, filled-in lands, artificial islands, statutory water rights, and areas extending from the line of mean low tide to the line of vegetation, apply only to the owner policy and cannot be deleted or amended.
•Item 5, relating to property taxes, should be reviewed for the status of tax payments and the existence of rollback taxes.
•Item 6, relating to the terms and conditions of the documents creating the insured’s interest in the land, cannot be revised. The referenced documents should, however, be reviewed.
•Item 7, relating to materialman’s and mechanic’s liens, applies only to the mortgagee policies on interim construction loans and may be deleted if satisfactory evidence that the paragraph does not apply is furnished to the title company. For additional information about materialman’s and mechanic’s liens, see chapters 19, 20, and 21 in this manual.
•Item 8, relating to subordinate liens and leases, applies only to the mortgagee policy.
•Item 9, relating to existing liens, should show only liens permitted by the contract. Copies of all lien documents should be reviewed with regard to due-on-sale provisions; dragnet clauses relating to other debt; condemnation provisions; notice, cure, and default provisions; and subordinate financing. A superior lienholder’s estoppel agreement should be obtained from any lienholder whose note and lien are being either assumed or taken “subject to.”
All other special exceptions, such as easements, mineral interests, leases, or matters shown on a current survey, should be carefully reviewed to determine if they affect the buyer’s groundwater rights. The commitment should indicate whether these exceptions apply to the groundwater estate, the easement estate, or both. If the real property consists of more than one tract of land, the commitment should specify which items apply to which tract or tracts.
Schedule C: The attorney should ensure that the seller has complied with the contract by curing and effectively removing all matters appearing on Schedule C at or before closing. Schedule C matters may require obtaining releases of liens, settling specific claims or lawsuits affecting title to the property, furnishing evidence of good standing and authority (corporate resolution or partnership agreement), and obtaining proof of property settlement and divorce, proof of heirship or probate of a particular estate, or evidence relating to a bankruptcy. From the buyer’s perspective, curative matters appearing on Schedule C should be attended to by either the seller or the title company. The contract requires that the seller resolve all Schedule C items before closing, but if that provision is not used, the buyer should object to all Schedule C items in the commitment to ensure that they are not added to Schedule B of the title policy.
The Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas should be consulted for information on the various types of policies and endorsements that are available and their respective costs.
§ 16.21:2Review of Abstract of Title
If the seller is obligated to provide an abstract of title, the contract provides that the buyer may have the abstract of title reviewed by an attorney at either the buyer’s or seller’s expense, as specified in the contract. If the condition of title is to be determined based on an abstract of title, the buyer should have the abstract of title reviewed by an attorney experienced in land title examination and knowledgeable about groundwater rights, and should obtain a written opinion of title in time to make title objections within the deadline specified in section A of the contract.
The abstract of title required by the contract covers the period from the first conveyance from the sovereignty to the present. It is possible to obtain an abstractor’s certificate from a title or abstract company that covers a shorter period and may contain a conclusion by the abstractor as to the identity of the current record owner of property, the existence of any outstanding liens, and other title encumbrances affecting the real property. While this information is useful, it is not a satisfactory substitute for an abstract of title as specified in the contract and an attorney’s opinion of title. Often, the title or abstract company preparing the abstractor’s certificate or abstract of title will limit liability for error to the amount charged for the certificate or abstract.
The seller is required to provide copies of any existing surveys under exhibit C (seller’s records). The contract allows the buyer to require the seller to provide a new survey of the real property, at the seller’s expense, as specified in the contract. The required survey category should be set out in the contract in the indicated place under the block for information on the surveyor. Different types of surveys and survey certifications are available, depending on the nature of the property and the requirements of the parties. An excellent resource on surveys is the Manual of Practice for Land Surveying in the State of Texas, published by the Texas Society of Professional Surveyors, which may be contacted at www.tsps.org/default.aspx. It describes the various categories and conditions for surveys in Texas, the level of accuracy required for each category of survey, matters to be depicted on the survey, and the nature of certificates.
The attorney should keep the following points in mind when reviewing a boundary survey:
•The survey should bear a recent date and should conform to the required category and condition for the type of survey specified in the contract and location of the property.
•The certificate should be sealed and signed and should conform to any certificate specified in the contract.
•There should be a north compass bearing on the survey.
•The attorney should observe the system of reference used for the survey, locate the beginning point, and determine that it is monumented and locatable.
•The survey, particularly all course and distance notations, should be compared to the legal description either appearing on or attached to the survey. This description then should be compared to the one appearing in the contract and the title commitment or title opinion.
If a more extensive survey, such as a land title survey, is obtained, the attorney should also keep the following points in mind:
•All recorded easements appearing in the title commitment or title opinion should be located and noted on the survey with the appropriate recording data, and blanket easements should be noted in the surveyor’s notes. The surveyor should also note any items shown in Schedule B that the surveyor determines do not affect the real property. Conversely, the attorney should examine the survey for any matters (such as easements) not appearing in the title commitment or title opinion.
•The survey should be examined for the location of improvements. The attorney should determine if the improvements protrude onto adjoining property or easement areas, if there are encroachments of improvements from adjoining property onto the property, and if there are building setback line violations.
•The survey should be examined for the depiction of overhead lines, roadways, or other uses of the property that are not within an easement area covered by a recorded easement, as these may indicate the existence of prescriptive easement rights. Any written notations on the survey, such as those relating to rights of parties in possession, should be reviewed to determine their effects on the property and its anticipated use.
•The property should have legal and adequate access to public streets or roads.
•The survey should show the existence and location of utilities.
•The surveyor’s certificate should indicate the location of the floodplain, if applicable.
The contract includes provisions for the conveyance of personal property and fixtures and requires that the seller furnish UCC searches of the UCC records of the Texas secretary of state and the UCC records of any other appropriate state. It should be remembered that groundwater permits, wells, and other property may fall within broad collateral descriptions such as “equipment” and “general intangibles” in security agreements and financing statements.
The inspection period is intended to give the buyer the opportunity to investigate the groundwater and real property and decide whether to close the transaction. The contract provides that the buyer may terminate the contract at any time before the end of the inspection period for any reason and have the earnest money returned, except for the independent consideration provided in the contract.
The contract provides for reasonable rules of entry and that the buyer will indemnify the seller for claims resulting from the buyer’s inspection of the property. Except for the environmental indemnity stated in exhibit B (if used), the indemnity provisions of the contract are not intended to shift risk from the indemnified party to the indemnitor for the indemnified party’s own negligence. One consequence of this allocation of risk is that the indemnified party may not be able to recover the costs of defense from the indemnitor if the indemnified party is sued for the consequences of its alleged negligence. See Fisk Electric Co. v. Constructors & Associates, 888 S.W.2d 813 (Tex. 1994). The environmental indemnity, if used, shifts risk for the seller’s own negligence from the seller to the buyer. It is unlikely, however, that the environmental indemnity will be effective to shift risk in the event of misrepresentation or fraud.
It is prudent for the purchaser of groundwater rights to be produced on site, whether or not previously severed, to obtain an environmental site assessment on the land overlying the ground-water that meets the requirements of the “all appropriate inquiries” rule under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. §§ 9601–9675, in order to secure protection as an “innocent landowner” from strict liability for groundwater contamination. While there is no case law in which the owner of a groundwater right has been held strictly liable for groundwater contamination as a result of his ownership of the groundwater right, the owner of a mineral estate has been held to be an “owner” under CERCLA because it is the owner of a fee simple estate separate from the surface estate. See City of Grass Valley v. Newmont Mining Corp., No. 2:04-cv-00149-GEB-DAD, 2007 WL 4287603 (E.D. Cal. Dec. 4, 2007) (also cited in Halliburton Energy Services, Inc. v. NL Industries, 648 F. Supp. 2d 840, 896–97 (S.D. Tex. 2009)). An owner of a groundwater rights estate would, under the court’s reasoning in Edwards Aquifer Authority v. Day, 369 S.W.3d 814 (Tex. 2012), be the owner of a fee simple estate separate from the surface estate and could, therefore, be held to have strict liability for groundwater contamination. See William D. Dugat, All Appropriate Inquiries in Connection with Groundwater Purchases, in The Changing Face of Water Rights in Texas, State Bar of Texas (2015).
The contract provides that the earnest money will be deposited in one lump sum. The parties alternatively may agree that the buyer is obligated to deposit additional earnest money after agreed conditions have been satisfied—for example, if the buyer decides not to terminate the contract at the end of the inspection period and to proceed to closing.
§ 16.23Representations and Warranties
Representations and warranties are negotiated by the parties with specific reference to the transaction. They may include such matters as ownership of the real property and groundwater rights; organization of the parties; authority to execute the contract and close the transaction; condition of title; parties in possession; pending litigation and claims that may ripen into litigation; pending or threatened condemnation or other taking; use restrictions, such as zoning and restrictive covenants; condition of the property or disclaimer of representations (for example, “as is” language); presence of landfills or hazardous and toxic wastes; floodplain location; utility availability and capacity; compliance with all laws; effectiveness of required licenses and permits; status of leases; operation and maintenance of property before closing; accuracy of books and records; agricultural or other special-use tax assessment; payment of ad valorem taxes; and status of debt to be assumed or taken “subject to.”
In negotiating representations, the parties should specify whether representations are to be absolute or based on the seller’s knowledge and belief; whether the representations will be based on the knowledge of the entity that is the seller or on the knowledge of specified individuals; whether the seller must perform further investigation to make the representations or may rely on its current knowledge, without further investigation; and whether and to what extent the representations will survive closing.
The approach used in this contract limits the seller’s representations and warranties, but it is not intended to insulate the seller from liability for fraud or misrepresentation.
•The seller represents only facts, not opinions. For example, the seller does not represent whether, in the seller’s opinion, the property is in compliance with applicable laws and regulations. Instead, the seller represents that it has not received notice of violation of any law, ordinance, regulation, or requirement affecting the property or use of the property, except as stated in the contract.
•The seller makes no representations or warranties that are not stated in the contract, including exhibit D (notices, statements, and certificates required by law and regulation), or in the closing documents.
The following optional clauses are also provided:
•The buyer agrees to accept the property in its “as is, where is” condition, investigate the property on the buyer’s own behalf, and not rely on information or representations attributable to the seller, except to the extent stated in the contract.
•The buyer waives its rights under the Texas Deceptive Trade Practices–Consumer Protection Act.
•The buyer assumes responsibility after closing for all environmental matters relating to the property.
If the parties negotiate different representations, exhibit B must be revised accordingly.
The contract provides that the parties’ representations are true and correct when made and must be true and correct at closing, or the buyer may terminate the contract.
It is common practice to include representations regarding the organization and authority of the parties in contracts but to defer the obligation to deliver documentary evidence confirming those representations until the closing of the transaction. That evidence customarily consists of certificates of existence and good standing from public officials, certified copies of organizational documents, certified corporate resolutions or partnership consents, and certificates of incumbency. The attorney may consider requiring such documentary evidence at the execution of the contract to avoid encountering a claim, after substantial obligations have been paid or incurred, that the other party is not authorized to consummate the transaction. While the seller’s organizational documents should be available at the time of execution of the contract, the buyer’s organizational documents are often not prepared until shortly before closing.
§ 16.24Condition of Property until Closing; Cooperation; No Recording
The parties’ signing of the contract obligates them concerning maintenance and operation of the property, casualty damage, condemnation, claims, governmental proceedings, permits, licenses, and inspections. The contract also sets out the parties’ agreement not to record the contract. Oil and gas leases may be of concern to the buyer of groundwater, because the lessee has the right to use groundwater in connection with its operations whether that right is stated in the lease or not. In addition, oil and gas leases may expressly allow the lessee to use significant amounts of groundwater for flooding or secondary recovery operations or may permit activities that could contaminate the groundwater, such as the injection or disposal of saltwater onto the real property. Paragraph I.2. of the contract contains provisions that restrict the ability of the seller to enter into oil and gas leases before and after closing.
The contract provides for disposition of the earnest money after termination and for posttermination obligations in certain events. If the memorandum of contract is used, the title company or escrow agent should record the notice of termination of contract if the contract is terminated before closing. See form 16-18 in this chapter.
The contract provides that, unless the parties agree otherwise before closing, certain closing documents will use the forms contained in the current edition of the Texas Real Estate Forms Manual. This approach defers the time and expense of negotiating the closing documents until after the contract is signed, while providing certainty if the parties do not otherwise negotiate closing documents. Alternately, the closing documents can be negotiated before the contract is signed and, if so, should be attached as exhibits to the contract.
The contract allocates closing obligations and transaction costs between the parties.
The contract provides that the buyer acquires possession of the property at closing. The parties may agree, however, on earlier or later possession by the buyer. If the buyer takes possession before closing, a groundwater lease may be appropriate.
Although it is not common, a seller or buyer may be represented by a real estate broker in a groundwater transaction. Real estate brokers and real estate salespersons must have a written commission agreement to enforce payment of a real estate commission. The commission may be payable on contract execution, when the contract closes, or as otherwise agreed by the parties. The contract provides that the commission agreement is a separate document between the broker and the party responsible for paying the commission. For applicable forms, see forms 26-29 through 26-31 in this manual. Alternately, the contract may include the commission agreement or restate its key terms. The parties indemnify each other against claims by brokers and finders arising by, through, or under the indemnifying party. The contract may state that there are no brokers, but there is no requirement to do so.
If either the buyer or the seller is licensed as a real estate salesperson or real estate broker and is acting as a broker in the transaction, a disclosure to that effect is required under the Real Estate License Act. See Tex. Occ. Code § 1101.652(b)(16).
The contract provides that the buyer may elect one of the following remedies for the seller’s default: termination (with disposition of the earnest money and payment of additional liquidated damages to the nondefaulting party) or specific performance. In addition, the buyer may terminate if the seller’s representations are not true and correct or if a warranty set forth in the contract is breached. The parties may be entitled to payment of actual damages and perhaps of consequential damages if the untruth or breach is first discovered after closing. The contract is drafted to limit the parties’ remedies, but remedies are often negotiated.
The contract provides that the party prevailing in litigation is entitled to recover attorney’s fees and court and other costs.
The contract contains alternate clauses concerning assignment. The buyer either may not assign the contract or may assign the contract only to an entity controlled by the buyer.
If the contract provides that the buyer has the right to assign, the assignment provision should state whether the buyer is relieved from obligations under the contract after assignment.
The party handling the closing (the title company or escrow agent) commonly attends to the matters discussed in the following sections.
§ 16.29:1Payoff Information and Other Closing Expenses
Written request should be made to each lienholder for the lienholder’s written payoff statement. The lienholder should be requested through an authorized representative to state the remaining principal balance due on the note, the accrued interest as of a certain date, a per diem amount of interest, and whether the lienholder will credit the amount held in the escrow account, if one exists, to the total due or, alternatively, refund the amount directly to the borrower. Closing must occur and payment be made to the lienholder before the release of lien will be signed.
