SCA passes landmark decision on transfer of water use rights

A recent Supreme Court of Appeal (SCA) judgment, which found that the National Water Act (NWA) allows for the transfer of water use entitlements, may have significant implications from a deal-making perspective.

This is the view of three lawyers after the judgment by the SCA which on Monday passed its judgment on three cases, heard together by a full bench of the North Gauteng High Court in Pretoria, in which the same issues were dealt with. The issues were:

• whether water use entitlements in terms of the NWA may be transferred temporarily or permanently from an entitlement-holder to another person; and
• whether trading in water use entitlements is permitted.

The question of whether the holder of a water use entitlement can transfer ownership of such right lawfully to a third party has been a contentious issue for some time.

In 2013, the department of water and sanitation issued a circular prohibiting such transfer and trading in water rights.

However, the majority decision in the SCA on Monday found otherwise, saying section 25 allows for the transfer of water use entitlements in two circumstances. 

First, a water user association is empowered in terms of section 25(1) to allow a holder of a water use entitlement for irrigation, to use it temporarily for another purpose or to allow it to be used on another property by another person.

Second, the court said section 25(2) creates a mechanism for permanent transfers of water use entitlements, where such entitlement is surrendered to a third party on condition that a water use licence (WUL) is obtained to exercise such right. 

Writing after the judgment, Garyn Rapson, Tendai Bonga and Daniella Ghillino from law firm Webber Wentzel said the interpretation of section 25 by the SCA is particularly relevant in the agricultural sector, where the transfer of water use entitlements is often central to the disposal or acquisition of agricultural land.

They said from a mergers and acquisitions (M&A) perspective, this decision lends weight to the argument that WULs are transferable in the context of broader commercial transactions, on application of the “successor in title” language included under section 51 of the NWA.

“It is generally accepted that, following the closure of an M&A transaction, water use rights transfer to a successor in title, by operation of law. For instance, in a sale of business transaction, the purchaser will become the successor in title of any lawful water uses associated with the business operation, post-closure of the transaction,” they said.

This transfer must, however, be formalised in terms of section 51 to reflect the purchaser as the licensee or successor in title of the water use rights, they said, adding that it remains to be seen whether the decision will be appealed to the Constitutional Court.

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