By VERNON ROBISON
The Progress
An ongoing legal dispute between Paradise Canyon, LLC, owner of the Wolf Creek Golf Course in Mesquite, and the Virgin Valley Water District (VVWD) is expected to go to trial in the next couple of weeks. The dispute has been ongoing since 2018.
The outcome of the trial could have major ramifications for both Wolf Creek and VVWD. But it also could have repercussions felt by the entire Virgin Valley community well into the future.
The following is a close look at the legal arguments from both sides of this case up to the present. We will examine what this dispute is all about and how it could affect VVWD ratepayers.
The lease
The entire lawsuit revolves around a lease agreement in which VVWD entered with Wolf Creek in 2011. In this document, VVWD agrees to lease 155 water shares it owns in the Mesquite Irrigation Company (MIC) to Wolf Creek. These shares would be used to water the golf course and to keep it green.
MIC shares are established portions of senior water rights from the Virgin River which date back to the 1920s.
In the lease, the parties agreed that Wolf Creek would lease the water at the rate of $250 per share, or a total of $38,750 per year. The lease locked that rate in for Wolf Creek until Dec. 31, 2019.
The lease also allows Wolf Creek a right of first refusal in return for a fee of $25,575. Among other things, this allows Wolf Creek to have a first chance to continue leasing the shares after Jan. 1, 2020. But it would be at a new rate determined at the sole discretion of the VVWD, according to the lease.
The lawsuit, initially filed by Wolf Creek against VVWD, calls the terms of this lease into question. Each party is disputing the other’s interpretation of the details in the contract. And in the middle of all this is the VVWD ratepayers who, whichever way it goes, will have to pick up the pieces and may even have to foot the bill.
What is at stake?
The stakes are high for both parties in the lawsuit.
Wolf Creek is a world-renowned golf course known for its beautiful green opulence amid a harsh desert environment.
Since opening in 2000, golfers from all over the world have travelled to Mesquite to play at Wolf Creek. The course has been ranked in the top 100 courses in the U.S.
Wolf Creek claims to employ more than 85 residents of the Virgin Valley and to draw tens of thousands of golfers annually to the city.
But those lush, emerald fairways and perfectly manicured greens in the midst of the desert southwest do require significant resources. Perhaps most important is a sure source of water.
Wolf Creek has relied on the lease of VVWD irrigation shares from the very beginning, including agreements made and executed before the 2011 agreement.
Those 155 leased irrigation shares equate to about 1,100 acre feet per year (afy) of water. That is roughly enough to supply more than 3,300 Virgin Valley households for a year.
VVWD has acquired its MIC shares over the space of many years at a cost of more than $22 million. To pay that cost, the district has had to incur a significant debt load which is currently being paid down by its ratepayers.
But the MIC shares, coming from the Virgin River as they do, are not immediately suitable as drinking water. The river water would require an extensive, and expensive, treatment facility to get it to that point.
So why has the VVWD gone to such expense of purchasing river water not suitable for drinking? The answer is in its view toward the future.
Currently, the tapwater supplied to Virgin Valley residents by VVWD comes from a deep underground aquifer. A network of wells and pipes draws that water out of the ground and delivers it to local homes and businesses.
The aquifer is calculated to be able to yield around 12,000 afy before it is tapped out. Given the current growth trends, VVWD expects that to take place in about 20 years from now.
In its long term plan, the VVWD proposes to build water treatment facilities at that time, This will allow the district to begin putting its irrigation shares to work to feed continued growth.
In the meantime, the district has been leasing its irrigation shares to parties like Wolf Creek. This puts the water to use and brings in revenues to lessen the burden on the ratepayer.
But if these irrigation shares are tied up in ownership disputes, they would not be available to carry out that plan, VVWD documents state.
Lease rate increase of 2020
In 2018, VVWD notified Wolf Creek that the lease rate would be increasing in 2020. The annual rate would go from $250 to $1,115 per share.
According to VVWD, the 2011 rate was well below the market from the start. A discount was granted at that time, during the Great Recession, as a temporary way of helping the golf courses through a tough economic period, VVWD documents claim. The proposed rate increase of 2020 would simply bring things back to a current market rate.