Additionally, information concerning other matters requiring payment at closing should be obtained, such as payoff amounts for mechanic’s lien claims, federal or state tax liens, property taxes, paving assessments, and abstracted judgments that affect the property. For additional information about materialman’s and mechanic’s liens, see chapters 19, 20, and 21 in this manual.
The closing agent must also determine the amounts of closing costs, such as surveying expenses, attorney’s fees, brokers’ commissions, and loan fees.
§ 16.29:2Ad Valorem Taxes and Groundwater Authority Fees
Currently groundwater is not assessed and taxed independently from the surface estate for ad valorem tax purposes. Consequently, the contract does not provide for a proration of ad valorem property taxes at closing, but it does require that the taxes be paid in full at closing by the seller, if they are due and payable at the time of closing. Under current law, the sale of the groundwater rights, at least when the buyer retains sufficient reserved groundwater to enable it to continue its existing use of the real property, would not appear to trigger the assessment of rollback taxes. Consequently, the contract provides that if the real property has been, or at any time after closing is, the subject of special valuation and reduced tax assessments pursuant to the provisions of chapter 23, subchapter D, of the Texas Tax Code, the seller will be responsible for the payment of any such taxes, penalties, and interest, including rollback taxes. If the seller is not reserving sufficient groundwater to continue the seller’s existing use of the real property, the parties should consider modifying this provision.
After closing, the seller will continue to pay all ad valorem taxes and assessments due in connection with the real property before delinquency, except that if ad valorem taxes are ever assessed separately against the buyer’s groundwater rights after closing, the buyer will be responsible for paying such taxes and assessments if the buyer is obligated to pay such taxes under applicable law. After closing, the buyer will be responsible for paying all fees, assessments, taxes, and charges of any kind imposed by the groundwater authority or any successor authority in connection with the buyer’s use of the groundwater, and the seller will be obligated to pay such taxes and assessments with regard to the reserved groundwater, if any. The provisions regarding taxes should be set out in the deed and easement agreement signed by the parties at closing.
§ 16.29:3Preparation of Closing Documents
The closing agent may be expected to prepare several documents.
Closing Statements: Closing statements may be on either the federally prescribed settlement statement, the State Board of Insurance settlement statement, or a separate seller’s, buyer’s, or borrower’s statement, depending on the nature of the transaction. The purpose of a closing statement is to assemble in one document all the pertinent financial features of the contract, including purchase price, loan amounts, costs and expenses of closing the transaction, and prorations. Execution of the statement evidences the parties’ agreement with the numbers and computations appearing on the statement.
Affidavits: Affidavits concerning debts and liens, parties in possession, identity of the parties, leases, and the parties’ marital status will likely be required at closing by the title company, escrow agent, or a party’s attorney.
Financing documents are typically prepared by the lender’s attorney. Conveyancing and other closing documents may be prepared by the parties to the transaction, their attorneys, or an attorney for the closing agent.
The closing agent typically disburses funds in connection with closing. Disbursements are made according to the closing statement, usually from funds paid by the buyer and its lenders.
Except in the case of certain nontaxable sales of principal residences, the person responsible for closing a real estate transaction is required to file with the Internal Revenue Service an information return relating to the transaction and is subject to penalties for failing to report. See 26 U.S.C. § 6045. This reporting requirement is often satisfied by the responsible person by delivering the seller’s closing statement, together with an attachment of additional required information, to the IRS.
If funds will be disbursed at closing, payments must be made to the closing agent with “good funds” as defined by the regulations of the Texas State Board of Insurance or immediately available funds. See Procedural Rule P-27, Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas.
If it is not necessary to disburse funds at closing, the parties need not comply with the “good funds” rule, and payment may be made in other ways.
In a lending transaction, the attorney for the lender should consider obtaining an insured closing service letter from the title insurance underwriter, if title insurance is available, whose policies are to be issued. This letter indemnifies the lender for any fraudulent acts of the closing title insurance company relating to the handling of closing funds. See forms T-50 and T-51 of the Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas. See www.tdi.texas.gov/title/titlemm5.html.
The title company or escrow agent is responsible for recording documents intended to be recorded. This responsibility extends to the recording of releases or transfers of liens for notes paid at closing. Each document should be checked before recording to ensure that it is properly executed and notarized, the exhibits referred to in the document are attached, and the name and address of the person to whom the document is to be returned after recording is included.
Attorneys for the buyer, the seller, and the lender may each prepare closing instructions for the closing agent. For applicable forms, see forms 26-15 through 26-18 in this manual. These instructions relate to the conditions precedent to closing, including the status of the title after closing, the title insurance policies to be issued, disposition of funds, and distribution of documents received by the closing agent.
§ 16.30Additional Considerations
§ 16.30:1Transactions Involving Foreign Persons
Buyer: If the buyer is a foreign person, certain disclosures and reports may be required under the Foreign Investment in Real Property Tax Act of 1980. See 26 U.S.C. § 6039C.
Seller: With certain exceptions, anyone purchasing real property located in the United States from a foreign person must withhold 15 percent of the price and remit the funds to the Internal Revenue Service within twenty days of the date of transfer. See 26 U.S.C. § 1445(a), (b). The transferee should assume that the seller is a foreign person until the contrary is established, because transferees act at their own peril until they obtain a nonforeign affidavit. See 26 U.S.C. § 1445(b)(2). The nonforeign affidavits (forms 26-19 and 26-20 in this manual) are suggested for use in all transactions.
The attorney should prepare a closing checklist, itemizing the documents that will be required to close the transaction, including curative documents. The checklist should also refer to all other preclosing considerations relating to the transaction.
§ 16.30:3Postclosing Considerations
After closing, recorded documents and relevant title insurance policies issued after closing should be reviewed for accuracy and compliance with the title commitment. The owner policy should be dated on or after the recording date of the deed conveying title to the buyer, and the mortgagee policy should be dated on or after the recording date of the deed of trust of the insured lien.
An original or title company’s certified copy of each executed document relating to the closing should be provided to the seller and the buyer or the borrower by their attorneys. Generally, the party benefiting from a document receives the original, and the other parties receive copies.
[Sections 16.31 through 16.40 are reserved for expansion.]
III. Groundwater Transaction Guide for Sale of Permitted Groundwater Rights for Off-Site Production
§ 16.41Sale of Permitted Groundwater Rights for Production Off-Site
The rights to produce and transport groundwater can be sold under a contract of sale and conveyed by deed and easement agreement. These rights can also be leased under a groundwater lease. (But see section 16.1 above for a discussion of ownership of groundwater rights.) This part of this chapter applies to the sale and conveyance of permitted groundwater rights for off-site production. The sale or conveyance of groundwater for on-site production is addressed in part II. of this chapter. The sale and conveyance of surface water rights is addressed in part IV. Financing documents for use in transactions in which the groundwater rights and permit constitute the collateral are discussed in part V.
The forms discussed in this part of this chapter are for general use. Users should be aware that modifications may be required for specific transactions. For all groundwater sales, it is imperative that attorneys involved in the transaction identify the regulatory agencies with jurisdiction over the groundwater rights (referred to collectively in this transaction guide as the “groundwater authority”) and obtain copies of all rules and regulations pertaining to groundwater as early in the transaction as possible. The rules may contain requirements that have an important bearing on the transaction, such as minimum acreage requirements for production, limitations on production, and requirements for the issuance and transfer of permits. It may be necessary for the practitioner to make modifications to the forms based on the rules of the groundwater authority. The forms require significant modifications for use in the sale of groundwater subject to the rules of the Edwards Aquifer Authority.
§ 16.42Groundwater Rights Sales Contract, Deed, and Related Forms; Place for Recordation
Whether the seller is the owner of both the surface and groundwater estates in the land or is the owner only of groundwater pursuant to ownership of all or part of a permit for production of groundwater, if the seller is selling the permitted groundwater for production at a location other than the land from which the original permit was derived, only the groundwater sales contract, form 16-10 in this chapter, should be used in the transaction. Specifically, in some groundwater authorities, notably the Edwards Aquifer Authority (EAA), a purchaser may buy all or a portion of the unrestricted right to produce groundwater pursuant to the terms of a permit issued by the EAA and then elect to withdraw the water from a location different from the original permit location as long as the new location is within the jurisdiction of the EAA. Form 16-10 specifically contemplates a transaction in which a groundwater authority has issued a permit for the production of groundwater, and the groundwater, through the mechanism of the permit, is what is being sold. The production of the groundwater will occur at a well location other than the land set forth in the permit. The new location for production will be designated by the buyer at some point in the transfer mechanism with the groundwater authority. With these types of transactions, it is never contemplated that the buyer will actually produce groundwater on the land owned by the seller, and, in fact, the contract and the subsequent deed prohibit the buyer from having access to the land owned by the seller.
For transactions entered into after September 1, 2019, the Texas legislature has created additional mechanisms for the transfer of groundwater permitted by the EAA for irrigation purposes on “historically irrigated land.” See Acts 2019, 86th Leg., R.S., ch. 904, § 1 (H.B. 3656), eff. Sept. 1, 2019 (amending § 1.34 of the Edwards Aquifer Authority Act, Acts 1993, 73d Leg., R.S., ch. 626, § 1.34 (S.B. 1477), eff. Sept. 1, 1993). Previously, a holder of a permit for irrigation was not authorized to lease more than 50 percent of the irrigation rights initially permitted. House Bill 3656 sets out conditions under which a permit holder may seek approval from the EAA to sell or lease the remaining water rights for historically irrigated land and adds new definitions for the terms developed land, historically irrigated land, and land no longer practicable to farm.
In order to sever all or a portion of the remaining water rights, the permit holder must demonstrate to the satisfaction of the EAA, based on rules adopted by the EAA to implement House Bill 3656, (1) that the historically irrigated land has become developed land or is no longer practicable to farm, and/or (2) that the land cannot be developed because of its topography or location within a floodplain.
Subject to approval by the EAA, the permit holder may sever the water rights in proportion to the part of the land that meets such requirements. The approval of a severance of water rights affected by House Bill 3656 is subject to a contested case hearing in accordance with EAA rules. House Bill 3656 expressly prohibits the EAA from adopting rules that would expand either the type of land that is considered to be “developed land” or “land no longer considered practicable to farm.”
House Bill 3656 also authorizes the EAA to adopt rules that would allow a permit holder to lease all or part of the water rights for use in irrigation granted in the initial permit to another person for irrigating land, whether or not the land to be irrigated is the same land to which the original permit was granted, so long as the land is within the boundaries of the EAA’s jurisdiction.
All recordable documents, including the new permit when issued, should be recorded in the county or counties in which the land from which the groundwater and permit rights were originally obtained is located. In addition, if a new withdrawal location is selected in a different county, all of the same documents, including the new permit, should also be recorded in that county. For example, if the original permit was derived from land in Medina County, but the new withdrawal location is to be in Bexar County, all documentation should be recorded in both Medina and Bexar counties. Although not required, deeds, deeds of trust, and other recordable documents may, in addition, be filed in any county in which land from which the permit is derived is located. This may include land that was at one time owned or leased by the permit holder or the holder’s predecessor in title. This serves as a means of giving actual notice of the groundwater rights and liens to persons looking in the real property records of these counties.
The basic sales documents include the following:
1.Groundwater Rights Sales Contract (Off-Site) (form 16-10).
2.Groundwater Rights Warranty Deed (Off-Site) (form 16-11).
3.Permit Transfer Request (forms 16-13 and 16-28) or a transfer form promulgated or approved by the groundwater authority or another form promulgated by the groundwater authority, if it has a particular form for transfer.
4.Partial Release of Lien (form 16-12) if the seller has an existing lien on the land and only the groundwater rights are being released from the lien at closing.
5.Release of Lien (form 10-2 in this manual) if the seller’s entire lien will be released at closing.
6.Form UCC3 (form 9-14 in this manual), a form promulgated by the Texas secretary of state, if there is a security interest that covers or that could be construed to cover the groundwater or the permit to be conveyed at closing.
7.Assignment and Assumption of Lease (form 16-15) if there is an existing lease of the groundwater.
8.Lessee Estoppel Certificate (form 16-16) used to assure the buyer that the groundwater lease is valid and not in default and that the lessee understands the lease is being assigned.
9.Affidavit of Debts and Liens [and Indemnity] (form 16-14) (if this form is not being provided by a title company) used to provide additional protection to the buyer, especially in instances in which no title insurance will be obtained or title insurance is not available.
10.Loan documents required by the lender.
The groundwater rights sales contract, form 16-10 in this chapter, is drafted as a neutral form of contract, intending to favor neither the buyer nor the seller. For each contract, the basic elements of the transaction are, in general, stated in the sections to be completed at the beginning of the form. Some provisions, however, are required to be completed throughout the contract. The general terms that follow in the form may be used for many transactions. However, the sale of groundwater is an emerging area of law, and there are no well-established terms of sale. Contracts for the purchase and sale of groundwater are diverse, and additional drafting may be necessary. The following commentary is organized in the same order as the sections of the contract.
§ 16.44Introductory Paragraph: Offer and Acceptance
The introductory paragraph of the contract states what the parties must do to form the contract of purchase and sale. If the buyer’s earnest money cannot be collected, the buyer will be in default.
There are sections for the names of and other information concerning the seller, the buyer, and their attorneys. Proper identification of the parties is important, and the seller and buyer should be identified as fully as possible. Capacity and authority should be considered, especially if a party is not an individual acting on his own behalf. See chapter 3 in this manual for a discussion of party designations. It should be noted that if the owner of the real property and the owner of the permit are not the same party, the attorney for the buyer must make certain that both parties sign all closing documents. Most groundwater authorities will not mediate ownership of groundwater rights.
§ 16.45:2Title Company or Escrow Agent
Title insurance to insure title to groundwater rights in Texas is not generally offered by title insurance underwriters in Texas, although currently there is at least one insurer that offers title insurance for water rights. To the extent it is available, the title insurance product is a variation of a title policy on the real property. In many ways, it may not provide the parties with the complete coverage and closing details they are used to receiving in a land closing and title policy. For that reason, many sales of groundwater, in particular permitted groundwater transactions, are completed through the use of a title opinion based on information prepared by a title company. Nonetheless, the contract designates a title company or escrow agent to act as the escrow and closing agent in order to address either option. The title company or escrow agent is responsible for closing the transaction and receiving and disbursing funds under the terms of the contract. If a title opinion is provided as evidence of title to the groundwater rights, it should be reviewed by an attorney who is knowledgeable about land titles and groundwater rights.
It is advisable to have a written escrow agreement between the title company or escrow agent, the buyer, and the seller that defines the rights and duties of the title company or escrow agent. Form 4-4 in this manual is an escrow agent receipt and escrow agreement. It can be modified for use with an escrow agent other than a title company.
A survey is rarely used in the sale of permitted groundwater, as the underlying issue is not the location of the real property but rather the chain of title related to the real property and the permit. If there is a need for a survey, a section could be drafted for the contract.
