Frank Z. Ruttenberg Bracewell

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Drafting Groundwater TransferAgreements
Thank you for your participation in the Texas
Real Estate Land Institute Outlook Conference,
and for attending my presentation on Groundwater
Marketing. I hope you found my presentation
informative and useful. For your convenience,
I have attached a copy of my power point
presentation. If you should have any questions
about my presentation or about water law issues,
please do not hesitate to contact me.

• Frank Z. RuttenbergBracewell Giuliani LLP
• Frank.ruttenberg_at_bgllp.com
• 210 299-3467

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Drafting Groundwater TransferAgreements Frank
Z. Ruttenberg Bracewell Giuliani LLP 106 S. St.
Marys Suite 800 San Antonio, Texas 78205 Texas
Realtors Land Institute April 2008
       

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Drafting Groundwater TransferAgreements Overview
       

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

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Drafting Groundwater TransferAgreements

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Drafting Groundwater TransferAgreements
       

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Drafting Groundwater TransferAgreements
       

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

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Drafting Groundwater TransferAgreements
Groundwater Regulation

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

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Drafting Groundwater TransferAgreements
Result Cities, industry and property owners are
scrambling to firm up water rights including
groundwater Water Rights which use to be a
passing thought to property owners are now in
certain circumstances - a very valuable property
right People are searching for the right way to
obtain value from these groundwater rights
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Drafting Groundwater TransferAgreements Purpose
of Outline To Address
First What are we trying to transfer? Next -
What issues typically arise between a buyer and
seller or lessors and lessees of these
rights? Last - How might we address these issues
in transfer documents?
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Drafting Groundwater TransferAgreements Transfer
s of Groundwater
Beginning Questions -What is the nature and
character of these Groundwater Rights we are
attempting to transfer? Real Property? Personal
Property? Does it matter?

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Drafting Groundwater TransferAgreements

• Transfers of Groundwater
• Case Law
• Groundwater is a part of the surface estate of
  the land (not the mineral estate)
• The owner of land has the exclusive property
  rights to the groundwater to be used at their
  will and
• The rights to this groundwater include all
  rights that they might have for any other species
  of property.

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Drafting Groundwater TransferAgreements

• BUT
• Regulation Relating to Groundwater Transfers
• SB-1, SB-2 AND SB-3 authorized groundwater
  districts to
• Regulate the production of groundwater
• Regulate transfers of groundwater within a
  district an
• Regulate transfers of groundwater out of the
  groundwater district.

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Drafting Groundwater TransferAgreements

• ISSUES RELATING TO THE PURCHASE SALE OR LEASGIN
  OF GROUNDWATER

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Drafting Groundwater TransferAgreements
Purchase and Sale of Groundwater How do we
purchase and sell groundwater? Most Common Forms

• Buy the land and get the groundwater as a part of
  the bundle of sticks (not covered in this
  outline)
• Purchase of groundwater in fee simple
• Transfer of groundwater for a period of time
• Fee simple determinable
• Lease
• License
• Water supply agreements

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Drafting Groundwater TransferAgreements

• Purchase and Sale of Groundwater
• Legal Description
• What groundwater is being conveyed?
  geological description.
• Exclusive or non-exclusive right to develop and
  use groundwater.
• If less than all is conveyed - determine the
  priority for use (withdrawal limitations) and
  access (spacing limitations).
• Physical Limitations
• Regulatory Limitations

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Drafting Groundwater TransferAgreements
Access to Groundwater from Surface Estate

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

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Drafting Groundwater TransferAgreements

• Purchase and Sale of Groundwater
• Legal Description
• What does a water right give you
• What does a water right NOT give you
• OG Distinction
• Naked Water Right
• DONT BUY A NAKED WATER RIGHT!!

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Drafting Groundwater TransferAgreements
Access to Groundwater from Surface Estate

• What else does the Purchaser of Groundwater need?
• The right to use the surface estate for the
  exploration and development of the groundwater
  estate on an exclusive or non-exclusive basis
• The right to place infrastructure on the surface
  estate (through a fee interest, lease or
  easement) and
• The right of ingress and egress to construct,
  operate and repair a water collection system.
• Implied easement of necessity?