For many years, lease rates on water had been driven by the going rate being offered by the Southern Nevada Water Authority (SNWA). The large regional water purveyor had made a standing offer to irrigation shareholders ever since a 2007 change to the law of the Colorado River. This change allowed SNWA to take credit for tributary flows into the Colorado, including leased irrigation shares from the Virgin and Muddy Rivers. The authority could now pull those credits from its intakes at Lake Mead for treatment and use in Las Vegas. This change made irrigation shares much more valuable throughout the region.
By 2020, the SNWA was leasing more than 600 MIC shares from various parties near the same rate as the VVWD was now offering Wolf Creek.
But in the lawsuit Wolf Creek claims that this rate should not apply to their leased shares. Rather the company asserts that it should be in a different “local rate” class.
Wolf Creek cites earlier contracts in 2008 when VVWD declined leasing to SNWA at a higher market rate. This was because of a VVWD policy, at that time, not to lease to parties outside of the Virgin Valley area.
Later on, that policy was relaxed. During the same time as the 2011 lease was made with Wolf Creek, the VVWD also entered a lease agreement with SNWA for more than 6 times the rate it was charging the golf course, the Wolf Creek documents claim..
From this, Wolf Creek concludes that the district had set up a “local rate” separate from that charged to SNWA. Thus, the rate charged to SNWA was separate from, and irrelevant to, the rate charged locally, specifically to Wolf Creek.
But in a VVWD response, the district insists that there are not two rates, nor would such a thing even be legal. Nevada law and the district’s founding legislation, requires that water rates should be set without preference, the district documents state.
In addition, VVWD points out that, in 2020, more than 90 percent of all MIC shares being leased by various owners, were at the rate of $1,115 per share or more. This was enough for the VVWD board to establish its standard lease rate in 2020 and apply it to the renewal of the Wolf Creek lease, the district claimed.
But in the end, VVWD claims that all of these arguments are off point. The matter is settled in the lease document itself, the district claims.
VVWD attorneys point to words of the lease document which state: “Under no circumstances shall the Lessee have the right to lease the Irrigation Shares on the same terms as set forth in this Lease after Jan. 1, 2020….the rent amount for the Irrigation Shares after (that time) shall be determined in the sole and absolute discretion of VVWD.”
Right of 1st Refusal
The lease offers Wolf Creek a right of first refusal to lease of the shares beyond 2020. Wolf Creek has paid the required fee to secure that right.
Wolf Creek sees that as a hard option to continue leasing the water “in perpetuity.” In other words, the company claims that even though VVWD can set the rate on the shares, it cannot decide to NOT lease the shares to Wolf Creek as long as the company exercises its right to do so.
But VVWD has refuted this notion, insisting that the contract only grants the right of first refusal, not a binding option.
As a legal term, a right of first refusal requires two conditions to be in place, VVWD attorneys state.
First, the shareowner must desire to lease the water. Second, the lessee must agree to the terms acceptable to the shareowner.
An option, on the other hand, binds the shareowner to lease water at a specific, agreed-upon price, at the option of the lessee.
VVWD attorneys point to the minutes of the VVWD board meeting of June 7, 2011, when the lease was approved. These minutes make no mention of granting an “option” to Wolf Creek. Rather board members and staff alike refer repeatedly to it as a “right of first refusal.”
Thus continuation of the lease, especially after 2020, is subject to the district making the shares available to begin with. Indeed, the lease document itself states that “upon termination of this Lease, Lessee may lease the same shares…provided they are available and provided Lessee pays the then-current annual rent for such shares” (italics added).
Finally, VVWD asserts its intent in leasing shares in the first place. There would be no point in binding the irrigation shares in perpetuity, the district argues. After all, the shares were acquired to be used as a future drinking water source when needed. If the district allowed them to be leased “in perpetuity,” it would have to spend millions of dollars more to secure other water resources to serve the needs of the community.
Despite all of this, Wolf Creek claims it was so sure of its “perpetual right” that, in 2012, it secured an SBA loan for $2.1 million. In connection with that loan, the district provided the company and its creditor with a document which, according to Wolf Creek, stated that the company “has the right to lease the Leased Shares on a perpetual basis.”
