Groundwater Rights in California: What Property Owners Need to Know as SGMA Reshapes the Law
The Water Beneath Your Land May Be Worth More Than the Land Itself, and the Law Is Changing
In Merced County in 2017, a lender foreclosed on a ranch worth roughly $20 million. Beneath that ranch sat approximately 500,000 acre-feet of stored groundwater. By 2022, the prior owner claimed that water was worth $600 million. A battle over who owned it would take eight years to resolve.
In Ventura County in 2018, a coalition of agricultural landowners challenged a groundwater management agency’s authority to dramatically curtail how much water they could pump from beneath their own land. In March 2026, California’s Second District Court of Appeal became the first appellate court to affirm a comprehensive groundwater adjudication under the framework enacted alongside the Sustainable Groundwater Management Act. The outcome created a practical roadmap for similar disputes statewide.
Both of these cases touch on something that California property owners, agricultural landowners, and anyone involved in buying or selling rural land needs to understand: groundwater rights in California are a distinct category of property right, they can carry enormous economic value, they are governed by a complex legal framework that SGMA is actively reshaping, and the law is developing rapidly enough that what was settled five years ago may not be settled today.
This blog explains what those rights are, how the legal framework governing them works, what the 2025 and 2026 case law developments mean for landowners, and where the law is heading.
The Three Types of Groundwater Rights in California
California recognises three main categories of rights relating to groundwater from a groundwater basin. Understanding which type applies to a given situation determines how much water an owner can use, what priority they have relative to other users, and how SGMA affects them.
Overlying rights are the foundational category. In California, the owner of land overlying a groundwater basin has a right to pump that water for reasonable beneficial use on the overlying land. This right arises from property ownership and does not require a state permit. As confirmed by the State Water Resources Control Board, in most areas of California overlying landowners may extract percolating groundwater and put it to beneficial use without approval from the State Board or a court. The right is correlative, meaning that in a shortage, overlying owners reduce use in proportion to their surface land shares. An owner with 1,000 acres carries a proportionally larger correlative right than one with 100 acres. Overlying rights carry higher priority than appropriative rights.
Appropriative rights apply where water is pumped from a basin for use on non-overlying land, or exported out of a watershed or basin. Appropriative rights are acquired through actual use and follow the “first in time, first in right” priority system familiar from surface water law. Among competing appropriators, the earlier right prevails in a shortage. Appropriative rights to groundwater are subject to forfeiture for non-use and have lower priority than overlying rights in any dispute between the two categories.
Prescriptive rights arise in an overdrafted basin where a pumper extracts water for a non-overlying use and that extraction is notorious and continuous for at least five years. Prescriptive rights are legally complex, contested, and a feature primarily of historically overdrafted basins rather than the typical property ownership context.
For most agricultural landowners and rural property owners in California, the relevant category is overlying rights. The question SGMA forces onto every such owner is what those rights are worth, and what limits a groundwater sustainability agency can lawfully impose on their exercise.
What Percolating Groundwater Actually Means Under California Law
California law draws a distinction between underground streams flowing in known and defined channels, which are treated much like surface water and subject to riparian and appropriative rights, and percolating groundwater, which covers all groundwater that is not flowing in a known and defined channel.
Percolating groundwater is, in the words of California courts, in a natural state and is part of the land. That phrase is not merely descriptive. It is a legal conclusion with significant practical consequences. Because percolating groundwater is part of the land, it cannot be separately conveyed from the land, does not require a state permit to access, and is transferred as part of any real property transaction, including a foreclosure sale.
The Sandton Agriculture case, discussed below, turned almost entirely on this principle.
Sandton Agriculture Investments III v. 4-S Ranch Partners: What Happens to Groundwater in Foreclosure
The Fifth District Court of Appeal’s decision in Sandton Agriculture Investments III, LLC v. 4-S Ranch Partners, LLC resolved a question that had enormous financial stakes and unclear prior law: when land transfers in a foreclosure sale, does the groundwater beneath it transfer with it?
The court first issued its decision on March 14, 2025. 4-S Ranch petitioned for rehearing. On August 8, 2025, the court issued its opinion on rehearing, which is the operative final authority. The rehearing opinion reaffirmed the original holdings and expressly rejected 4-S’s theory of “floodwater as personalty through dominion and control,” confirming that water in its natural state remains real property unless physically severed from the land regardless of how it got there.
