Sharing the Common PoolCharles R. Porter Jr., MLA, Assistant Professor of History

“Water Rights and Everyday Real Estate Transactions”

presented by

CharlesR.Porter Jr., MLA, Assistant Professor of History[1]

St. Edward's University

Austin

Water rights affect the everyday lives of Texans most often in transactions involving real estate. Water rights and everyday real estate transactions set the market value of land with far reaching consequences for every Texan. Assessing the water characteristics of real property presents unique challenges to buyers, sellers, lessors, lessees, and real estate agents. The water scarcity predicted in our future requires potential buyers to consider a variety of heretofore less often considered assessment criteria. Likewise, the potential of future water scarcity requires sellers and their real estate agents to exercise extreme caution and prudence in their duties of disclosure of the water situation of any property for sale.

Looking to the Future

The Texas Water Development Board’s (TWDB) State Water Plan for 2012 asked, "Do we have enough water for the future?" Their startling and unequivocal answer was:

We do not have enough existing water supplies today to meet the demand for water during times of drought. In the event of severe drought conditions, the state would face an immediate need for additional water supplies of 3.6 million acre-feet per year with 86 percent of that need in irrigation and about 9 percent associated directly with municipal water users. Total needs are projected to increase by 130 percent between 2010 and 2060 to 8.3 million acre-feet per year. In 2060, irrigation represents 45 percent of the total and municipal users account for 41 percent of needs.[2]

Water more than ever before will dictate he market value of land in our state. Land values are crucial base elements of all private and public economic activities.

Water and the Market Value of Land

Land adjacent to flowing water is obviously the most valuable in our state; the better the water and the water right, the more valuable the land. An early example of this idea can be found in the historical record.[3] On November 19, 1879 George W. Brackenridge, pioneer San Antonio banker, University of Texas regent, and donor of the "Brackenridge" tracts in Austin[4] and San Antonio[5] completed an inspection of several sections of land in Kimble County owned by his land-speculating brother Thomas. His enthusiasm about the land was based upon its water:

We arrived on this place last evening from a survey of the Seventeen Sections [10,880 acres] of your land in the northern portion of this County and I found it to far exceed my expectations. [He described] ... an abundance of water [on several of the tracts, and he said tract 19 had] . . . all the water there is in that section in [a] splendid spring.[6]

Toward the end of the letter, Brackenridge made a prophetic statement, "You must be careful not to dispose of those sections on which the water is unless the other goes with it, as the water renders the land valuable."[7] Nothing was truer then, and nothing is truer now.

Considering that the "norm" for Texas is drought or "soon-to-be-back-in-drought," the troublesome consequence of water scarcity, outside the most obvious - the ability of an area to sustain life - will be a decrease of land values leading to a weakened ad valorem tax base, inevitably making Texas a less attractive home for new people and industry. Our ad valorem tax base across the stateunderlies the funding of our most cherished public services and societal values.

Water is fast becoming the battleground between the basic ways of life in Texas, rural and urban. The cities are thirsty for water and the source they seekto quench this thirst is, in many cases, the groundwater held by rural neighbors. Just review the file in the infamous "Del Rio case,"City of Del Rio v. ClaytonSam Colt Hamilton Trust,to learn the efforts one city made, for over a decade, to expand their water resources regardless of cost or consequences.[8]

If an urban area pumps away a rural neighbor's groundwater, land values in the rural area drop subsequently diminishing its ad valorem tax base. Without a corresponding increase in tax rate, which always ignites heated debate, our most valued public services such as public school education and hospitals could suffer. Since almost 90% of Texans now live in urban areas,[9]we simplycannot and likely will not allow any urban area to decline even if that urban area's only available new water resource comes from adjacent rural groundwater. Competition over water is a zero-sum game.[10] The choice between urban and rural life is one no legislature or court should have to make, but without fully funded comprehensive long term statewide water planning respecting all the stakeholders’ needs, there could very well be a winner and a loser. The cities will rightly do their duty and act to protect their citizens by gathering rural groundwater in any manner legally possible. Statewide water policy must be written in a manner that enhances and protects both urban and rural ways of life in Texas.

The market value of water at the everyday level is easily determined. We quickly understand the price of water when we read and pay our water bills or buy bottled water. The market value of a water right is not as obvious. The fair market value[11] of a water right is based upon comparable sales of existing water rights, judicial rulings, and government contracts. Over the years, a tepid marketplace has developed for the sale of surface and groundwater rights.Comparable sales and leases of today's water rights are discoverable; some of the Groundwater Conservation Districts(GCDs)[12] and the Edwards Aquifer Authority in particular post for sale or lease notices by holders of water rights in their jurisdictions. Some real estate appraisers are now able to give reasonably well supported valuations of water rights based upon confirmed comparable sales, always the best indicator of fair market value.