§ 16.45:4Groundwater Authority
Generally, for a groundwater transaction involving a permit, the real property is located within a groundwater conservation district or other groundwater authority, and the authority should be identified. It is imperative that the buyer’s attorney consult the rules of the groundwater authority to determine all restrictions on the use and production of groundwater, requirements for sale of groundwater, and rules regarding the issuance or transfer of a permit. Generally, copies of the rules can be obtained only from the groundwater authority. The buyer’s attorney should also obtain, and personally review, copies of all documents maintained by the groundwater authority pertaining to the groundwater and permit being sold. The attorney should note all relevant information from the file, such as yearly allocations, if applicable, and should determine the feasibility of meeting all conditions of the groundwater authority’s approval of the sale within the buyer’s required time frame.
It is important for the buyer to determine the status of the seller’s permit issued by the groundwater authority in connection with the groundwater and what the groundwater authority requires for the transfer of the permit. Cooperation by the seller in the transfer of the permit should be set out in the contract and is paramount to the buyer’s efforts to obtain approval of the transfer. All permit information should be set out in the contract. The contract should address the timing of the filing of application to transfer the permit to the buyer and whether approval of the groundwater authority is a condition of closing. Form 16-28 in this chapter is an example of an application to the groundwater authority to transfer permits in the absence of a form promulgated by the authority.
The amount of earnest money is negotiable and depends on several factors, including the purchase price, the type of financing, and the relative financial strengths of the parties.
§ 16.45:7Independent Consideration
If the buyer terminates the contract before the end of the inspection period and the buyer is otherwise entitled to have the earnest money returned, the contract provides that a stated amount should not be returned to the buyer but should be paid to the seller, because that amount is the independent consideration to the seller for the buyer’s right to terminate the contract.
The real property is the land from which the groundwater or permit is to be sold and is described in exhibit A of the contract. The contract should describe the real and personal property with legal specificity. If the property is not described sufficiently, the contract may be unenforceable because of vagueness. See chapter 3 in this manual for a discussion of property descriptions. Attention also should be given to the conveyance of appurtenant rights, such as permits, licenses, and similar rights.
The definition of groundwater is derived in part from Pecos County WCID No. 1 v. Williams, 271 S.W.2d 503, 505–06 (Tex. App.—El Paso 1954, writ ref’d n.r.e.).
The contract defines groundwater rights to include the right to withdraw a stated quantity of groundwater from a specific aquifer as described in the permit (the “groundwater”) and all rights and interests relating to the groundwater, including—
all of the real and personal property rights, appurtenances, authorities, licenses, consents, and contracts, if any, relating to or pertaining to the Groundwater, which will also include all common-law property rights in and to the Groundwater as well as those rights or interests that now or in the future may be useful or necessary to withdraw or otherwise beneficially use the Groundwater Rights . . . .
§ 16.45:11Reserved Groundwater
Generally, the seller will retain ownership of some permitted rights; however, a specific reservation is not usually required, as the description of the groundwater will specify what number of acre-feet of water will be sold out of the permit. In addition, if the permit being transferred is that of an irrigation groundwater right, in some groundwater districts, there is a certain required acre-feet of groundwater that cannot be severed or sold from the real property. In the case of the Edwards Aquifer Authority (EAA), one acre-foot of irrigation groundwater is known as the base water and, with a few specific exceptions, cannot be sold from the real property from which it derived. The EAA’s rules related to the reservation of one acre-foot of irrigation groundwater and the permit holder’s ability to secure authorizations from the EAA to transfer those rights, either by sale or lease, were challenged by several landowners, the Uvalde County Underground Water Conservation District, the city of Uvalde, and Uvalde County in Uvalde County Underground Water Conservation District v. Edwards Aquifer Authority, No. 2018-01-31972-CV (38th Dist. Ct., Uvalde County, Tex. Nov. 2, 2018). In response to the litigation, House Bills 1479, 3644, and 3656 were considered by the Texas legislature during the 86th legislative session. House Bill 3656 passed and became effective September 1, 2019.
For transactions entered into after September 1, 2019, the Texas legislature has created additional mechanisms for the transfer of groundwater permitted by the EAA for irrigation purposes on “historically irrigated land.” See Acts 2019, 86th Leg., R.S., ch. 904, § 1 (H.B. 3656), eff. Sept. 1, 2019 (amending § 1.34 of the Edwards Aquifer Authority Act, Acts 1993, 73d Leg., R.S., ch. 626, § 1.34 (S.B. 1477), eff. Sept. 1, 1993). Previously, a holder of a permit for irrigation was not authorized to lease more than 50 percent of the irrigation rights initially permitted. House Bill 3656 sets out conditions under which a permit holder may seek approval from the EAA to sell or lease the remaining water rights for historically irrigated land. See section 16.42 above for an in-depth discussion of the requirements.
There is no standard method of determining the purchase price for groundwater rights; however, in the case of permitted groundwater, the sales have been based most often on a price per acre-foot of water. Variations on this model include pricing on a per-acre-foot-permitted basis or a per-acre-foot-per-acre allocation. The field of groundwater rights appraisal is still evolving. In areas in which there are numerous groundwater sales, such as the Edwards Aquifer, it is possible to obtain an appraisal of groundwater rights based on comparable sales. The contract provides for the purchase price based on a stated price per acre of groundwater being purchased. The buyer will be paying for the groundwater under each acre of land, based on a stated price per acre, regardless of how much or how little water is actually under the land. Exhibit E of the contract may be used if the parties agree to seller financing of the purchase. If obtaining third-party financing is a condition to the buyer’s obligations, that fact and the terms of the complying financing should be addressed in the contract. See chapters 6 and 8 in this manual for further discussion of financing.
§ 16.45:13Buyer’s and Seller’s Liquidated Damages
The liquidated damages sections of the contract are provided so that the parties can agree on additional liquidated damages to be paid by the defaulting party to the nondefaulting party on default.
§ 16.45:14Title Commitment and Title Information
Title insurance may not be available to insure title to groundwater rights, but even if available, the parties may agree not to procure title insurance. If the seller is not required to provide a title commitment, the contract requires the seller to provide the buyer with title information. The contract provides that the buyer may have the title information reviewed by an attorney of the buyer’s choice, at the expense of the seller or buyer as specified in the contract. If the buyer obtains title information, the buyer should have it reviewed by an attorney who is experienced in land titles and knowledgeable about groundwater rights.
The contract defines title documents to include the seller’s “Permit and instruments affecting title to the Groundwater and the Real Property” referenced in the title commitment or title information and UCC search. These documents are to be provided as part of the seller’s records. Under paragraph F.6. of the contract, title objections can be made on the basis of the title documents. This provides the buyer with the ability to make objections to title based on the seller’s permit or unrecorded documents provided as part of the seller’s records.
Section A of the contract contains most of the deadlines, grouped for ease of reference, and provides two alternate ways to determine most of the deadlines: either a stated date or a specified number of days after the effective date of the contract or another specific date. The contract provides that time is of the essence and that closing will occur a certain number of days after the expiration of the inspection period, but closing may also be specified to occur a certain number of days following a different event or on a certain date. The closing date may also be specified as “on or before” a certain date or event.
Section B of the contract lists the documents to be signed and delivered to close the transaction and serves as a checklist to prepare for closing. Section C contains a number of exhibits. The attorney should choose the specific exhibits appropriate for the sale.
§ 16.47:1Exhibit B—Representations; Environmental Matters
Exhibit B contains the parties’ representations. These items are always negotiated by the parties and will vary from transaction to transaction.
§ 16.47:2Exhibit C—Seller’s Records
Exhibit C is a list of the seller’s records of the property that will be delivered or made available to the buyer for review during the inspection period and also delivered to the buyer at closing.
§ 16.47:3Exhibit D—Notices, Statements, and Certificates
Exhibit D lists notices, statements, and certificates required by federal and state law and regulations to be delivered when common real estate contracts are executed. The items applicable to a specific transaction should be selected. See chapter 2 in this manual for brief discussions of laws and regulations that require notices, statements, and certificates. Some of the statutory provisions would appear to include the sale of groundwater, simply because they apply to a sale or conveyance of real property, and no exemption is made for the sale of groundwater.
§ 16.47:4Exhibit E—Seller Financing
Exhibit E contains seller-financing terms.
§ 16.47:5Exhibit F—Memorandum of Contract
If it is anticipated that there may be a significant amount of time between the date the contract is signed and the date of closing, it is advisable to have the memorandum of contract signed and recorded in the real property records to provide notice of the buyer’s contract rights. See form 16-17 in this chapter.
§ 16.47:6Exhibit G—Notice of Termination of Contract
If the memorandum of contract is used, the parties should execute the notice of termination of contract form at the same time and deliver it to the title company or escrow agent for recordation in the event the contract is terminated before closing. See form 16-18 in this chapter.
§ 16.48Investment of Earnest Money
The contract provides that the buyer may direct the title company or escrow agent to invest the earnest money in an interest-bearing account in a federally insured financial institution. If the earnest money is to be invested, the title company will require the buyer’s tax identification or Social Security number so that accrued interest may be reported to the Internal Revenue Service.
The contract incorporates the statutory notice that the Texas Real Estate License Act requires real estate brokers and real estate salespersons to give to a buyer, advising that the buyer should either have the title examined by an attorney or obtain a title insurance policy, if available. Tex. Occ. Code § 1101.652(b)(29). If a broker or salesperson is not involved, the paragraph may be deleted.
The contract requires that the seller provide to the buyer the title commitment or title information, the UCC search, and legible copies of each document referred to in these instruments by the deadlines stated in the contract. The contract follows a typical procedure under which the buyer reviews the title commitment or title information, the seller’s permit, the documents provided by the seller, and the UCC search and notifies the seller of any objections. After notice, the seller may elect to cure the buyer’s objections but is not required to do so. If the seller does not agree to cure, the buyer may either proceed to close the transaction and accept the groundwater subject to the uncured matters or terminate the contract. However, the seller is obligated to resolve all items listed on Schedule C of the title commitment at or before closing and to cure title matters that arise by, through, or under the seller after the contract is signed.
§ 16.49:1Review of Title Commitment
The contract provides that the condition of title will be established by either a title commitment or title information, as agreed to by the buyer and the seller. If title information is furnished, the buyer may have the title information reviewed by an attorney and obtain the attorney’s written opinion of the title information. The benefit of obtaining title insurance, if such insurance is available, over an attorney’s opinion of title is that title insurers are required to maintain reserves to cover claims that are greater than the malpractice coverage maintained by most law firms. Consequently, there is an increased likelihood of recovery if an error is made by the title company in its determination of title. See also section 16.21:1 above.
An essential reference on title insurance is the Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas, available from the Texas Department of Insurance at www.tdi.texas.gov/title/titleman.html. The manual contains Texas rate and procedural rules; the text of title 11 of the Texas Insurance Code, relating to title insurance; and various bulletins of the Texas State Board of Insurance dealing with title insurance practices.
The attorney should review the signature and effective date of the commitment. The attorney should confirm that the commitment is signed, and the issuance date is not more than ninety days before the closing. Otherwise, a new or revised commitment should be ordered.
Schedule A: The attorney should confirm that the proposed insured parties are correctly named, the amounts of insurance are correctly stated, and the correct estate is insured, including the correct number of acre-feet of groundwater and the correct reference to the permit. Record title should be vested in the seller. The attorney should confirm that the property description is correct and conforms to the description in the contract.
Schedule B: The attorney should review the following matters:
•Item 1, relating to covenants and restrictions, should be noted as either “Covenants, conditions, and restrictions (other than any restrictions indicating preference, limitation, or discrimination based on race, color, religion, sex, handicap, familial status, or national origin) as set forth in [recording data] of the real property records of [county] County, Texas” or “Item 1 of Schedule B is hereby deleted in its entirety.”
•Item 3, relating to homestead or community property or survivorship rights, should be reviewed to verify ownership right.
•Item 5, relating to property taxes, should be reviewed for the status of tax payments and the existence of rollback taxes.
•Item 6, relating to the terms and conditions of the documents creating the insured’s interest in the land, cannot be revised. The referenced documents should, however, be reviewed.
•Item 7, relating to materialman’s and mechanic’s liens, applies only to the mortgagee policies on interim construction loans and may be deleted if satisfactory evidence that the paragraph does not apply is furnished to the title company. For additional information about materialman’s and mechanic’s liens, see chapters 19, 20, and 21 in this manual.
•Item 8, relating to subordinate liens and leases, applies only to a mortgagee policy and may not be applicable for every water transaction.
•Item 9, relating to existing liens, should show only liens permitted by the contract. Copies of all lien documents should be reviewed with regard to due-on-sale provisions; dragnet clauses relating to other debt; condemnation provisions; notice, cure, and default provisions; and subordinate financing. A superior lienholder’s estoppel agreement should be obtained from any lienholder whose note and lien are being either assumed or taken “subject to.”
All other special exceptions should be carefully reviewed to determine if they affect the buyer’s groundwater rights. If there is more than one set of groundwater rights being insured, the commitment should specify which exceptions apply to which set of groundwater rights.
Schedule C: The attorney should ensure that the seller has complied with the contract by curing and effectively removing all matters appearing on Schedule C at or before closing. Schedule C matters may require obtaining releases of liens, settling specific claims or lawsuits affecting title to the property, furnishing evidence of good standing and authority (corporate resolution or partnership agreement), and obtaining proof of property settlement and divorce, proof of heirship or probate of a particular estate, or evidence relating to a bankruptcy. From the buyer’s perspective, curative matters appearing on Schedule C should be attended to by either the seller or the title company. The contract requires that the seller resolve all Schedule C items before closing, but if that provision is not used, the buyer should object to all Schedule C items in the commitment to ensure that they are not added to Schedule B of the title policy.
The Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas should be consulted for information on the various types of policies and endorsements that are available and their respective costs.
§ 16.49:2Review of Abstract of Title or Title Information
If the seller is obligated to provide an abstract of title or title information, the contract provides that the buyer may have the abstract of title or title information reviewed by an attorney at either the buyer’s or seller’s expense, as specified in the contract. If the condition of title is to be determined based on an abstract of title or title information, the buyer should have it reviewed by an attorney experienced in land title examination and knowledgeable about groundwater rights, and should obtain a written opinion of title in time to make title objections within the deadline specified in section A. of the contract.
The abstract of title required by the contract covers the period from the first conveyance from the sovereignty to the present. It is possible to obtain an abstractor’s certificate from a title or abstract company that covers a shorter period and may contain a conclusion by the abstractor as to the identity of the current record owner of property, the existence of any outstanding liens, and other title encumbrances affecting the real property. While this information is useful, it is not a satisfactory substitute for an abstract of title or title information as specified in the contract and an attorney’s opinion of title. Often, the title or abstract company preparing the abstractor’s certificate or abstract of title will limit liability for error to the amount charged for the certificate or abstract.
A survey is not required for a transaction involving off-site production.
The contract includes provisions that require the seller to furnish searches of the UCC records of the Texas secretary of state and the UCC records of any other appropriate state. Groundwater permits, wells, and other property may fall within broad collateral descriptions such as “equipment” and “general intangibles” in security agreements and financing statements.