VVWD has admitted to providing the document with information as requested. But it denies knowing all of the details of the Wolf Creek loan agreement. In addition, such an administrative document would not alter the clearly stated intent in the lease document, the district claims.
“The lease document speaks for itself,” the VVWD attorney states in the response.
Required use of effluent
In its counter-arguments, VVWD has pointed out that the right of first refusal is also dependent on Wolf Creek adhering to the terms of the lease agreement. The district alleges that the company has been in breach of those terms on several points.
Firstly, the Wolf Creek had a standing agreement with the City of Mesquite to use a certain amount of recycled effluent water from city sewage treatment facilities as irrigation water.
In respect to that agreement, the 2011 lease with VVWD requires the company to use that effluent before using any of the leased water. Thus, Wolf Creek was only to use leased water as needed and return the rest back to the district for beneficial use elsewhere.
According to VVWD and the City, Wolf Creek has never used its allotment of effluent water.
Wolf Creek has claimed that the full amount of effluent has never been made available in full accordance with the contract with the city.
But in an affidavit made in August of 2018, city officials declare that the city had made effluent available. Wolf Creek had refused the use of it. This resulted in a significant waste of effluent water, the city document claims.
In its countersuit, VVWD asserts that Wolf Creek’s refusal to use the effluent was less about the city’s agreement and more about the cost. The cost of effluent water was $600 for an equivalent quantity of water that the company was getting in VVWD shares for $250, VVWD documents claim.
VVWD has claimed that it has sent multiple demands to Wolf Creek to use available effluent and return the unneeded leased shares to the district. This would allow the district to put the shares to beneficial use at higher current market rates, thus providing relief to the ratepayers.
“Every dollar derived by leasing irrigation shares is one less dollar needed from the general ratepayers,” states one of the VVWD demand documents to Wolf Creek. “On the other hand, every dollar uncollected by leasing shares at below-market rates to for-profit golf courses must be subsidized by the District’s rate payers as a whole.”
Beneficial Use
VVWD also points out that the leased shares were subject to all the regulations, terms and conditions of MIC and the Nevada State Engineer, a state officer who is responsible for administering and enforcing Nevada water law.
During the lease term, the State Engineer and MIC required that all water associated with MIC shares be put to beneficial use. A careful accounting of that use was also required.
VVWD alleges that Wolf Creek has only been using a portion of the water available under the lease.
“The District contacted Wolf Creek and notified (the company) of the requirements of MIC and State Engineer and requested that Wolf Creek return the unused shares for a refund so that the water could be productively used elsewhere,” the VVWD states in its legal documents. “However, Wolf Creek failed to cooperate and comply with the directives…of MIC and the State Engineer in violation of the Lease.”
Wolf Creek claims that the company did not receive the notice from VVWD, nor did it consent to the re-allocation of water allocated to its leased shares.
Wolf Creek also claims that other individual MIC shareholders – including the then-MIC President, board members and many others – were not required to make the accounting of beneficial use. Thus the company alleges it was being unfairly singled out in the requirement.
In addition, Wolf Creek asserts that the deadline on the requirement to account for beneficial use had been extended to 2022 for everyone else. Therefore the company should not be required to do so earlier than that.
Subleasing prohibited
The lease document also prohibits Wolf Creek from subleasing the VVWD lease shares to any other parties. But sources from the company itself have testified in the court proceedings that Wolf Creek did lease unused leased water shares to a homeowners association in the area. This alleged sublease activity began taking place as early as 2012, according to the testimony.
Wolf Creek insisted on its need to sublease the shares in order to retain use of them in perpetuity.
“By subleasing the shares on a temporary basis, Paradise Canyon (Wolf Creek) would retain control over the Leased Shares in perpetuity for the purpose of maintaining the golf course,” the Wolf Creek complaint states. “However, if compelled to amend the Lease to reduce the number of Leased Shares, Paradise Canyon would be permanently divested of those shares exposing it to a risk of an inadequate water supply.”
This lawsuit, involving issues of complex Nevada water law, is set to go to trial beginning as early as next week. Thus these matters of vital importance to Wolf Creek, VVWD and the future of Virgin Valley community as a whole, will be decided in district court in Las Vegas, before a jury presumably comprised of urban Clark County residents.
Keep an eye on The Progress for more details on the proceedings as they become available.
