Wineries Get Guidance on Water Agreements From a Recent California Opinion

Access to water is a paramount need in running a winery (or
any beverage business for that matter). 
That water might come from a source on your land, or might be the
subject of various agreements or arrangements between you and another
owner.  Whatever the case, if you find
yourself drafting a water and drainage agreement to have access, or to provide
access, to water, there are some valuable lessons in a recent unpublished opinion
from California.

The case made it to the California Court of Appeal (2nd
District), after a trial court granted judgment to Sylvester Winery, Inc., and
the Limited Partnership that owns the land that is leased to the winery.

The situation involved a family dispute over water
rights.  The winery, roughly 60 acres located in Paso
Robles, California, along with an additional 340 acres located around the
winery property, used to be owned by one individual.  That individual mortgaged the winery property
to finance the costs of building the winery building and a tasting room back in
1997.  When the loan was made, the lender
required the owner to enter into a water and drainage lease between himself and
the Limited Partnership that owned the 60 acres of the winery because the
winery didn’t have a well or water at the time and the lender wanted assurances
that the property would have access to water. 
The agreement made no mention of price or payment between the two
parcels for use of the water.

The agreement that the owner execute allowed the Winery
property use of the water from a designated well on the larger 340 acre piece
of land for a period of a renewing one-year term from a particular well.

The owner sold the Winery in 2001 and by 2009, given
disputes over the operation of the Winery and the surrounding land, through settlement,
the owner transferred ownership of the land owned by the Limited Partnership
(the 60 acres under the Winery) to the Winery owner.  The water and drainage agreement was excluded
from the settlement issues.

In 2010, the owner started billing the Winery for use of the
water and the Winery refused to pay the bills and sued for breach of the water
and drainage agreement.  There was a
countersuit and the owner argued that the water and drainage agreement created
a license for the water between the two parcels, not an easement allowing the servient
parcel to obtain water as a right.

In the end, the trial court found that the water and
drainage agreement created an appurtenant easement, not just a license to use
the water from the well.  This decision
stems from some particular language in the water and drainage agreement:

AGREEMENT TO FURNISH
WATER

NOW, THEREFORE,
[Owner] agrees to furnish to [Limited Partnership] from said well such water as
may be necessary for the use by [Limited Partnership] in the occupancy and
development of [Limited Partnership’s] Land on the following terms and
conditions.

LIMIT ON WATER AMOUNT

1. [Limited Partnership] is entitled up to 100% of the water
that may be made available from said well or any replacement well drilled in
place of said well.

NO GUARANTY AS TO
QUANTITY

2. [Owner] cannot and does not make any guaranty concerning
the quantity of water agreed to be furnished under this Agreement or concerning
the continuing availability of water except as herein expressly provided. [Limited
Partnership] understands and hereby acknowledges that [Owner] is not a public
utility, is not guaranteeing any specific quantity of water, is the sole owner
of said well and all waters underlying or in any way connected with the
retained land, and has agreed to furnish water to [Limited Partnership] only in
accordance with the terms of this Agreement. [Limited Partnership] stipulates
that it has no right, title, or interest in or to any water from said well or
water underlying said retained land except as herein specifically set forth.

…

TERM OF AGREEMENT

7. This Agreement is made for the period of one year
commencing October 1, 1997, and will be automatically renewed thereafter from
year to year.

SALE OF RETAINED LAND
AND WELL

8. [Owner] expressly reserves the right to sell, lease,
trade, mortgage, encumber, or otherwise deal with the retained land as it may
see fit. This agreement is binding on [Owner] and its successors in
interest.

The Court’s holding here found that the language in
paragraph 7 actually implied a permanent or perpetual relationship and not one
that could be terminated.  This was a
matter of some dispute.  The language
appears to imply a year-to-year agreement, but it fails to include a
termination clause. 

Failure to include the language might have been an oversight.  But, the Court points out that the lender
probably wouldn’t have given the money on an agreement that could simply be
terminated in any given year after the loan. 
Which is why the agreement likely doesn’t have a termination clause.

Another argument also came up during the case.  The Winery also used the water for property other
than the 60 acres.  The owner sought to
limit that use but the court agreed with the Winery’s argument that the
agreement was silent about limiting the use of the water to the dominant tenement
(the 60 acres).

So the lessons here for drafting a water agreement are twofold.  A) if you intend to grant a license, you need
to specifically limit the duration and include a termination clause; and B) if
you want to limit the use of the water, you need to make that an express
provision or the dominant tenement can use the water as it sees fit.