The inspection period is intended to give the buyer the opportunity to investigate the groundwater and real property and decide whether to close the transaction. The contract provides that the buyer may terminate the contract at any time before the end of the inspection period for any reason and have the earnest money returned, except for the independent consideration provided in the contract.
The contract provides for reasonable rules of entry and that the buyer will indemnify the seller for claims resulting from the buyer’s inspection of the property, although in the case of the purchase of permitted groundwater to be produced from another location, the need to visually inspect the real property is rare. Generally, inspection periods in these types of contracts are used more as a feasibility period, allowing the buyer time to evaluate the overall purchase of the groundwater rather than inspect the actual property.
Except for the environmental indemnity stated in exhibit B (if used), the indemnity provisions of the contract are not intended to shift risk from the indemnified party to the indemnitor for the indemnified party’s own negligence. One consequence of this allocation of risk is that the indemnified party may not be able to recover the costs of defense from the indemnitor if the indemnified party is sued for the consequences of its alleged negligence. See Fisk Electric Co. v. Constructors & Associates, 888 S.W.2d 813 (Tex. 1994). The environmental indemnity, if used, shifts risk for the seller’s own negligence from the seller to the buyer. It is unlikely, however, that the environmental indemnity will be effective to shift risk in the event of misrepresentation or fraud.
The contract provides that the earnest money will be deposited in one lump sum. The parties alternatively may agree that the buyer is obligated to deposit additional earnest money after agreed conditions have been satisfied—for example, if the buyer decides not to terminate the contract at the end of the inspection period and to proceed to closing.
§ 16.51Representations and Warranties
Representations and warranties are negotiated by the parties with specific reference to the transaction. They may include such matters as ownership of the real property and groundwater, organization of the parties, authority to execute the contract and close the transaction, condition of title, pending litigation and claims that may ripen into litigation, pending or threatened condemnation or other taking, disclaimer of representations (for example, “as is” language), compliance with all laws, status of leases, payment of ad valorem taxes, and status of debt to be assumed or taken “subject to.”
In negotiating representations, the parties should specify whether representations are to be absolute or based on the seller’s knowledge and belief; whether the representations will be based on the knowledge of the entity that is the seller or on the knowledge of specified individuals; whether the seller must perform further investigation to make the representations or may rely on its current knowledge, without further investigation; and whether and to what extent the representations will survive closing.
The approach used in this contract limits the seller’s representations and warranties, but it is not intended to insulate the seller from liability for fraud or misrepresentation.
•The seller represents only facts, not opinions. For example, the seller does not represent whether, in the seller’s opinion, the property is in compliance with applicable laws and regulations. Instead, the seller represents that it has not received notice of violation of any law, ordinance, regulation, or requirement affecting the property or use of the property, except as stated in the contract.
•The seller makes no representations or warranties that are not stated in the contract, including exhibit D (notices, statements, and certificates required by law and regulation), or in the closing documents.
The following optional clauses are also provided:
•The buyer agrees to accept the property in its “as is, where is” condition, investigate the property on the buyer’s own behalf, and not rely on information or representations attributable to the seller, except to the extent stated in the contract.
•The buyer waives its rights under the Texas Deceptive Trade Practices–Consumer Protection Act.
If the parties negotiate different representations, exhibit B must be revised accordingly.
The contract provides that the parties’ representations are true and correct when made and must be true and correct at closing, or the buyer may terminate the contract. Termination of the contract may not be a satisfactory remedy for the buyer, in which case other remedies could be negotiated, such as a reduction in the sales price.
It is common practice to include representations regarding the organization and authority of the parties in contracts but to defer the obligation to deliver documentary evidence confirming those representations until the closing of the transaction. That evidence customarily consists of certificates of existence and good standing from public officials, certified copies of organizational documents, certified corporate resolutions or partnership consents, and certificates of incumbency. The attorney may consider requiring such documentary evidence at the execution of the contract to avoid encountering a claim, after substantial obligations have been paid or incurred, that the other party is not authorized to consummate the transaction. While the seller’s organizational documents should be available at the time of execution of the contract, the buyer’s organizational documents are often not prepared until shortly before closing.
§ 16.52Condition of Property until Closing; Cooperation; No Recording
The parties’ signing of the contract obligates them concerning the groundwater, condemnation, claims, governmental proceedings, permits, licenses, and inspections. The contract also sets out the parties’ agreement not to record the contract.
The contract provides for disposition of the earnest money after termination and for posttermination obligations in certain events. If the memorandum of contract is used, the title company or escrow agent should record the notice of termination of contract if the contract is terminated before closing. See form 16-18 in this chapter.
The contract provides that, unless the parties agree otherwise before closing, certain closing documents will use the forms contained in the current edition of the Texas Real Estate Forms Manual. This approach defers the time and expense of negotiating the closing documents until after the contract is signed, while providing certainty if the parties do not otherwise negotiate closing documents. Alternately, the closing documents can be negotiated before the contract is signed and, if so, should be attached as exhibits to the contract.
The contract allocates closing obligations and transaction costs between the parties.
The contract provides that the buyer acquires possession of the groundwater at closing; however, the groundwater authority may not actually approve the transfer of the permit until weeks after closing. For this reason, the continued cooperation of the seller, if necessary, is required should there be any impediment at the office of the groundwater authority.
If closing is performed by an escrow agent, the escrow agent should be responsible for getting the affidavit of debts and liens (form 16-14 in this chapter), the settlement statement, and similar documents typically provided by a title company, signed at closing.
Although it is not common, a seller or buyer may be represented by a real estate broker in a groundwater transaction. Real estate brokers and real estate salespersons must have a written commission agreement to enforce payment of a real estate commission. The commission may be payable on contract execution, when the contract closes, or as otherwise agreed by the parties. The contract provides that the commission agreement is a separate document between the broker and the party responsible for paying the commission. For applicable forms, see forms 26-29 through 26-31 in this manual. Alternately, the contract may include the commission agreement or restate its key terms. The parties indemnify each other against claims by brokers and finders arising by, through, or under the indemnifying party. The contract may state that there are no brokers, but there is no requirement to do so.
If either the buyer or the seller is licensed as a real estate salesperson or real estate broker and is acting as a broker in the transaction, a disclosure to that effect is required under the Real Estate License Act. Tex. Occ. Code § 1101.652(b)(16).
The contract provides that each party may elect one of the following remedies for the other’s default: termination (with disposition of the earnest money and payment of additional liquidated damages to the nondefaulting party) or specific performance. In addition, the buyer may terminate if the seller’s representations are not true and correct or if a warranty set forth in the contract is breached, and as noted earlier, if termination is not a satisfactory remedy for the buyer, other remedies such as a reduction in the purchase price can be negotiated and included in the contract. The parties may be entitled to payment of actual damages and perhaps of consequential damages if the untruth or breach is first discovered after closing. The contract is drafted to limit the parties’ remedies, but remedies are often negotiated.
The contract provides that the party prevailing in litigation is entitled to recover attorney’s fees and court and other costs.
The contract contains alternate clauses concerning assignment. The buyer may either not assign the contract or assign the contract only to an entity controlled by the buyer.
If the contract provides that the buyer has the right to assign, the assignment provision should state whether the buyer is relieved from obligations under the contract after assignment.
The party handling the closing (the title company or escrow agent) commonly attends to the matters discussed in the following sections.
§ 16.57:1Payoff Information and Other Closing Expenses
Written request should be made to each lienholder for the lienholder’s written payoff statement. The lienholder should be requested, through an authorized representative, to state the remaining principal balance due on the note, the accrued interest as of a certain date, a per diem amount of interest, and whether the lienholder will credit the amount held in the escrow account, if one exists, to the total due or, alternatively, refund the amount directly to the borrower. Closing must occur and payment be made to the lienholder before the release of lien will be signed. In many cases, when only permitted groundwater is being sold, the lender will provide only a partial release and the amount of the payoff will be determined by a lender formula related to the value of the permitted water compared with the remaining value of the mortgaged asset.
Additionally, information concerning other matters requiring payment at closing should be obtained, such as payoff amounts for mechanic’s lien claims, federal or state tax liens, property taxes, estate taxes, and abstracted judgments that affect the real property or groundwater. For additional information about materialman’s and mechanic’s liens, see chapters 19, 20, and 21 in this manual.
The closing agent must also determine the amounts of closing costs, attorney’s fees, brokers’ commissions, and loan fees.
§ 16.57:2Ad Valorem Taxes and Groundwater Authority Fees
Currently groundwater is not assessed and taxed independently from the surface estate for ad valorem tax purposes. Consequently, the contract does not provide for a proration of ad valorem property taxes at closing, but it does require that the taxes be paid in full at closing by the seller if they are due and payable at the time of closing. The sale of the groundwater, at least when the buyer retains sufficient reserved groundwater to enable it to continue its existing use of the real property, would not appear to trigger the assessment of rollback taxes. Consequently, the contract provides that if the real property has been, or at any time after closing is, the subject of special valuation and reduced tax assessments pursuant to the provisions of chapter 23, subchapter D, of the Texas Tax Code, the seller will be responsible for the payment of any such taxes, penalties, and interest, including rollback taxes. If the seller is not reserving sufficient groundwater to continue the seller’s existing use of the real property, the parties should consider modifying this provision.
After closing, the seller will continue to pay all ad valorem taxes and assessments due in connection with the real property before delinquency. However, if ad valorem taxes are assessed separately against the buyer’s groundwater rights after closing, the buyer will be responsible for paying such taxes and assessments if the buyer is obligated to pay such taxes under applicable law. After closing, the buyer will be responsible for paying all fees, assessments, taxes, and charges of any kind imposed by the groundwater authority or any successor authority in connection with the buyer’s use of the groundwater; the seller will be obligated to pay such taxes and assessments with regard to the reserved groundwater, if any. The provisions regarding taxes should be set out in the groundwater deed signed by the parties at closing.
§ 16.57:3Preparation of Closing Documents
The closing agent may be expected to prepare several documents.
Closing Statements: Closing statements may be on either the federally prescribed HUD-1 settlement statement, the State Board of Insurance settlement statement, or a separate seller’s, buyer’s, or borrower’s statement, depending on the nature of the transaction. The purpose of a closing statement is to assemble in one document all the pertinent financial features of the contract, including purchase price, loan amounts, costs and expenses of closing the transaction, and prorations. Execution of the statement evidences the parties’ agreement with the numbers and computations appearing on the statement.
Affidavits: Affidavits concerning debts and liens, parties in possession, identity of the parties, leases, and the parties’ marital status will likely be required at closing by the title company, escrow agent, or a party’s attorney.
Financing documents are typically prepared by the lender’s attorney. Conveyancing and other closing documents may be prepared by the parties to the transaction, their attorneys, or an attorney for the closing agent.
The closing agent typically disburses funds in connection with closing. Disbursements are made according to the closing statement, usually from funds paid by the buyer and its lenders.
Except in the case of certain nontaxable sales of principal residences, the person responsible for closing a real estate transaction is required to file an information return with the Internal Revenue Service relating to the transaction and is subject to penalties for failing to report. See 26 U.S.C. § 6045. This reporting requirement is often satisfied by the responsible person by delivering the seller’s closing statement, together with an attachment of additional required information, to the IRS.
If funds will be disbursed at closing, payments must be made to the closing agent with “good funds” as defined by the regulations of the Texas State Board of Insurance. See Procedural Rule P-27, Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas.
If it is not necessary to disburse funds at closing, the parties need not comply with the “good funds” rule, and payment may be made in other ways.
In a lending transaction, the attorney for the lender should consider obtaining an insured closing service letter from the title insurance underwriter, if title insurance is available, whose policies are to be issued. This letter indemnifies the lender for any fraudulent acts of the closing title insurance company relating to the handling of closing funds. See forms T-50 and T-51 of the Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas. See www.tdi.texas.gov/title/titlemm5.html.
The title company or escrow agent is responsible for recording documents intended to be recorded. This responsibility extends to the recording of releases or transfers of liens for notes paid at closing. Each document should be checked before recording to ensure that exhibits referred to in the document are attached and the name and address of the person to whom the document is to be returned after recording is included. The deed and other recordable documents should be recorded in the county or counties in which the groundwater is permitted to be withdrawn.
Attorneys for the buyer, the seller, and the lender may each prepare closing instructions for the closing agent. For applicable forms, see forms 26-15 through 26-18 in this manual. These instructions relate to the conditions precedent to closing, including the status of the title after closing, the title insurance policies to be issued, if applicable, disposition of funds, and distribution of documents received by the closing agent.
§ 16.58Additional Considerations
§ 16.58:1Transactions Involving Foreign Persons
Buyer: If the buyer is a foreign person, certain disclosures and reports may be required under the Foreign Investment in Real Property Tax Act of 1980. 26 U.S.C. § 6039C.
Seller: With certain exceptions, anyone purchasing real property located in the United States from a foreign person must withhold 15 percent of the price and remit the funds to the Internal Revenue Service within twenty days of the date of transfer. See 26 U.S.C. § 1445(a), (b). The transferee should assume that the seller is a foreign person until the contrary is established, because transferees act at their own peril until they obtain a nonforeign affidavit. 26 U.S.C. § 1445(b)(2). The nonforeign affidavits (forms 26-19 and 26-20 in this manual) are suggested for use in all transactions.
The attorney should prepare a closing checklist, itemizing the documents that will be required to close the transaction, including curative documents. The checklist should also refer to all other preclosing considerations relating to the transaction.
§ 16.58:3Postclosing Considerations
After closing, if a title policy has been obtained, recorded documents and relevant title insurance policies issued after closing should be reviewed for accuracy and compliance with the title commitment. The owner policy should be dated on or after the recording date of the deed conveying title to the buyer, and the mortgagee policy should be dated on or after the recording date of the deed of trust of the insured lien.
An original or title company’s certified copy of each executed document relating to the closing should be provided to the seller and the buyer or the borrower by their attorneys. Generally, the party benefiting from a document receives the original, and the other parties receive copies. If no title company is involved in the transaction, the closing agent should perform this task.
[Sections 16.59 and 16.60 are reserved for expansion.]
IV. Surface Water Rights Transaction Guide
§ 16.61Sale of Surface Water Rights
This part of the chapter applies to the sale and conveyance of surface water evidenced by a permit or certificate of adjudication. It does not cover the sale or conveyance of groundwater rights, which is covered in parts II. and III. of this chapter.
Surface water in Texas is generally owned by the state. One may obtain a right to use the state’s surface water under the state’s statutory appropriation process. Under this process, the state may grant precisely defined surface water rights, evidenced by a permit or certificate of adjudication. The surface water rights consist of the right to use water in a specific amount, from a specified body of water, by diversion at a definite location or locations (“point of diversion”) for a specified use.