A significant and notable indication of a more sophisticated valuation aspect of water rights came in a court ruling in 2010. The judge offered the market value not only of groundwater rights per acre-foot, but also the added incremental value of market classification of the land in the matter as an irrigated farm as opposed to a non-irrigated farm.

The “Cat Case” or the Case with Nine Lives

JoLynn and Glenn Bragg operate two farms in the Medina County area which require irrigation to be productive, one named the D'Hanis Orchard (approximately 42.16 acres) and the other named the Home Place Orchard (approximately 58.51 acres).[13] The irrigation wells for these farms required permits from the Edwards Aquifer Authority (EAA). The Braggs requested more groundwater than the EAA granted. The long years of litigation resulted in decisions generally in favor of the EAA. However, the Braggs persisted in the face of unfavorable rulings and filed another lawsuit under a “takings”[14] claim against the EAA after an appeals court ruling in a similar case, Day and McDaniel v. the Edwards Aquifer Authority,[15] brought up the possibility that the EAA owed just compensation for their regulatory actions. The Braggs' new/revised lawsuit sought just compensation from the EAA for the amount of groundwater they were denied. Judge Thomas Lee of Hondo ruled favorably for the Braggs on May 7, 2010, with language that should awake everyone concerned about groundwater in Texas.[16]

Judge Lee, a retired District Judge living in Hondo reviewed the evidence and testimony. In Judge Lee’s words:

The implementation of the Edwards Aquifer Act, and the denial of an Initial Regular Permit (IRP) on February 8, 2005, for an amount less than requested or needed by the Plaintiffs to operate their Home Place Orchard, unreasonably impeded the Plaintiffs' use of the Home Place Orchard as a pecan farm, causing them severe economic impact; interfered with their investment-backed expectations, and constituted a regulatory taking of the Plaintiffs' property . . . the Plaintiffs are entitled to be compensated for their loss.[17]

The difference in the amount requested by the Braggs and the amount the EAA granted them was 108.65 acre-feet of water. The Plaintiffs requested that their compensation for this water would be based upon $7,500 per acre-foot for a total of $814,875.[18] Judge Lee determined that the water was worth $5,500 per acre-foot for a total award on this portion of the damage claim of $597,575.[19] The further language he chose on page 2 and 3 seems to be written to meet the requirements that the actions of the EAA constituted a “taking.” All Texans should take close notice of this section of Judge Lee's ruling:

I believe this is as much about the taking away of a lifestyle as it is about the decrease in the value of land. The Braggs invested their lives, labor and money in a good family farm that could be passed on to their heirs. That life plan has been undermined, and their investment severely damaged.[20]

Judge Lee assigned additional damages to one tract of land, the D'Hanis Orchard, caused by the actions of the EAA. The denial of the water for this orchard no longer allowed it to be considered an "irrigated" farm. He determined that the difference between a dry land farm and an irrigated farm was $134,918.40 or $3,200 per acre.[21] Judge Lee's total compensation award to the Braggs for both elements of damage was $732,493.40.[22] The total acreage of the two orchards is 100.67 acres making this award $7,276 per acre. This ruling is one cornerstone that can be used in determining the market value of irrigated land and of groundwater. It may not reflect a fair market valuation at any one time in the future but at the time of his finding, it is a strong indication of the value of water and the incremental value of an irrigated farm over a non-irrigated farm. The incremental value of an irrigated farm isa significant by highly subjective new consideration in land valuation.[23] His award of $5,500 per acre-foot of water reconfirms another well known and acceptable reliable comparable valuation. Considering that both tracts of land are valued at the appraisal district at $4,000 per acre apparently without adjustment for the irrigated value found by Judge Lee, simply the fact the farm is considered "irrigated" at a premium of $3,200 an acre almost doubled the land value.The water rights, therefore, could also be said tomore than double the value of the land.

This ruling is yet another confirmation that water availability and adequate water rights strongly enhance the value of land. His findings also assume the Braggs' interest in groundwater was a "vested" property right,[24] a right government has a primary duty to protect. Since water rights or the lack thereof so significantly affect land values, the characteristics and especially any defects in those rights are material and significant considerations that must be disclosed by sellers and their real estate agents to any potential purchaser of property during their decision to purchase.

Disclosure Duties Owed by Sellers to Buyers

The land buying public statewide is becoming more cognizant about defects in water rights. For almost two decades, any defect actually known to the seller and the real estate agents have had to be disclosed to potential purchasers of single family homes.[25] Non-disclosure of defects involving access to water and water rights by the sellers and/or their real estate agents potentially creates substantial liability for civil damages in lawsuits. Sellers' and real estate agents'duties are similar as to disclosure of all known defects.

