Legal Issues in Vineyard Development and Expansion

August 2012

California Association of Winegrape Growers

“Lessons in Site Selection and Planning” is the second installment in a multi-part primer tackling the issues that CAWG members may face during vineyard development and expansion. Part I in the July Crush covered the importance of long term winegrape contracts in the vineyard development and expansion process. This installment focuses on the site-selection process: evaluating potential development and expansion sites, and avoiding the most common legal headaches. Future segments will discuss post-land acquisition issues, including: environmental regulations, permitting compliance, water rights, sale and supply contracts, and compliance with labor laws.

Part I: Lessons in Site Selection and Planning

With the demand for winegrapes on the rise, the potential for developing a new vineyard or expanding an existing vineyard has been at the forefront of many growers’ minds. Before committing to development or expansion though, a grower needs to understand not only what he or she is getting for the purchase price, but also whether there are any legal catches that are not readily apparent might turn an otherwise promising business expansion into a legal quagmire.

A grower who understands not just the physical and viticultural aspects of expanding the vineyard onto a particular parcel but also the legal aspects of doing so can better negotiate the price of buying or leasing the parcel, avoid costly surprises, and can better ensure that the new vineyard site really will meet his business’s needs.

Evaluating the Property Rights: What are You Paying For?

A savvy grower should have a clear picture of what rights, exactly, are being sold or leased with the new vineyard site: what water rights are available and is there an additional cost associated with those rights? Are there any limits to the buyers’ use and access to the parcel? Does the current property owner have the legal right to sell the property? Do any third-parties have rights to access or use the surface or subsurface? And are there one or more separate mineral owners which can create major headaches for unwary buyers? Before committing to a parcel, a grower needs to understand what rights his money is buying (and what rights it isn’t).

For example: buyers typically take ownership of a property subject to recorded property interests. Among other provisions, these interests may restrict a subsequent owner’s use of the property or grant neighbors, utility companies, water districts, or mineral rights owners the right to travel over or through the property, disturb the surface, or place new facilities on the land. Depending on their terms, these limitations may have a serious impact on the day-to-day operations of a newly developed vineyard. If some third party holds a purchase option or a right of first refusal on a parcel, would-be purchasers may see their deal fall through at the last minute—or worse, be the subject of a lawsuit challenging their right to the property post-acquisition.

Recorded property interests on neighboring properties can also benefit the property being targeted for purchase. As such, it is important to establish what rights the buyer will hold by virtue of having this particular slice of land—in order to guarantee that the grower has all of the rights necessary to get to and use the parcel once the sale is complete. If the proposed vineyard site can only be accessed by crossing over a neighboring parcel, a potential buyer should verify that he will still be able to cross over the neighbor’s land after purchase. Without a recorded easement, this access may not be guaranteed when the new owner takes title.

A grower also needs to understand the rights that are not transferred when he takes title to the property. For example, purchasing a parcel to establish a new vineyard does not guarantee the owner an unlimited supply of water to serve that vineyard. Water rights are a function of the parcel’s geography, prior water use, and the transactions of prior owners, so establishing the right to water can be a complicated administrative process (even if surface water seems to be readily available). County groundwater ordinances can further limit a buyer’s ability to access water supplies by limiting the times, locations, or volumes of water that can be pulled from the groundwater basin. If verification of a water right is an issue, potential buyers can engage an attorney and consulting team to determine the extent of the water rights on a parcel.

Finally, a grower should be aware of what, exactly, he’s purchased a right to: rights to the surface (“surface estate”) and subsurface minerals (“mineral estate”) on a single parcel can be severed, and each estate can be transferred to different individuals. If a prior owner severed the land and mineral estates on a parcel, a later buyer might hold title only to the surface, but not to the mineral estate. This distinction is important: in California, the mineral estate is dominant over the surface estate, so if the mineral estate owner decides to develop his property interest, he has a right to access and disturb the surface to get to it—even at the expense of the owner’s newly-planted vineyard. Although the owner of a mineral estate may not always be apparent from a title report, the transfer of these estates is typically a matter of public record. With some additional research, and the help of good legal counsel, would-be purchasers can verify exactly what their money will buy, and protect themselves from tremendous legal headaches.

Using the Property: Are There Hidden Legal Costs to This Parcel?

Before selecting a vineyard site, a grower must also understand whether there is anything unique about this parcel that will cause legal or regulatory headaches in the future, or limit his potential use of the property.

If the property is subject to a Williamson Act contract for example, any development by the new owner must be related to agriculture “as a primary purpose.” The financial penalties for violating this rule can be steep, and the guidelines for what types of improvements and uses are compatible with the contract terms vary depending on the county, the age of the contract itself, and the specific language of the contract covering the property. Before purchasing or leasing Williamson Act land, a potential buyer should consult with an attorney to confirm that any proposed buildings or other changes to the property use will fall within the contract terms, particularly if a maintenance barn, tasting room, secondary housing, grape processing facilities, on-site gravel extraction for roads, or recreational facilities are contemplated on the property.

Before committing to a parcel, buyers also should investigate what county-specific zoning and permitting requirements will apply to the buyer’s intended use of the parcel. In moving forward, tread carefully: it is not enough to assume that because the current owner is using a parcel in a particular way, the use has been condoned by the city or county. Buyers who fail to investigate these issues may face unexpected hurdles and delays as they attempt to develop the property.

Finally, the unique physical conditions of a particular parcel can present legal complications. Wetlands, swales, vernal pools, springs, and sometimes even abandoned stock ponds or quarry sites pose regulatory issues for the unwary future owner. Wetlands and waterways may be considered “jurisdictional waters of the United States” subject to federal Clean Water Act regulations, which require permits from State and federal agencies prior to ripping the soil as deep as necessary before planting. Additionally, unreclaimed quarry sites, even if used for on-site road maintenance, may be considered unlawful surface mines. If there are threatened or endangered species on the parcel, additional environmental surveys and even incidental take permits may be required under state and federal Endangered Species Acts before the vineyard can be ripped and planted. Prior agricultural uses of the property are also a concern: Every purchaser should also consider conducting a Phase I Environmental Assessment for the property as prior agricultural uses could pose contamination risks, including pesticide use, fuel tanks, and hydrocarbon development. Even the actions taken to prepare the site for planting (for example, cutting trees on a hillside), may trigger local tree harvesting permits and environmental review under the California Environmental Quality Act (CEQA). A grower that understands these triggers is in a better position to evaluate a potential parcel, plan for development, and protect his business’s interests as the deal moves forward.

Wrapping up the Deal:

Once a grower has a potential expansion site in mind, good legal counsel can guide a would-be purchaser through each of these analyses, and highlight any other site-specific issues that may arise. Legal hurdles need not kill an otherwise good deal—but careful research prior to purchase or lease can help a grower avoid many unexpected costs, avoid enforcement actions from government agencies, streamline the permit process, and insure that the parcel is truly worth the purchase price. With a clear understanding of each of these elements, the would-be purchaser is in a better position to plan for the future—and to get down to the business of growing grapes in a newly planted or expanded vineyard.

Pending Publication by the California Association of Winegrape Growers. Republished with permission.