The facts are striking. 4-S Ranch Partners had secured a $33 million loan from Sandton Credit Solutions, using more than 5,200 acres of farmland in Merced County as collateral. Beneath that farmland sat approximately 500,000 acre-feet of stored groundwater. Much of this water had accumulated through periodic flooding from the San Joaquin River, which had recharged the aquifer over time. 4-S Ranch valued this water at $200 million in 2020 and claimed the value had risen to $600 million by 2022.
When 4-S Ranch defaulted on the loan, Sandton Credit acquired the property at a nonjudicial foreclosure sale with a $20 million credit bid, then transferred the land to Sandton Agriculture Investments III. 4-S Ranch then claimed the groundwater was its personal property and had not transferred with the land. In its view, the water it had intentionally captured and stored in the aquifer remained a separate personal property asset, not part of the real estate.
The Court of Appeal rejected that argument on three independent grounds, as analysed in the California Water Views analysis of the Sandton decision:
First, once water seeps into an aquifer and becomes percolating groundwater, it loses its status as personal property regardless of how it originally got there. The legal character of groundwater is determined by its physical state, not by the intentions of the party who may have directed it there. Water that has percolated into the earth and joins the groundwater in the basin is part of the land. It ceases to be personal property.
Second, even if the water had retained some element of a personal property character, the rights to use it are a real property right and run with the land. Under California water law, the right to extract percolating groundwater is appurtenant to the overlying land. Appurtenant rights pass with the land in any transfer, including a foreclosure sale.
Third, 4-S Ranch had not taken sufficient steps to sever the water rights from the land before the foreclosure occurred. Without express severance, the rights remained part of the real property and transferred accordingly.
The practical significance for anyone involved in a property transaction is considerable. Groundwater rights are part of the land. They transfer with it. They cannot be silently retained by a seller or a borrower after the land changes hands through foreclosure. Where a parcel has significant groundwater value, that value is embedded in the land itself and must be accounted for in any transaction, financing arrangement, or bankruptcy proceeding that involves the property.
The Las Posas Valley Adjudication: The First Post-SGMA Roadmap
While Sandton Agriculture addressed who owns groundwater, the Las Posas Valley rulings address something equally important: what rights landowners retain once SGMA is in force, and how the adjudication process interacts with the new regulatory regime.
On March 5, 2026, the California Court of Appeal, Second Appellate District, Division Six, issued two opinions in Las Posas Valley Water Rights Coalition v. Ventura County Waterworks District No. 1 (Case No. B330837) and a companion unpublished decision. These are, as confirmed in the O’Melveny analysis of the Las Posas rulings, the first contested comprehensive groundwater adjudication to be affirmed under the procedural framework enacted alongside SGMA.
The Las Posas Valley Groundwater Basin underlies approximately 42,200 acres in Ventura County, where groundwater is the primary source of irrigation for high-value crops including lemons, avocados, and berries. The Fox Canyon Groundwater Management Agency, which became the Basin’s Groundwater Sustainability Agency under SGMA, had imposed increasingly severe pumping restrictions over the years, including an emergency ordinance in 2014 that prohibited new wells and limited extractions.
In 2018, the Las Posas Valley Water Rights Coalition, a group of overlying landowners, filed a complaint challenging Fox Canyon’s restrictions and seeking a comprehensive determination of groundwater rights. The adjudication proceeded through three phases, resulting in a settlement supported by approximately 87% of the Basin’s groundwater extractors. Three groups of objectors appealed.
The Court of Appeal affirmed the trial court’s judgment in its entirety. The key holdings, summarised from the O’Melveny analysis, are significant for any California landowner dealing with a groundwater sustainability agency:
Adjudication and SGMA can operate together. The court upheld a physical solution that incorporated the Groundwater Sustainability Plan into the adjudication framework, with the Fox Canyon Groundwater Management Agency appointed as court watermaster. This confirms that adjudication and SGMA are not mutually exclusive: a court can adjudicate water rights in a basin that also has an active GSP, and the two frameworks can be integrated.
A hybrid allocation model is permissible. The court approved an allocation system for agricultural landowners that combined base allocations tied to irrigated acreage with supplemental allocations tied to historical use. This balanced approach was held to be equitable, giving California courts and water agencies a confirmed model for future cases.
Dormant overlying rights can be subordinated. Where overlying landowners have not pumped for years and have not demonstrated an intent to resume use, courts can subordinate those dormant rights. This is significant for property owners who have not actively used their groundwater: passive non-use, without demonstrated intent to resume, can result in lower-priority status in an adjudicated basin.