If the surface water is authorized for use in connection with an identified tract of land (as in the case of water permitted for irrigating a specific tract of land), the water right is considered “appurtenant” to that land unless the water right is held by a water corporation or governmental entity authorized to supply water to others. 30 Tex. Admin. Code § 297.81. If land subject to an appurtenant surface water right is conveyed, the water right passes with the conveyance of title to the land, unless the water right has been expressly reserved or excepted or the water right has been granted for the irrigation of land not owned by the applicant. 30 Tex. Admin. Code § 297.81. Once a surface water right has been put to beneficial use according to its terms, the right is “perfected” and becomes a vested property interest. Tex. Water Code §§ 11.025–.026.
The forms contained in this chapter are for general use. The forms conveying surface water rights assume that the water rights to be conveyed have already been appropriated, as is the case with most surface water rights in Texas. Surface water rights that are the subject of a proposed transfer will therefore be represented by either a permit or a certificate of adjudication. The term permit refers to the document the Texas Commission on Environmental Quality (TCEQ) or its predecessor water authority issued when the surface water right was first appropriated. If the applicable river basin or stream segment has not been adjudicated, or if a new water right is recognized following the conclusion of adjudication proceedings, the document evidencing the water right will usually be a TCEQ permit. The surface water rights, whether evidenced by a permit or a certificate of adjudication, are real property. See sections 16.5:1 through 16.5:3 above.
Adjudication occurs when existing water rights (whether represented by permit, certified filing, or riparian rights) for a particular river basin or stream segment are subjected to administrative and judicial proceedings that recognize ownership of water rights and determine the quantities, priority dates, and other terms and conditions of each of the water rights from that river basin or stream segment. See generally Tex. Water Code §§ 11.301–.324. At the conclusion of the adjudication process, the recognized holders of then-existing water rights are issued certificates of adjudication to show what rights have been adjudicated to them in that proceeding. Thereafter, that certificate of adjudication is the document evidencing the owner’s surface water rights and is required to be recorded with the county clerk of each county in which the appropriation is made. Tex. Water Code § 11.324. Most stream adjudications in Texas were concluded in the 1970s and 1980s. The Upper Rio Grande adjudication was completed in 2007.
Thus, new (or any postadjudication) surface water rights issued by the TCEQ are in the form of a water rights permit. As with certificates of adjudication, the law requires the permit to be recorded with the county clerk of the county in which the appropriation is to be made. Tex. Water Code § 11.136. An existing certificate of adjudication is amended, when necessary, through the same TCEQ process as for water rights permits. The processes for obtaining a permit for previously unappropriated surface water rights and for adjudicating water rights in Texas are beyond the scope of this chapter.
As early in the surface water transaction as possible, it is imperative that the attorneys involved (1) examine the permit or certificate of adjudication evidencing the water rights, including all amendments to it; (2) identify the regulatory agencies with jurisdiction over the surface water rights (referred to collectively in this part of the chapter as the “water authority”); (3) obtain copies of all rules and regulations pertaining to the surface water rights; and (4) obtain a title report or title commitment on any appurtenant land to determine whether the surface water rights have been previously severed or whether there are liens on the land that may affect the water rights. The rules and regulations for surface water rights transactions may vary depending on the river basin involved in the transaction. See 30 Tex. Admin. Code chs. 281, 288, 295, 297–299, 303, 304. If the transaction involves an interbasin transfer, there are other statutory and regulatory implications affecting the water rights, which are beyond the scope of this chapter. See Tex. Water Code § 11.085; 30 Tex. Admin. Code §§ 295.13, 295.155, 295.177, 297.1, 297.18.
The TCEQ is the water authority that has jurisdiction over all surface water rights transactions in Texas, including the issuance, amendment, cancellation, and transfer of water rights permits. See Tex. Water Code §§ 5.011–.013; Tex. Water Code ch. 11. For river basins in which a watermaster has been appointed, the TCEQ administers adjudicated water rights through a watermaster and a watermaster advisory committee appointed for each water division. See Tex. Water Code §§ 11.326, 11.3261. See generally 30 Tex. Admin. Code chs. 303, 304. The watermaster divides the water of the streams (or other sources of supply) in the division based on the adjudicated water rights. Tex. Water Code § 11.327(a). The watermaster also regulates controlling works and diversion works in times of shortage to protect existing water rights, prevent waste, and prevent practices in excess of adjudicated rights. Tex. Water Code § 11.327(b). Currently, there are watermaster programs for South Texas, the Rio Grande, the Concho River, and the Brazos River.
More information regarding the watermaster programs can be found on the TCEQ’s website at www.tceq.texas.gov.
An attorney representing a purchaser or lender acquiring an interest in water rights that are subject to a watermaster program should become familiar with the applicable statutory and program provisions at Tex. Water Code §§ 11.325–.3291, 30 Tex. Admin. Code chs. 303, 304 (Watermaster Operations), and the TCEQ website. Water rights in the Rio Grande below Lake Amistad are allocated on an account basis based on the use of the water, such as municipal and irrigation, instead of on a seniority basis, with priority being given to municipal use. If, in any given month, surplus water is identified over the water needed for municipal use, the water is allocated to the other accounts, such as irrigation. In purchasing water rights, the buyer should determine whether an allocation has been made to the seller, and if so, the purchase contract should address how the water allocation will be divided between the parties at closing. The cost of administration of water rights by watermasters is allocated among the adjudicated water rights holders, and assessments are made by the TCEQ. In general, no water may be diverted, taken, or stored by or delivered to a person while he is delinquent in the payment of his assessed costs. See Tex. Water Code §§ 11.329, 11.455. Purchasers should determine the amount of assessments that have been made against a seller and the payment status as part of their due diligence. The purchase contract should address the manner in which these assessments will be allocated at closing, if appropriate.
§ 16.62Surface Water Rights Sales Contract and Related Forms; Place for Recordation
The surface water rights sales contract, form 16-20 in this chapter, represents an approach to the sale of surface water rights under which a conditional closing of the transaction first occurs, pending the required water authority’s prior approval of the transaction. Once the water authority (that is, the TCEQ) has approved the change in ownership and any amendments to the permit or certificate of adjudication sought by the buyer or required by the TCEQ, there is a final closing of the transaction. Alternatives to this “conditional closing followed by a final closing” approach include granting the buyer an option to purchase the water rights, or leasing the water rights to the buyer, pending TCEQ approval; however, the water right must be used in accordance with the terms of the permit or certificate of adjudication until such time as the TCEQ has granted any necessary amendments to the permit/certificate of adjudication.
The basic sales documents include the following:
1.Surface Water Rights Sales Contract (form 16-20).
2.TCEQ Change of Ownership Form (Form TCEQ-10204), plus any additional applications, forms, and supplemental materials necessary to obtain the amendments to the permit or certificate of adjudication to accommodate the buyer’s intended use of the water rights.
3.Surface Water Rights Conveyance—Conditional (form 16-21). Frequently, this is the only conveyance document used by the parties, as they deem the conditional conveyance final once the stated condition—TCEQ approval of necessary amendments—has occurred.
4.TCEQ Amendment to Permit or Certificate of Adjudication, or letter amendment (Form TCEQ-10201).
5.Surface Water Rights Conveyance—Unconditional (form 16-22).
In addition, the release of lien (form 10-2) or partial release of lien (form 10-3) in this manual, bill of sale (form 5-16), assignment and assumption of lease (form 5-21), and other forms may need to be adapted for use in connection with the transaction.
Although many attorneys rely on the files maintained by the TCEQ to determine ownership of surface water rights, rather than the real property records, recordation of surface water rights documents in the county real property records is still a legal requirement. See Tex. Water Code § 11.136. The attorney for the buyer of a surface water right should be aware that the buyer is responsible for making sure that the certificate of adjudication, permit, or any amendments, the surface water conveyance document, and other recordable real property documents are recorded with the county clerk of the appropriate county or counties. See Tex. Water Code § 11.136. In some instances, there can be uncertainty as to which of two or more locations is the correct place for recordation. If there is uncertainty, it is advisable to record the document in all the locations.
The Texas Water Code states that the TCEQ is required to transfer the certificate of adjudication or permit for recordation to the county clerk of the county in which appropriation is made. Tex. Water Code §§ 11.136, 11.324. In practice, however, the TCEQ does not do this. Instead the TCEQ sends the certificate of adjudication, permit, or amendment to the applicant for recordation along with a card. The applicant must send the document and card to the county clerk of the proper county or counties for recordation. In general, the certificate, permit, or amendment should be recorded in each county in which the points of diversion are located. If the water right is appurtenant to land, the certificate, permit, or amendment should also be recorded in the county or counties in which the water is used (that is, where the land is located). If a TCEQ amendment issued in connection with the transfer changed the land to which the water right is appurtenant to a different county, the conveyance document should be recorded in both counties. The county clerk is required to index the document by the name of the applicant and the stream or source of the water supply. Tex. Water Code §§ 11.136, 11.324. The county clerk should fill out the card with the recording information and send it to the TCEQ. It is incumbent on the attorney to make sure the county clerk records the documents and provides the information to the TCEQ. The attorney should also obtain the recording information for the attorney’s own records. The attorney should ensure that proper postage is added to the card provided by the TCEQ for completion and return mailing by the county clerk(s). This will increase the likelihood of the card’s being returned to the TCEQ.
It is important to identify the county or counties in which the documents affecting the surface water rights should be recorded to ensure that the public is put on constructive notice. Section 297.83 of the TCEQ regulations states that the “written instrument evidencing a water right ownership transfer shall be recorded in the office of the county clerk,” but does not specify in which county clerk’s office the instrument should be recorded. See 30 Tex. Admin. Code § 297.83. See generally Tex. Water Code § 11.136. As a rule, a surface water right conveyance document should be recorded in the real property records of each county in which the points of diversion and places of use are located. In addition, if the surface water rights are appurtenant to land (and there is no proposed amendment to change the land to which the surface water rights are appurtenant), the conveyance documents should also be recorded in the real property records of each county in which the land is located. If, however, the sale transaction contemplates an amendment that changes the land to which the surface water rights are appurtenant, only the final surface water rights conveyance—unconditional form should be recorded in each county in which the land is located. Recordation of the initial surface water rights conveyance—conditional document, before the TCEQ approved the amendment changing the land to which the surface water rights are appurtenant, could cloud the records and titles if the TCEQ did not approve the requested amendment.
As an added precaution, it is advisable to record the final documents in the real property records of each county in which the water is used, if different from the county or counties in which the points of diversion are located. It is helpful to have duplicate originals of the conveyance document executed for this purpose. Deeds of trust, leases, and other real estate documents pertaining to the surface water rights should be recorded in the same counties as the conveyance document.
The law requires an owner of a surface water right to promptly inform the executive director of the TCEQ of any transfer of water right or change of the owner’s address. See Tex. Water Code § 11.122; 30 Tex. Admin. Code § 297.82. Persons seeking to transfer surface water rights must file with the TCEQ executive director certified copies or photocopies of the recorded instruments establishing the complete chain of title between the owners of record and the new owner, along with the change of ownership form and the required fee. 30 Tex. Admin. Code § 297.83.
If the surface water rights are subject to the jurisdiction of a watermaster, the TCEQ Watermaster Operations Rules require the new owner to promptly inform the TCEQ executive director of the change of ownership and provide the appropriate ownership documents. 30 Tex. Admin. Code §§ 303.44, 304.43. If the new ownership record is not complete, the executive director will inform the alleged owner by letter of the required submission. For a sixty-day period following the date of that letter, the watermaster will honor “declarations of intent” by the alleged owner in accordance with the water right; after that, however, no such declaration will be honored until the executive director informs the watermaster of the approved change in ownership. 30 Tex. Admin. Code § 304.43.
Because the place for recordation of surface water rights documents is somewhat unusual, there may be some benefit in recording duplicate originals of the conveyance document in additional county records, in order to provide actual notice of the buyer’s surface water rights to any person who may consult these records. As examples, additional locations may include Travis County (where the TCEQ main administrative office is located) and, if the water rights are subject to regulation by a watermaster, the county in which the administrative office of the watermaster is located.
Attorneys dealing with water rights where a watermaster is located should be aware of recording requirements. See generally 30 Tex. Admin. Code chs. 303, 304. This is particularly true for water rights subject to the jurisdiction of the Rio Grande watermaster. There are two subsections (j) to section 11.3271 of the Texas Water Code adopted by the legislature in 2003 that have never been reconciled. See Tex. Water Code § 11.3271. Under one subsection (j), the watermaster with jurisdiction over the Rio Grande is made the official recorder for all instruments, including deeds, deeds of trust, financing statements, security agreements, and liens that the TCEQ authorizes or requires to be filed in connection with a water right relating to water in the lower, middle, or upper basin of the Rio Grande and that are subject to a permit, certified filing, or certificate of adjudication, and the filing will have the same legal effect as filing under other law for the same type of instrument. Under the other subsection (j), the watermaster is required to maintain a central repository that includes certified copies of all instruments, including deeds, deeds of trust, and liens that the TCEQ requires to be filed in connection with the same type of water rights as are described in the first-referenced subsection (j), and it is expressly stated that on and after September 1, 2003, a lien against a water right shall not be effective against third parties unless a certified copy of the instrument is filed with the watermaster and all requirements under other law are met. It would be prudent when conveying rights or interests in water rights in the Rio Grande to record a duplicate set of original documents with the Texas watermaster, as well as in the real property records of the county or counties in which the documents are otherwise authorized to be recorded, and to also file a certified copy of the documents recorded in the county real property records (at least with regard to liens) with the watermaster.
The surface water rights sales contract, form 16-20 in this chapter, is drafted as a neutral form of contract, intending to favor neither the buyer nor the seller. For each contract, the basic elements of the transaction are, in general, stated in the sections to be completed at the beginning of the form. Some provisions, however, are required to be completed throughout the contract. The general terms that follow in the form may be used for many transactions. However, the sale of surface water rights is an emerging area of law, and there are no well-established terms of sale. The terms in contracts for the purchase and sale of surface water rights are diverse and heavily negotiated. Additional drafting may be necessary to tailor the forms to the transaction.
§ 16.64Surface Water Rights Sales Contract
The following sections describe the provisions and terms of form 16-20 in this chapter and include considerations for the attorney in drafting or reviewing a contract, assisting the client during investigation of the surface water rights, and closing the transaction. This commentary is organized in the same order as the sections of the contract.
§ 16.65Introductory Paragraph: Offer and Acceptance
The introductory paragraph of the contract states what the parties must do to form the contract of purchase and sale. If the buyer’s earnest money cannot be collected, the buyer will be in default.
There are sections for the names of and other information concerning the seller, the buyer, and their attorneys. Proper identification of the parties is important, and the seller and buyer should be identified as fully as possible. Capacity and authority should be considered, especially if a party is not an individual acting on his own behalf. See chapter 3 in this manual for a discussion of party designations.
§ 16.66:2Title Company or Escrow Agent
Title insurance to insure title to surface water rights in Texas is no longer generally offered by Texas title insurance underwriters, and it is uncertain whether it will be available in the future. Even if available, parties may choose not to obtain title insurance or to close the transaction through a title company. The contract designates a title company or escrow agent to act as the escrow and closing agent in order to address either option. The title company or escrow agent will be responsible for closing the transaction and receiving and disbursing funds under the terms of the contract.