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Drafting Groundwater TransferAgreements

• Purchase and Sale of Groundwater
• Legal Description
• DONT BUY A NAKED WATER RIGHT!!
• In City of Del Rio vs. Clayton Sam Colt Hamilton
  Trust Del Rio argued that a severance without
  access was void due to the fact that it violated
  the Texas Constitution Art 1 Sec 26 rule
  against perpetuities
• Implied easement of necessity?

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Drafting Groundwater TransferAgreements

• Access to Groundwater from Surface Estate
• Development Responsibility determine who will
  develop and deliver the groundwater?
• Withdrawal
• Collection
• Storage
• Treatment
• Delivery
• Capital investment
• Operating responsibility
• Impact on Pricing

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Drafting Groundwater TransferAgreements

• Access to Groundwater from Surface Estate
• Development Responsibility
• Capital investment
• Exploration Cost
• Infrastructure cost
• Right of Way Cost
• Marketing Cost
• Political Cost

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Drafting Groundwater TransferAgreements

• Access to Groundwater from Surface Estate
• Operating responsibility
• Maintenance
• Repair
• Liability

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Drafting Groundwater TransferAgreements

• Access to Groundwater from Surface Estate
• Development Responsibility Impact on Pricing
• What are you selling?
• Water in place or water delivered?
• Alteration of price after a return on
  infrastructure?

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Drafting Groundwater TransferAgreements
Access to Groundwater from Surface Estate

• Operating covenants or behavioral covenants
  relating to the Landowners use of the surface
  estate
• Groundwater Owner wants
• Flexibility as to placement of facilities at
  beginning and in future
• Access for construction maintenance and
  operations
• Restricted use by landowner that will not
  interfere with withdrawal of groundwater
• Limitations on surface penetrations (Oil and
  Gas)
• Limits on environmentally harmful use - sanitary
  control easements

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Drafting Groundwater TransferAgreements
Access to Groundwater from Surface Estate

• Operating covenants or behavioral covenants
  relating to the Groundwater owners use of the
  surface estate
• Landowner wants
• Restricted use by groundwater owner
• Construction standards
• Limits on location of facilities - low
  intrusion factor
• High maintenance responsibility
• Preservation of development rights for other
  uses, and
• Duty of mitigation.

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Drafting Groundwater TransferAgreements

• Purchase and Sale of Groundwater
• Mitigation
• Rework wells
• Deliver groundwater to site
• Provide access to delivery system
• cost to mitigate

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Drafting Groundwater TransferAgreements
Purchase and Sale or Lease of Groundwater Consider
ation

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

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Drafting Groundwater TransferAgreements
Purchase and Sale of Groundwater

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

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Drafting Groundwater TransferAgreements
Access to Groundwater from Surface
Estate Termination of Rights to Use Groundwater

• Ownership of facilities after termination
• Condition of facilities after termination and
• Plugging of wells upon termination. 

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Drafting Groundwater TransferAgreements
General Contract Provisions

• Default and Termination
• Special Provisions for termination
• Indemnity
• Governmental limitations

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Drafting Groundwater TransferAgreements
General Contract Provisions

• Insurance Provisions
• Lender Non Disturbance and Subordination
  Agreements
• Release Provisions

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Drafting Groundwater TransferAgreements
General Contract Provisions

• Force Majeure
• Physical Limitations
• Regulatory Limitations
• Temporary Interruptions
• Permanent Interruptions

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Drafting Groundwater TransferAgreements

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

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Drafting Groundwater TransferAgreements
Due Diligence Issues - Water

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

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Drafting Groundwater TransferAgreements
Due Diligence Issues Real Property

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

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Drafting Groundwater TransferAgreements
General Contract Provisions
WATER SUPPLY AGREEMENTS Need reliability Quality
Control Priority Commitment
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Drafting Groundwater TransferAgreements Frank
Z. Ruttenberg Bracewell Giuliani LLP 106 S. St.
Marys Suite 800 San Antonio, Texas 78205 Texas
Realtors Land Institute April 2008