Water rights vary from province to province; in Alberta water rights are primarily covered by the Water Act (the “Act”). Under the Act, there are three primary ways that an agricultural business may divert water:
- Water License
- Exempted Agriculture User
- Traditional Agriculture User
The Act also establishes a system of priority referred to as “First-in-Time, First-in-Right” or FITFIR. A license or registration’s priority is determined by its priority number, which are assigned at the time of issuance, in ascending order. The older the entitlement, the lower its priority number will be. Generally speaking, in times of water shortage, those with numerically lower priority numbers (and thus an older license or registration) will take the full allocation of water allotted to them by their entitlement, as they were the “First-in-Time”. Those with later registration may be forced to go without. As such, the lower the entitlement’s priority number, the earlier the entitlement was established and the potentially more valuable the allocation.
1. Water License
A water license stipulates a volume of water permitted to be diverted for a prescribed purpose. Pursuant to s. 58 of the Act, the license will specify either land or an undertaking to which it is appurtenant (pertaining). The license is inseparable from that land or undertaking, and thus runs with them on disposition (unless the Governor in Council orders otherwise).
The allocations made under these licenses can be transferred. Further, despite s.58 of the Act, the Court of Queen’s Bench of Alberta has found that a water license can be severed from the land.
In Royal Bank v Hirsche Herefords (Hirsche), a receiver was empowered to sell the assets of a debtor, which included certain lands, and the water license appurtenant to said lands. The receiver listed these lands, including a statement which specified that the water rights would be sold separately, which was acknowledged by the purchaser in the purchase contract. The question of whether these rights run with the land was not fully settled, however Justice Strekaf found that the water license was an asset of the receivership. It was also held that a transfer of the allocation under the license was for the Director under the Act to approve.
Despite any presumptions that a mortgage over the lands would contemplate the water license appurtenant to such land, it is possible, where a transfer is approved by the Director, for those rights to be severed from the lands. Accordingly, lenders should pre-emptively take a specific assignment of any water licenses when securing real property, particularly with borrowers who are in the business of agriculture where this would be a valuable asset. Lenders should also use specific reference to water licences in their general security agreements, so as to avoid any doubt whether such collateral constitutes personal property for the purposes of the Personal Property Security Act (Alberta).
2. Exempted Agriculture User
Section 19 of the Act allows persons who, on or before January 1, 1999 diverted water for the purposes of raising animals or applying pesticides to crops, as part of farm unit, and on (or after) January 1, 1999, owned or occupied land adjoining certain water features, or under which groundwater exists, to divert up to a maximum of 6250m3 of water for the same purposes. They can do so without obtaining any approval, licensing, or registration under the Act.
However, due to the lack of licensing or registration, exempted users have no priority under the Act. As a result, in times of shortage this entitlement quickly loses its value, both practical and monetary. Lenders should be aware that some of their agricultural borrowers may be relying on this exemption and should require that a proper registration, as set out below, is made in order to avoid business interruptions during periods of drought.
3. Traditional Agriculture User
Traditional agriculture users are similar in most respects to exempted users. However, section 24 of the Act requires that the land in question has a registration appurtenant to it. As a result, these users are assigned a priority number. Priority is assessed amongst licensees and traditional agriculture users together, not simply against entitlements of like kind.. Registrations, in the same manner as licenses, run with the land. These registrations should form an integral element of a lender’s due diligence, as water shortages in the prairies are becoming more of an issue which means an increasing risk of lost revenues for farming operations.
II. Licenses Compared
Fishing licenses pose as an interesting comparison to water licenses. In Saulnier v. Royal Bank of Canada, it was found that a fishing license granted pursuant to s.7(1) of the Fisheries Act met the definition of property under the Bankruptcy and Insolvency Act and the Personal Property Security Act. This was due to the fact that a fishing license is more than mere “permission to do that which would otherwise be unlawful”; it is coupled with a proprietary interest in the harvest.
In contrast, there is no indication that the government intends to grant property rights in either the Act or the typical water license. While it permits diversions and use of water that would otherwise be unlawful, there is typically no accompanying proprietary interest in the water diverted. In that sense, they are a simple license.
Despite the lack of explicit property rights granted in respect of the water that is used pursuant to a water licence under the Act, the value associated with the water in agri-business is vital. Lenders should proactively take security in water rights and ensure registration under the Act is effected with respect to the water diversion rights granted to their agriculture industry clients. By securing the water rights, lenders will endeavour to secure and take priority over these assets in accordance with personal property legislation and the Act and will also ensure that a receiver can deal with them in the event of a default. In an environment that is constantly changing, with effects such as global warming, the risk of water shortage is becoming an ever more problematic issue and one that lenders should always keep in mind.