It is advisable to have a written escrow agreement between the title company or escrow agent, the buyer, and the seller that defines the rights and duties of the title company or escrow agent. Form 4-4 in this manual is an escrow agent receipt and escrow agreement. It can be modified for use with an escrow agent other than a title company.
In surface water transactions in which no appurtenant land is being transferred, the parties generally do not provide for a survey. The form provides optional language, however, if there is appurtenant land to be surveyed.
The water rights authorities with jurisdiction over the subject surface water rights will include, at a minimum, the TCEQ. There may also be a watermaster appointed for the river basin and division in which the water rights are located. See section 16.6 above.
§ 16.66:4Permit or Certificate of Adjudication
Permits and certificates of adjudication have a TCEQ number designation and establish the priority date of the water rights. In addition, the permit or certificate of adjudication, as it may have been previously amended, will describe the water rights authorized in the particular river basin and stream, including any rights of diversion, use, or storage. Diversion and use rights will include, at a minimum, the following details: (1) quantity, expressed in terms of a right to divert a certain number of acre-feet of water, often also limited to a certain rate of diversion (expressed in gallons per minute or cubic feet per second), from a particular watercourse; (2) the current ownership; (3) the place of use; (4) the purpose of use (for example, municipal, irrigation, industrial, recreational); and (5) the precise location of the point or points of diversion. Depending on the river basin from which the water rights are derived, there may be further descriptions. For example, Rio Grande Valley water rights are further described by class (for example, “Class B Water Rights”), a designation relating to the priority and use of the water rights. The permit or certificate of adjudication will also identify any other special terms or conditions defining the water rights or affecting the owner’s exercise of those rights (for example, streamflow restriction requirements or other environmental or conservation requirements).
§ 16.66:5Buyer’s Intended Use of Water Rights
The description of the buyer’s intended use (purpose and place of use) of the water rights is important for purposes of determining what amendments to the permit or certificate of adjudication must be obtained from the TCEQ and any other applicable water authority, such as a watermaster, before the transfer of the water rights. The approval process can be both costly and lengthy, particularly if the buyer’s intended use requires amendments to the permit or certificate beyond ownership of the water rights, and especially if these amendments are contested by the TCEQ staff, by other water rights holders in the basin, or by other affected parties.
The statement of the buyer’s intended use also affects the parties’ rights in the event of condemnation before conveyance of the water rights.
The description of the water rights to be conveyed will be based on the permit or certificate of adjudication, amended as needed to accommodate the buyer’s intended use, including the rights of diversion, use, or storage set out in the permit or certificate of adjudication, as described in section 16.61 above. Surface water rights may be conveyed in whole or in part, like land. The contract should clearly indicate if only portions of the water rights are being conveyed. The parties can contract for the sale and purchase of all or a portion of (1) the number of acre-feet authorized to be diverted, (2) the diversion rate, (3) storage capacity, or (4) storage reservoirs authorized by the water right. Accordingly, the parties should be specific regarding components of the water right to be sold.
The surface water rights to be sold may be appurtenant to specific land. The description of any appurtenant land is important, regardless of whether the appurtenant land is also to be purchased by the buyer. There may be liens on the appurtenant land that, absent language in the lien documents to the contrary, attach to the water rights. A description of the appurtenant land is therefore important to the buyer’s due diligence inquiries, the title investigation, and the determination of the need for lien releases, subordination agreements, or other documents required at closing.
If the water rights permit authorizes the irrigation of specific land, it generally will be appurtenant to the land, unless the water right is owned by a water supply corporation, water district, river authority, or governmental entity authorized to supply water to others. 30 Tex. Admin. Code § 297.81(b). If the buyer intends to use the water on land other than as specified in the permit or certificate of adjudication, an amendment to the permit or certificate of adjudication must be obtained before use. The land to which the water rights are appurtenant may not be the land from which the water is diverted. The permit or certificate of adjudication, or other water authority records, will identify the land authorized to be irrigated (“place of use”) to which the permit or certificate of adjudication is appurtenant. Under current TCEQ rules, conveyance of the land to which water rights are appurtenant conveys the water rights, unless the conveyance specifically reserves or excepts the water rights, or the water right has been granted for the irrigation of land not owned by the applicant. 30 Tex. Admin. Code § 297.81(a).
If the water rights are appurtenant to land and the land is not also being conveyed to the buyer, the attorney should verify that the water rights can be severed from the land under applicable statutory, regulatory, and case law. See Herrmann v. Lindsey, 136 S.W.3d 286 (Tex. App.—San Antonio 2004, no pet.); see generally 30 Tex. Admin. Code § 297.81. If the appurtenant land is also being purchased by the buyer, the drafter can adapt the additional provisions in the forms in chapter 4 in this manual. If the buyer will purchase a portion of the land and a portion of the water rights with which to irrigate the land, the parties should expressly describe in the contract the specific allocation of the water rights to the specific tract of land.
In addition, any fixtures and personal property to be conveyed with the land or the surface water rights should be described in the applicable contract forms. Contract provisions discussed in section 16.21:4 above, providing for UCC searches, should be inserted into the contract form if fixtures or personal property are included in the transaction.
§ 16.66:8Reserved Surface Water Rights
The seller of surface water rights may retain ownership of some permitted rights; however, a specific reservation is not usually required, as the description of the surface water will specify the number of acre-feet of water that will be sold out of the certificate of adjudication.
In instances in which surface water rights are appurtenant to land, however, if the seller is selling the land and some portion of the water rights, the conveyance of the land and unsevered surface water rights will be by deed, and the seller should expressly state in the contract and the deed the acre-feet of surface water rights that will be severed from the land and retained by the seller. After closing, the seller will generally need to file an application with the TCEQ either to change the designated land on which the severed agricultural or irrigation water rights may be used and the point of diversion or to change the use of the severed water rights from agricultural or irrigation to some other permitted use and to obtain approval of a new point of diversion.
If the water right is being purchased independently of the appurtenant land, and the parties agree that the buyer will have certain use rights on the appurtenant land, such as the right to use the same diversion point(s) or to use storage facilities located at the land, the parties will need to address these property rights in the contract by providing for the seller to grant or convey an easement, a license, a lease, or another property interest at closing.
The amount of earnest money is negotiable and depends on several factors, including the purchase price, the type of financing, and the relative financial strengths of the parties. Additional factors unique to surface water rights transactions include the required prior approval from the TCEQ and any other applicable water authority, and a generally longer due diligence period.
The parties therefore often provide for more than one earnest money deposit, either over a period of time or based on certain events. In the description of the initial and each additional earnest money deposit inserted into the form, the drafter needs to specify the time when each earnest money deposit is to be made and whether each earnest money deposit is refundable or nonrefundable, in relation to the occurrence of events as the parties proceed towards conditional and final closing of the transaction.
§ 16.66:10Independent Consideration
If the buyer terminates the contract before the end of the inspection period and the buyer is otherwise entitled to have the earnest money returned, the contract provides that a stated amount should not be returned to the buyer but should be paid to the seller, because that amount is the independent consideration to the seller for the buyer’s right to terminate the contract.
There is no standard method of determining the purchase price for surface water rights. For further discussion on this topic, the attorney may want to consult Martyn C. Glen, Valuation of Water Rights, in The Changing Face of Water Rights in Texas, State Bar of Texas (2004). Exhibit F may be used if the parties agree to seller financing of the purchase. If obtaining third-party financing is a condition to the buyer’s obligations, that fact and the terms of the complying financing should be addressed in the contract. See part V. in this chapter and chapters 6 and 8 in this manual for further discussions of financing.
§ 16.66:12Buyer’s and Seller’s Liquidated Damages
These sections of the contract are provided so that the parties can agree on additional liquidated damages to be paid by the defaulting party to the nondefaulting party on default.
§ 16.66:13Title Commitment/Title Information
Title insurance to insure title to surface water rights in Texas is no longer generally offered by Texas title insurance underwriters, and it is uncertain whether it will be available in the future. If title insurance is not available, or if the parties agree not to procure title insurance, the contract may instead call for an opinion of counsel to be provided as evidence of title. In that event, certain title information, on which the buyer’s title inspection is to be based, is to be delivered to the buyer.
The contract defines title documents to include the permit or certificate of adjudication and instruments affecting title to the surface water rights and the real property referenced in the title commitment or title information. Under paragraph G.3. of the contract, the buyer can terminate the contract on the basis of the title commitment and title documents and the seller’s failure or refusal to cure the buyer’s objections to matters disclosed therein. This provides the buyer with the ability to make objections to title based on the permit or certificate of adjudication or unrecorded documents provided as part of the seller’s records.
In addition to checking these documents, the buyer should also review (1) the annual water use reports the seller has filed with the TCEQ, (2) the priority of the seller’s water rights relative to other water rights in the same source of supply, and (3) the TCEQ’s current records and any applicable TCEQ or watermaster rules reflecting any loss of water rights or priority as a result of the seller’s nonuse.
An attorney representing a purchaser or lender acquiring an interest in water rights that are subject to a watermaster program should become familiar with the applicable statutory and program provisions at Tex. Water Code §§ 11.325–.3291, 30 Tex. Admin. Code chs. 303, 304 (Watermaster Operations), and the TCEQ website. Water rights in the Rio Grande below Lake Amistad are allocated on an account basis based on the use of the water, such as municipal and irrigation, instead of on a seniority basis, with priority being given to municipal use. If, in any given month, surplus water is identified over the water needed for municipal use, the water is allocated to the other accounts, such as irrigation. In purchasing water rights, the buyer should determine whether an allocation has been made to the seller, and if so, the purchase contract should address how the water allocation will be divided between the parties at closing. The cost of administration of water rights by watermasters is allocated among the adjudicated water rights holders, and assessments are made by the TCEQ. In general, no water may be diverted, taken, or stored by or delivered to a person while he is delinquent in the payment of his assessed costs. See Tex. Water Code §§ 11.329, 11.455. Purchasers should determine the amount of assessments that have been made against a seller and the payment status as part of their due diligence. The purchase contract should address the manner in which these assessments will be allocated at closing, if appropriate.
Section A of the contract groups most of the deadlines for ease of reference. Most of the deadlines are stated in terms of a specified number of days after the effective date of the contract or another specific date. The contract provides that time is of the essence; however, final closing cannot occur until such time as the TCEQ, and any other applicable water authority, has approved the change in ownership and any other amendments to the permit or certificate of adjudication representing the water rights.
Section B of the contract lists the documents to be signed and delivered to close the transaction. Paragraph B.1. lists the documents for the conditional closing (before the TCEQ or other water authority approval of the transaction). The parties might consider adding to the list of documents for the conditional closing a power of attorney appointing the buyer as agent of the seller to pursue the necessary proceedings with the TCEQ for approval of the sale and any amendments to the certificate of adjudication or permit. Paragraph B.2. lists the documents for the final closing. Form 16-22 in this chapter is for conveyance of the surface water rights once the TCEQ has approved the change of ownership and any other amendments to the permit or certificate of adjudication. The parties sometimes do not provide for or sign a final unconditional conveyance document, instead relying on the TCEQ’s issuance of an amendment to the certificate or permit as satisfying the condition stated in the earlier conditional conveyance document. Both paragraphs B.1. and B.2. in the contract serve as checklists to prepare for closing.
Section C contains a number of exhibits. The attorney should choose the specific exhibits appropriate for the sale.
§ 16.68:1Exhibit C—Representations; Environmental Matters
Exhibit C contains the parties’ representations. These items are always negotiated by the parties and will vary from transaction to transaction. Exhibit C is offered as a checklist; however, not all items will necessarily apply to a sale of surface water rights, and the buyer may want to seek additional representations or warranties with respect to water quality, environmental matters, and the like.
§ 16.68:2Exhibit D—Seller’s Records
Exhibit D is a list of the seller’s records of the property that will be delivered or made available to the buyer for review during the inspection period and also delivered to the buyer at closing.
§ 16.68:3Exhibit E—Notices, Statements, and Certificates
Exhibit E lists notices, statements, and certificates required by federal and state law and regulations to be delivered when common real estate contracts are executed. The items applicable to a specific transaction should be selected. See chapter 2 in this manual for brief discussions of laws and regulations that require notices, statements, and certificates. Some of the statutory provisions would appear to include the sale of surface water rights, simply because they apply to a sale or conveyance of real property, and no exemption is made for the sale of surface water rights.
§ 16.68:4Exhibit F—Seller Financing
Exhibit F contains seller-financing terms.
§ 16.69Investment of Earnest Money
The contract provides that the buyer may direct the title company or escrow agent to invest the earnest money in an interest-bearing account in a federally insured financial institution. If the earnest money is to be invested, the title company will require the buyer’s tax identification or Social Security number so that accrued interest may be reported to the Internal Revenue Service.
The contract requires that the seller provide to the buyer by the deadlines stated in the contract the title commitment or title information and legible copies of each document referred to in these instruments.
The contract follows a typical procedure in which the buyer reviews the title commitment or title information, with the permit or certificate of adjudication and the documents provided by the seller. The buyer’s review is done during the inspection period. The buyer then has a right to terminate the contract based on the buyer’s review or can notify the seller of any objections. After notice, the seller may elect to cure the buyer’s objections but is not required to do so. If the seller does not agree to cure, the buyer may either proceed to close the transaction and accept the surface water rights subject to the uncured matters or terminate the contract. However, the seller is obligated to resolve all items listed on Schedule C of the title commitment at or before closing and to cure title matters that arise by, through, or under the seller after the contract is signed.
The contract provides that the condition of title will be established by either a title commitment or an abstract of title, as agreed to by the buyer and the seller. If an abstract of title is furnished, the buyer may have the abstract of title reviewed by an attorney and obtain the attorney’s written opinion of the abstract of title. The benefit of obtaining title insurance over an attorney’s opinion of title is that title insurers are required to maintain reserves to cover claims that are greater than the malpractice coverage maintained by most law firms. Consequently, there is an increased likelihood of recovery if an error is made by the title company in its determination of title.
An essential reference on title insurance is the Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas, available from the Texas Department of Insurance at www.tdi.texas.gov/title/titleman.html. The manual contains Texas rate and procedural rules; the text of title 11 of the Texas Insurance Code, relating to title insurance; and various bulletins of the Texas State Board of Insurance dealing with title insurance practices.
The attorney should review the signature and effective date of the commitment. The attorney should confirm that the commitment is signed and the issuance date is not more than ninety days before the closing. Otherwise, a new or revised commitment should be ordered.
Schedule A: The attorney should confirm that the proposed insured parties are correctly named, the amounts of insurance are correctly stated, and the correct estate is insured. Record title should be vested in the seller. The attorney also should confirm that the property description is correct and conforms to the description in the contract.
Schedule B: The attorney should review the following matters:
•Item 1, relating to covenants and restrictions, should be noted as either “Covenants, conditions, and restrictions (other than any restrictions indicating preference, limitation, or discrimination based on race, color, religion, sex, handicap, familial status, or national origin) as set forth in [recording data] of the real property records of [county] County, Texas” or “Item 1 of Schedule B is hereby deleted in its entirety.”