Since 1993 in Texas, the concept of “caveat emptor” or “let the buyer beware” disappeared in single family residential transactions. Sellers of single family residential properties, whether represented by a real estate agent or not, are required to disclose known defects to any potential buyer while the buyer is making the decision to purchase the property. The 73rd Texas Legislature added section 5.008, Seller's Disclosure of Property Condition, to the Texas Property Code effective January 1, 1994: “A seller of residential real property comprising not more than one dwelling unit located in this state shall give to the purchaser of the property a written notice as prescribed by this section . . .”[26] From this revision to the property code came a myriad of locally developed Seller’s Disclosure Notices, the birth of the home inspection industry, and of course,hundreds of lawsuits.[27]

Sellers’ Disclosure Notice forms are required, at a minimum, to include this line to disclose information about the water source of the property for sale: "Water Supply: ___ City ____Well ____ MUD ___ Co-op." Not all farms and ranches have single family residences, but if a single family residence is on the property, any defect in the water system or any well's water quality or working status, permit status, or any other known defect must be disclosed to a potential purchaser.[28] Typical plaintiff's petitions involving non-disclosure of defects include claims under the Texas Deceptive Trade Practices Act, claims of common law fraud, fraud in the inducement, negligent misrepresentation, and civil conspiracy many times even insituations where there is no single family home on the property. A prudent seller, agent, or buyer keeps in mind that the source and availability of water to any property are absolutely critical items that must be fully and truthfully disclosed.

Other questions on the minimum statutory Seller's Disclosure Notice form that could involve water conditions are:

  • Are you (Seller) aware of any item, equipment, or system in or on the property that is in need of repair?[29]
  • Are you (Seller) aware of . . . any notices of violations of deed restrictions or governmental ordinances affecting the condition or use of the Property?[30]
  • Are you (Seller) aware of . . . any condition on the Property which materially affects the physical health or safety of an individual?"[31]

Any pertinent water-related issues must be disclosed in the answer to any or all of these questions and supporting documents should be provided to the purchaser prior to making a commitment to buy.

Disclosure Duties Owed by Real Estate Agents

The duties of disclosure of defects for real estate agents are even broader in some ways than the sellers' duty to disclose. Any and all actually known defects must be disclosed by the agent even if the seller has disclosed them.[32] Disclosures of latent defects are not considered confidential information in Texas or elsewhere in the United States.

Real estate agents' duties to disclose known defects in water are found in the Texas Occupations Code, the Rules of the Texas Real Estate Commission (TREC), and if the agent chooses to join the National Association of Realtors (NAR), in NAR's Code of Ethics.

First, a real estate licensee’s duty to disclose defects is found in the Texas Occupations Code, Chapter 1101, also known as the Real Estate License Act, specifically Section 1101.652 (b) (3) and (4).[33] In short, TREC may revoke an agent’s license if the agent fails to disclose to a potential purchaser structural or other latent (hidden) defects known to the agent. In fact, this duty to disclose applies to all types of real estate, not just single family homes, a fact many agents in Texas still fail to recognize. Note the key word in 1101.652 (b)(3) is known. Most attorneys who defend agents in disclosure lawsuits correctly demand proof of the accused agent’s actual knowledge of any alleged defect.

Plaintiff attorneys, on the other hand, feel the agent’s conduct should be judged not only upon what the agent knew, but also what they heard, thought, said, did, decided, and failed to do. Many plaintiff attorneys would also like to see “known” changed to “should have known” in 1101.652 (b) (3). “Should have known” is considered constructive knowledge which is deemed to be actual knowledge in Texas.[34]

The next place agents' disclosure duties are outlined is found in the Rules of the Texas Real Estate Commissioncodified as Title 22, Chapter 531, of the Texas Administrative Code, and titled Canons of Professional Ethics and Conduct for Real Estate Licensees. These duties are organized under the general headings of fidelity, integrity, and competence. Under this code of ethics, effective since 1976, an agent is deemed to be a fiduciary[35] for the client. Fiduciary duty, per the code of ethics, means that the agent must place his or her clients’ interests above that of the agent and that the agent be scrupulous and meticulous[36] when performing the work. The agent must also avoid misrepresentation by acts of commission or omission,[37]that the agent must be informed on market conditions affecting the real estate business,[38] must be informed on national, state, and local issues and developments in the real estate industry,[39] and must exercise judgment and skill in the performance of the work.[40] If the real estate agent fails to inquire about the water rights and conditions of a property, the agent may violate some or all of these duties in the statutory code of ethics.