•Item 2 is the standard, preprinted survey exception. It generally would not apply to a transaction involving only surface water rights. If the surface water rights are being conveyed along with land, this exception may be amended and partially deleted to read “any shortages in area” if a current survey approved by the title company is obtained. An additional 5 percent premium is charged to amend the owner policy for a residential transaction; an additional 15 percent premium is charged to amend the owner policy for a commercial transaction. No additional premium is required to amend the mortgagee policy. The responsibility for paying the extra premium for the survey modification in the owner policy of title insurance is often negotiated between the parties, although the pertinent provision in the contract form provides for the extra premium to be paid by the buyer.
•Standard preprinted exceptions item 3 (relating to homestead or community property or survivorship rights) and item 4 (relating to tidelines, lands comprising the shores and beds of waterways, lands beyond the line of the harbor or bulkhead lines, filled-in lands, artificial islands, statutory water rights, and areas extending from the line of mean low tide to the line of vegetation) apply only to the owner policy and cannot be deleted or amended.
•Item 5, relating to property taxes, can be reviewed for the status of tax payments and the existence of rollback taxes; however, taxes generally are not involved in a transaction involving only surface water rights.
•Item 6, relating to the terms and conditions of the documents creating the insured’s interest in the land, cannot be revised. The referenced documents should, however, be reviewed.
•Item 7, relating to materialman’s and mechanic’s liens, applies only to the mortgagee policies on interim construction loans and may be deleted if satisfactory evidence that the paragraph does not apply is furnished to the title company. This exception would not generally apply to a transaction involving only surface water rights. For additional information about materialman’s and mechanic’s liens, see chapters 19, 20, and 21 in this manual.
•Item 8, relating to subordinate liens and leases, applies only to the mortgagee policy.
•Item 9, relating to existing liens, should show only liens permitted by the contract. Copies of all lien documents should be reviewed with regard to due-on-sale provisions; dragnet clauses relating to other debt; condemnation provisions; notice, cure, and default provisions; and subordinate financing. A superior lienholder’s estoppel agreement should be obtained from any lienholder whose note and lien are being either assumed or taken “subject to.”
All other special exceptions should be carefully reviewed to determine if and how they affect the buyer’s surface water rights.
Schedule C: The attorney should ensure that the seller has complied with the contract by curing and effectively removing all matters appearing on Schedule C at or before closing. Schedule C matters may require obtaining releases of liens, settling specific claims or lawsuits affecting title to the water rights, furnishing evidence of good standing and authority (corporate resolution or partnership agreement), and obtaining proof of property settlement and divorce, proof of heirship or probate of a particular estate, or evidence relating to a bankruptcy. From the buyer’s perspective, curative matters appearing on Schedule C should be attended to by either the seller or the title company. The contract requires that the seller resolve all Schedule C items before closing, but if that provision is not used, the buyer should object to all Schedule C items in the commitment to ensure that they are not added to Schedule B of the title policy.
The Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas should be consulted for information on the various types of policies and endorsements that are available and their respective costs.
The inspection period is intended to give the buyer the opportunity to investigate the surface water rights and real property and decide whether to close the transaction. The contract provides that the buyer may terminate the contract at any time before the end of the inspection period for any reason and have the earnest money returned. The inspection is based on the seller’s records and information in either the title commitment and documents referenced therein, if the parties have provided for title insurance, or the title information as defined.
§ 16.72Representations and Warranties
Representations and warranties are negotiated by the parties with specific reference to the transaction. They may include such matters as ownership of the real property and surface water rights; organization of the parties; authority to execute the contract and close the transaction; condition of title; parties in possession; pending litigation and claims that may ripen into litigation; pending or threatened condemnation or other taking; use restrictions, such as zoning and restrictive covenants; condition of the property or disclaimer of representations (for example, “as is” language); presence of landfills or hazardous and toxic wastes; floodplain location; utility availability and capacity; compliance with all laws; effectiveness of required licenses and permits; status of leases; operation and maintenance of property before closing; accuracy of books and records; agricultural or other special-use tax assessment; payment of ad valorem taxes; and status of debt to be assumed or taken “subject to.”
In negotiating representations, the parties should specify whether representations are to be absolute or based on the seller’s knowledge and belief; whether the representations will be based on the knowledge of the entity that is the seller or on the knowledge of specified individuals; whether the seller must perform further investigation to make the representations or may rely on its current knowledge, without further investigation; and whether and to what extent the representations will survive closing.
The approach used in this contract limits the seller’s representations and warranties, but it is not intended to insulate the seller from liability for fraud or misrepresentation.
•The seller represents only facts, not opinions. For example, the seller does not represent whether, in the seller’s opinion, the property is in compliance with applicable laws and regulations. Instead, the seller represents that it has not received notice of violation of any law, ordinance, regulation, or requirement affecting the property or use of the property, except as stated in the contract.
•The seller makes no representations or warranties that are not stated in the contract, including exhibit E (notices, statements, and certificates required by law and regulation), or in the closing documents.
The following optional clauses are also provided:
•The buyer agrees to accept the property in its “as is, where is” condition, investigate the property on the buyer’s own behalf, and not rely on information or representations attributable to the seller, except to the extent stated in the contract.
•The buyer waives its rights under the Texas Deceptive Trade Practices–Consumer Protection Act.
•The buyer assumes responsibility after closing for all environmental matters relating to the property.
If the parties negotiate different representations, exhibit C must be revised accordingly.
The contract provides that the parties’ representations are true and correct when made and must be true and correct at closing, or the buyer may terminate the contract.
It is common practice to include representations regarding the organization and authority of the parties in contracts but to defer the obligation to deliver documentary evidence confirming those representations until the closing of the transaction. That evidence customarily consists of certificates of existence and good standing from public officials, certified copies of organizational documents, certified corporate resolutions or partnership consents, and certificates of incumbency. The attorney may consider requiring such documentary evidence at the execution of the contract to avoid encountering a claim, after substantial obligations have been paid or incurred, that the other party is not authorized to consummate the transaction. While the seller’s organizational documents should be available at the time of execution of the contract, the buyer’s organizational documents are often not prepared until shortly before closing.
§ 16.73Conveyance of Water Rights—Conditional; Application for Approval; Cooperation; Condition of Water Rights until Final Closing; Memorandum/No Recording of Contract
The parties’ signing of the contract and the expiration of the inspection period without the buyer’s termination of the contract obligates the seller to conditionally convey the water rights to the buyer, pending the TCEQ’s and any other required water authority’s approval of the change in ownership and any amendments necessary to accommodate the buyer’s intended use. It also obligates the parties to pursue and cooperate in the water authority approval process, to maintain and operate the water rights in a certain manner pending the approval process, and to proceed in a certain fashion in the event of condemnation or claims affecting the water rights. The contract also sets out the parties’ agreement not to record the contract; however, given the sometimes lengthy duration involved in obtaining water authority approval, the buyer may want to record a memorandum of the contract in the public records. See form 16-17 in this chapter.
Form 16-21 is a proposed form of conditional conveyance to be signed by the parties at the initial, conditional closing on the contract. The surface water rights are not deemed transferred, however, until the TCEQ (and any other applicable water authority) has approved the change in ownership and any amendments to the certificate or permit. The parties often do not execute a second unconditional conveyance document (form 16-22); rather, once the condition (TCEQ approval) has been satisfied through issuance of the amended certificate or permit, the conveyance is treated as final.
§ 16.74Conditions of Contract and Termination
The contract provides for disposition of the earnest money if the TCEQ does not approve the transfer of ownership and any other amendments sought by the buyer by a specific date and after any other termination of the contract. It also provides for posttermination obligations. It is possible that the TCEQ’s approval of a transfer may be overturned on judicial review, and the parties may want to provide how the sale is affected if judicial review is sought by a protestant.
Once the TCEQ has approved the transaction and issued any necessary amendments to the permit or certificate of adjudication, the parties proceed to the final closing. The contract allocates closing obligations and transaction costs between the parties. In the case of irrigation surface water rights, the water rights will become appurtenant to the land approved for the “place of use” in the amended certificate or permit. To facilitate title examinations, the parties may want to describe this appurtenant property in an unconditional conveyance document signed at the final closing (form 16-22 in this chapter). The parties do not want to describe this property as appurtenant in the initial, conditional conveyance document (form 16-21), because of the risk that the TCEQ or other applicable water authority may not approve the transaction. There may be a cloud on the title to the water rights if the water rights were described as appurtenant to property in the initial conditional conveyance but not later approved as appurtenant to property by the applicable water authority.
The contract provides that the buyer may elect one of the following remedies for the seller’s default: termination (with disposition of the earnest money and payment of additional liquidated damages to the nondefaulting party) or specific performance. In addition, the buyer may terminate if the seller’s representations are not true and correct or if a warranty set forth in the contract is breached. The parties may be entitled to payment of actual damages and perhaps of consequential damages if the untruth or breach is first discovered after closing. The contract is drafted to limit the parties’ remedies, but remedies are often negotiated.
The contract provides that the party prevailing in litigation is entitled to recover attorney’s fees and court and other costs.
The contract contains alternate clauses concerning assignment. The buyer either may not assign the contract or may assign the contract only to an entity controlled by the buyer.
If the contract provides that the buyer has the right to assign, the assignment provision should state whether the buyer is relieved from obligations under the contract after assignment.
The party handling the closing (the title company or escrow agent) commonly attends to the matters discussed in the following sections.
§ 16.78:1Payoff Information and Other Closing Expenses
Written request should be made to each lienholder for the lienholder’s written payoff statement. The lienholder should be requested through an authorized representative to state the remaining principal balance due on the note, the accrued interest as of a certain date, a per diem amount of interest, and whether the lienholder will credit the amount held in the escrow account, if one exists, to the total due or, alternatively, refund the amount directly to the borrower. Closing must occur and payment be made to the lienholder before the release of lien will be signed.
Additionally, information concerning other matters requiring payment at closing should be obtained, such as payoff amounts for mechanic’s lien claims, federal or state tax liens, property taxes, paving assessments, and abstracted judgments that affect the property. For additional information about materialman’s and mechanic’s liens, see chapters 19, 20, and 21 in this manual.
The closing agent must also determine the amounts of closing costs, such as surveying expenses, attorney’s fees, brokers’ commissions, and loan fees.
Currently surface water rights are not assessed and taxed independently from the surface estate for ad valorem tax purposes. Consequently, the contract does not provide for a proration of ad valorem property taxes at closing, but it does require that the taxes be paid in full at closing by the seller if they are due and payable at the time of closing.
The closing agent may be expected to prepare or provide several documents.
Closing Statements: Closing statements may be on either the federally prescribed HUD-1 settlement statement, the State Board of Insurance settlement statement, or a separate seller’s, buyer’s, or borrower’s statement, depending on the nature of the transaction. The purpose of a closing statement is to assemble in one document all the pertinent financial features of the contract, including purchase price, loan amounts, costs and expenses of closing the transaction, and prorations. Execution of the statement evidences the parties’ agreement with the numbers and computations appearing on the statement.
Affidavits: Affidavits concerning debts and liens, parties in possession, identity of the parties, leases, and the parties’ marital status will likely be required at closing by the title company, escrow agent, or a party’s attorney.
Financing documents are typically prepared by the lender’s attorney. Conveyancing and other closing documents may be prepared by the parties to the transaction, their attorneys, or an attorney for the closing agent.
The closing agent typically disburses funds in connection with closing. Disbursements are made according to the closing statement, usually from funds paid by the buyer and its lenders.
Except in the case of certain nontaxable sales of principal residences, the person responsible for closing a real estate transaction is required to file an information return with the Internal Revenue Service relating to the transaction and is subject to penalties for failing to report. See 26 U.S.C. § 6045. This reporting requirement is often satisfied by the responsible person by delivering the seller’s closing statement, together with an attachment of additional required information, to the IRS.
If funds will be disbursed at closing, payments must be made to the closing agent with “good funds” as defined by the regulations of the Texas State Board of Insurance. See Procedural Rule P-27, Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas.
If it is not necessary to disburse funds at closing, the parties need not comply with the “good funds” rule, and payment may be made in other ways.
If title insurance is obtained through a title agent or fee attorney, the attorney for the lender and buyer should consider obtaining an insured closing service letter from the title insurance underwriter whose policies are to be issued. This letter indemnifies the lender or buyer for certain wrongful acts of the title agent or fee attorney relating to the handling of closing funds. See forms T-50 and T-51 of the Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas. See www.tdi.texas.gov/title/titlemm5.html.
The title company or escrow agent is responsible for recording documents intended to be recorded. This responsibility extends to the recording of releases or transfers of liens for notes paid at closing. Each document should be checked before recording to ensure that it is properly executed and notarized, the exhibits referred to in the document are attached, and the name and address of the person to whom the document is to be returned after recording is included.
Section 297.83 of the Texas Commission on Environmental Quality regulations currently provides only that the “written instrument evidencing a water right ownership transfer shall be recorded in the office of the county clerk.” 30 Tex. Admin. Code § 297.83. It does not specify in which county clerk’s office the instrument should be recorded. To assure notice to all persons in affected counties, the parties may want to prepare several duplicate originals to be filed in Travis County (where the TCEQ is located) and in each of the counties (1) from which the water is appropriated (that is, diverted), (2) in which the water is used, (3) in which any of the appurtenant land is located, and (4) in which the watermaster is located.
Attorneys dealing with water rights within a watermaster operation should be aware of the notice and recording requirements applicable to watermaster operations. See generally 30 Tex. Admin. Code chs. 303, 304. This is particularly true for the Rio Grande watermaster. There are two subsections (j) to section 11.3271 of the Texas Water Code adopted by the legislature in 2003 that have never been reconciled. See Tex. Water Code § 11.3271. Under one subsection (j), the watermaster with jurisdiction over the Rio Grande is made the official recorder for all instruments, including deeds, deeds of trust, financing statements, security agreements, and liens that the TCEQ authorizes or requires to be filed in connection with a water right relating to water in the lower, middle, or upper basin of the Rio Grande and that are subject to a permit, certified filing, or certificate of adjudication, and the filing will have the same legal effect as filing under other law for the same type of instrument. Under the other subsection (j), the watermaster is required to maintain a central repository that includes certified copies of all instruments, including deeds, deeds of trust, and liens that the TCEQ requires to be filed in connection with the same type of water rights as are described in the first-referenced subsection (j), and it is expressly stated that on and after September 1, 2003, a lien against a water right shall not be effective against third parties unless a certified copy of the instrument is filed with the watermaster and all requirements under other law are met. It would be prudent when conveying rights or interests in water rights in the Rio Grande to record a duplicate set of original documents with the Texas watermaster, as well as in the real property records of the county or counties in which the documents are otherwise authorized to be recorded, and to also file a certified copy of the documents recorded in the county real property records (at least with regard to liens) with the watermaster.
Attorneys for the buyer, the seller, and the lender may each prepare closing instructions for the closing agent. For applicable forms, see forms 26-15 through 26-18 in this manual. These instructions relate to the conditions precedent to closing, including the status of the title after closing, the title insurance policies to be issued, disposition of funds, and distribution of documents received by the closing agent.
§ 16.79Additional Considerations
§ 16.79:1Transactions Involving Foreign Persons
Buyer: If the buyer is a foreign person, certain disclosures and reports may be required under the Foreign Investment in Real Property Tax Act of 1980. See 26 U.S.C. § 6039C.
Seller: With certain exceptions, anyone purchasing real property located in the United States from a foreign person must withhold 15 percent of the price and remit the funds to the Internal Revenue Service within twenty days of the date of transfer. See 26 U.S.C. § 1445(a), (b). The transferee should assume that the seller is a foreign person until the contrary is established, because transferees act at their own peril until they obtain a nonforeign affidavit. See 26 U.S.C. § 1445(b)(2). The nonforeign affidavits (forms 26-19 and 26-20 in this manual) are suggested for use in all transactions.
The attorney should prepare a closing checklist, itemizing the documents that will be required to close the transaction, including curative documents. The checklist should also refer to all other preclosing considerations relating to the transaction.
§ 16.79:3Postclosing Considerations
After closing, recorded documents and relevant title insurance policies issued after closing should be reviewed for accuracy and compliance with the title commitment. The owner policy should be dated on or after the recording date of the deed conveying title to the buyer, and the mortgagee policy should be dated on or after the recording date of the deed of trust of the insured lien.
An original or title company’s certified copy of each executed document relating to the closing should be provided to the seller and the buyer or the borrower by their attorneys. Generally, the party benefiting from a document receives the original, and the other parties receive copies.
If the transaction fails to close, but the TCEQ and any other water authority have approved the transfer or any amendments to the permit or certificate of adjudication, the parties can ask the TCEQ and any other water authority to delete the amendment to the permit or certificate of adjudication.
[Section 16.80 is reserved for expansion.]
V. Water Rights Lien Documents
§ 16.81General Considerations for Lien Documents
The lien forms contained in this chapter may be used, with appropriate modification, for either groundwater rights or surface water rights transactions.
To address both the real and the personal property characteristics of water rights, it is advisable to incorporate both deed-of-trust provisions and security agreement provisions in loan documents. This can be done in one or more documents, depending on the transaction. The water rights deed of trust (form 16-23 in this chapter) is an adaptation to water rights of the basic deed of trust (form 8-1 in this manual). The water rights security agreement (form 16-24) is an adaptation of form 9-2, the basic form for security agreement found in chapter 9. Depending on the nature and use of the water rights being pledged, and the other collateral associated with those water rights, the additional clauses and forms from chapters 8 and 9 should be added to the basic forms appearing in this chapter. These additional clauses from chapters 8 and 9 are thus referenced in this chapter and should be inserted into the form 16-23 and form 16-24, as appropriate.
In any transaction, the pledged water rights may have both real and personal property characteristics. For example, surface water rights are real property, requiring use of a deed of trust. Once the water is transported for use, however, the water may become personal property. In addition, the permit or certificate of adjudication evidencing the surface water rights may constitute a separate property right. It is not clear under existing case law whether the permit or certificate of adjudication would constitute an interest in real property, similar to a license or land development permit, or whether it would be considered personal property in the nature of a general intangible. Consequently, it is advisable to use both a deed of trust and a security agreement with financing statements in loans secured by groundwater or surface water rights, to ensure that the lender has a lien on all real and personal property. The separate security agreement (form 16-24, adapted from the basic form for security interests in personalty) may be used if there is other purely personal property that secures the loan. Form 16-23 (which includes the additional security agreement language of clause 8-9-10) may be used to create both the real property lien and a personal property security interest in a single deed of trust document when there is no other personal property.
In other types of transactions, for example, groundwater rights completely severed from real property and represented by only permits (as described in part III. of this chapter) or groundwater rights for on-site production and for which a groundwater permit may have been issued (as described in part II.), the groundwater rights are real property, the produced water may be personal property, and the permit itself may be either an interest in real property or a general intangible under the Texas Uniform Commercial Code.
If a facility such as a well or pipeline is included in the collateral, this property may constitute either a fixture or equipment. Consequently, it is advisable to describe this type of facility in the deed of trust and security agreement and to file financing statements as both a fixture filing and a personal property filing.
In loan transactions in which water rights, permits, or facilities are used as collateral, the attorney drafting the loan documents will want to consider the importance of including in the loan documents a UCC article 9 security agreement, UCC financing statements, and a deed of trust to address both the real and the personal property aspects of water rights. The places for recording the deed of trust and financing statements are discussed in section 16.81:4 below.
In addition to using a deed of trust and security agreement, the attorney should consider using other documents to more fully protect the lender’s lien rights, particularly in instances in which the water rights are subject to the jurisdiction of a water authority (for example, the TCEQ, a watermaster, or a groundwater district authority). Persons dealing with water rights, including the water authority itself, may not check the real property records or the UCC lien records (particularly those in another state) before taking action in connection with the water rights. They instead may look solely at the information filed in the water authority’s records. There is currently no mechanism for recording liens in the records of any water authority. Furthermore, there is no statutory or case law that clearly requires a water authority to consult real property records or UCC lien records, or to acknowledge the rights of a lender, before authorizing a modification, termination, or transfer of a permit.
Consequently, the owner of the water rights pledged as collateral may adversely affect the value of those water rights to the lender by obtaining a change in the permitted use of the water rights or transferring the permit in whole or in part to another person without the lender’s knowledge. The lender may then have a difficult time reestablishing its rights in the collateral. In order to put the water authority, and persons checking the water authority’s records, on actual notice of the lender’s lien on the water rights, the attorney may want to file a form for notice of lender’s rights in the records of the water authority. The attorney may also want to have the owner of the water rights give written instructions to the water authority directing it not to take any action with regard to the permit or certificate of adjudication without the written authorization of the lender. Because there is no formal mechanism for filing such notice or instructions with a water authority, it is possible that the water authority may reject such a filing or refuse to comply with the instructions. Nevertheless, the lender will be in a better position to assert its rights against the water authority or a person who obtained a transfer of the permit or certificate, if such notice or instructions were delivered to the water authority, to be placed in the records pertaining to the permit or certificate for the pledged water rights. One or more of the following forms may be used: memorandum of groundwater loan (form 16-25), notice of the lender’s interest in water rights (form 16-26), and the permittee’s instruction letter to water authority (form 16-27).
§ 16.81:1Groundwater vs. Surface Water
Form 16-23 and form 16-24 in this chapter are designed for establishing a lien on or security interest in either groundwater or surface water rights. The forms contain suggested alternative clauses to describe the type of water rights being encumbered as security and categories of additional property associated with the water rights that might also serve as collateral for the loan.
A deed of trust is a mortgage on real property with a power of sale. Although a deed of trust by its literal terms conveys the real property in trust to the trustee, its actual effect under Texas law is to create a lien against the property to secure a debt of the grantor of the lien to the beneficiary of the lien. This chapter provides one basic water rights deed of trust form (form 16-23), which is an adaptation to water rights of form 8-1 in this manual. If the borrower is assuming obligations under the seller’s existing loan for which the water rights serve as collateral, similar adaptations can be made to the deed of trust to secure assumption (form 8-2). If a leasehold interest in the water rights is collateral for the loan, the leasehold deed of trust (form 8-10) can be revised. As discussed in this chapter and chapter 8, the forms may be adapted to a variety of situations.
A description of collateral in the deed of trust should be inserted for each category of property intended as collateral. In the water rights category, the description will include such identifying information from the permit or certificate of adjudication as the TCEQ or other water authority number designation, priority date, amendments, water rights authorized (including any rights of diversion, use, or storage), quantity, particular watercourse or aquifer from which the water rights come, ownership, place of use, purpose of use (for example, municipal, irrigation, industrial, recreational), and point of diversion. Also, if adapting form 8-10 for a leasehold deed of trust on the water rights, note that the description of the property in the leasehold deed of trust should be of the leasehold interest of the lessee granting the deed-of-trust lien.
In the case of irrigation surface water rights, the water rights will be appurtenant to the land designated as the “place of use” in the certificate or permit. If the land to which the water rights are appurtenant is also intended as collateral for the loan, the description of that land should be inserted in the definition of “appurtenant land.” If the land from which the water is diverted or on which it is to be used is not intended as collateral for the loan, the land should be described here as the “surface estate.”
The deed of trust for water rights contains security agreement and financing statement language. This security agreement language, in addition to addressing the personal property aspects of water rights, can also be used to create a security agreement in any fixtures associated with the real estate and water rights. For drafting instructions and guidance in using a deed of trust with a security agreement, see sections 8.11 and 9.8 in this manual.
There are a number of other considerations in using a deed-of-trust form, depending on the nature of the loan transaction and related collateral. The attorney can consult chapter 8 to determine whether and to what extent these additional considerations apply, and find additional guidance for completing and modifying the provisions of form 16-23 to reflect the dynamics in the loan transaction.
Chapter 9 of the Texas Business and Commerce Code, titled “Uniform Commercial Code—Secured Transactions,” governs consensual, contractual security interests in personal property and fixtures that secure payment or performance of an obligation. Tex. Bus. & Com. Code § 9.109(a)(1). Almost all water rights in Texas are evidenced by a permit or a certificate of adjudication. Because a permit or certificate of adjudication resembles a general intangible, form 16-24 in this chapter, for creating a security interest in water rights, is an adaptation of form 9-2, the security agreement found in chapter 9 in this manual.
If water rights are considered real property, an argument can be made that the secured transactions provisions of chapter 9 of the Business and Commerce Code do not apply to liens or security interests in water rights. Chapter 9 contains a real property interest exclusion. With an exception for fixtures, the creation or transfer of an interest in or a lien on real property, including a lease or rents, as defined by section 64.001 of the Property Code, is not governed by chapter 9. Tex. Bus. & Com. Code § 9.109(d)(11). By comparison, however, the definition of “account” under chapter 9 explicitly includes rights to payment for property (real or personal) sold. Tex. Bus. & Com. Code § 9.102(a)(2). In addition, security interests in farm products are governed by chapter 9 of the Business and Commerce Code, and specifically include supplies produced or used in farming operations, including aquatic farming operations. See Tex. Bus. & Com. Code § 9.102(a)(34), (a)(35).
To eliminate the risks associated with water rights collateral being classified as either exclusively real or exclusively personal property to which different rules may apply, a lender may ask the debtor to provide both a deed of trust and a security agreement. Although the deed of trust (form 16-23) contains security agreement language that may be sufficient to create a lien on the personal property aspect of water rights, the additional provisions in the security agreement (form 16-24) may provide greater clarity and guidance regarding the parties’ rights and obligations, particularly if related collateral for the loan has strictly personal property characteristics.
The rules for creating and perfecting a security interest are complex. Accordingly, in the context of any particular transaction, the attorney should consult chapter 9 in this manual, giving due consideration to all of the types of collateral involved in the loan transaction. The rules relating to classification and definitions of collateral, creation, attachment, perfection, priority, choice of law, and other issues will vary, depending on the transaction. Chapter 9 in this manual contains instructions that will provide guidance in completing and modifying form 16-24 and additional clauses that should be considered. Because of the complexity of the rules for creating and perfecting a security interest, the attorney should also consult the statutory text, the official comments, secondary sources, and any relevant case law.
§ 16.81:4Attachment, Perfection, and Recording
There are currently no express rules governing attachment and perfection of a security interest in water rights. For other types of collateral, there are four basic methods of perfecting an attached security interest, although as few as one of those methods may be effective, depending on the specific category of collateral. Those methods include (1) a properly completed financing statement (see Tex. Bus. & Com. Code § 9.102(a)(39)) filed in the appropriate UCC filing offices, (2) possession of the collateral in the secured party, (3) the secured party’s control of the collateral, and (4) in a few cases, automatic perfection on attachment of a security interest. If there are alternative methods of perfection, one secured party may obtain priority over another secured party, depending on the method used to perfect. For guidance on the various methods of attachment and perfection, consult sections 9.4 and 9.5 in this manual.
The lender should record the deed of trust in the place for recordation of the deed or conveyance documents described in section 16.12 above (groundwater rights for production on-site), in section 16.42 (permitted groundwater rights for production off-site), and in section 16.62 (surface water rights), as applicable. Given the ambiguities surrounding attachment and perfection of a security interest in water rights, and the different locations from which surface water rights or permitted groundwater rights may originate or be used, a lender may want to use as many means as it can to make sure persons are put on actual and constructive notice of the lender’s lien rights and security interests. Consequently, note should be taken of the additional alternative places for recording documents described in sections 16.42, 16.62, and 16.78:5.
Attorneys dealing with water rights within a watermaster operation should be aware of the notice and recording requirements applicable to watermaster operations. See generally 30 Tex. Admin. Code chs. 303, 304. This is particularly true for the Rio Grande watermaster. There are two subsections (j) to section 11.3271 of the Texas Water Code adopted by the legislature in 2003 that have never been reconciled. See Tex. Water Code § 11.3271. Under one subsection (j), the watermaster with jurisdiction over the Rio Grande is made the official recorder for all instruments, including deeds, deeds of trust, financing statements, security agreements, and liens that the TCEQ authorizes or requires to be filed in connection with a water right relating to water in the lower, middle, or upper basin of the Rio Grande and that are subject to a permit, certified filing, or certificate of adjudication, and the filing will have the same legal effect as filing under other law for the same type of instrument. Under the other subsection (j), the watermaster is required to maintain a central repository that includes certified copies of all instruments, including deeds, deeds of trust, and liens that the TCEQ requires to be filed in connection with the same type of water rights as are described in the first-referenced subsection (j), and it is expressly stated that on and after September 1, 2003, a lien against a water right shall not be effective against third parties unless a certified copy of the instrument is filed with the watermaster and all requirements under other law are met. It would be prudent when conveying rights or interests in water rights in the Rio Grande to record a duplicate set of original documents with the Texas watermaster, as well as in the real property records of the county or counties in which the documents are otherwise authorized to be recorded, and to also file a certified copy of the documents recorded in the county real property records (at least with regard to liens) with the watermaster.
Because water rights, permits, and facilities have both real and personal property characteristics, financing statements used in the loan transaction should be treated as applying to both fixtures and personal property and should be recorded in the appropriate locations as provided by the Uniform Commercial Code (title 1 of the Texas Business and Commerce Code). If applicable law requires the financing statement to be filed with the secretary of state of a state other than Texas (for example, in the state of the debtor’s location), the lender may still want to file an additional financing statement with the Texas secretary of state, to provide actual notice of the security interest to persons who check for filings in Texas. The UCC forms are available in a fill-in-the-blank format over the Internet from the Texas secretary of state at www.sos.state .tx.us/ucc/uccforms.shtml. For guidance in filling out the UCC forms, consult sections 9.13 through 9.17 in this manual.
[Sections 16.82 through 16.89 are reserved for expansion.]
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