Court-ordered basin management is not subject to Proposition 218 or CEQA. Where a court appoints and supervises a watermaster, the management actions taken under that supervision are not subject to the same public process requirements that apply to agency-driven regulation.
Mutual water company shareholders typically retain overlying rights. Landowners who are also shareholders in mutual water companies generally keep their higher-priority overlying water rights unless they have expressly severed those rights in the company’s favour.
What SGMA Means for Property Owners Who Have Not Been Paying Attention
The Sustainable Groundwater Management Act, enacted in 2014, represents the most significant change to California groundwater governance in the state’s history. Prior to SGMA, no state-level permit was required to pump percolating groundwater from beneath private land. The right was governed almost entirely by common law.
SGMA changed that by requiring Groundwater Sustainability Agencies to adopt Groundwater Sustainability Plans with enforceable pumping allocations for both the state’s critically overdrafted basins and its high and medium priority basins as designated by the Department of Water Resources. GSAs responsible for high and medium priority basins were required to adopt plans by January 2020 or January 2022 depending on whether the basin was in critical overdraft. Basins where a court adjudication has already established safe yield pumping limits are exempt from the GSP requirement under SGMA. Those plans are not merely advisory. An overlying landowner whose historical pumping rate exceeds their GSP allocation may now be legally required to reduce that pumping, regardless of how long they have been pumping or what their property rights nominally provide.
Importantly, California Water Code Section 10720.5 expressly provides that SGMA is not intended to affect or change the existing groundwater rights framework under California law. SGMA does not eliminate overlying rights or redefine what those rights are. What it does is regulate how those rights may be exercised within the sustainable yield of the basin. The right exists in the same form it always did; what a GSP does is limit how much of that right can be actively exercised in a given period.
This is where the constitutional property rights dimension enters. When a groundwater sustainability agency imposes restrictions that effectively deprive an agricultural landowner of economically significant groundwater use that was previously permitted under California law, the question arises whether that restriction constitutes a regulatory taking requiring just compensation under the California Constitution’s Article I, Section 19. That question has not been definitively resolved, and it is one of the most consequential open issues in California property rights law today.
The Environmental Law practice at Kassouni Law has addressed government over-regulation of property rights in contexts including CEQA, the Coastal Commission, and EPA enforcement, and the firm’s published articles on the cost of over-regulation document exactly the kind of pattern SGMA is now replicating in the water rights context. The Constitutional Property Rights practice is the relevant framework when GSA restrictions cross the line from regulation into confiscation.
Groundwater Rights in Property Transactions: What the Law Now Requires
The Sandton Agriculture decision makes clear that groundwater rights are embedded in the land and transfer automatically in any real property transaction. That creates both opportunities and risks that buyers, sellers, and lenders need to account for.
For buyers, a parcel of land with significant groundwater value may be worth substantially more than its surface characteristics suggest. Under California law, most private users must acquire overlying land to obtain groundwater rights, which means every agricultural land transaction in a SGMA basin is simultaneously a water rights transaction whether or not the parties treat it as one. Due diligence for any rural or agricultural property in California should now include an assessment of the property’s groundwater basin designation, whether that basin has a Groundwater Sustainability Agency and an approved GSP, what pumping allocations have been assigned to the parcel, and whether the basin is subject to or approaching adjudication.
For sellers, the groundwater rights associated with a property cannot be retained silently or split off from the sale without express legal steps to sever those rights from the real property, which itself requires legal analysis as to whether such severance is permissible. Any attempt to retain groundwater rights while conveying the surface estate must be explicitly addressed in the transaction documents.
For lenders, the Sandton decision confirms that groundwater rights are part of the collateral when land is used as security for a loan. The value of that groundwater should be reflected in the appraisal and in the lender’s analysis of the collateral’s worth.
When a Property Rights Attorney Is Relevant in the Groundwater Context
The intersection of SGMA, adjudication, and constitutional property rights creates several specific situations where legal representation is relevant for California property owners.
Where a groundwater sustainability agency has assigned a pumping allocation that does not reflect the property’s historical use or overlying rights, that allocation is subject to challenge. The Sandton decision confirms the value at stake: water rights can dwarf the value of the land surface. The Las Posas adjudication confirms that courts will adjudicate those rights and hold agencies accountable to the existing priority system.
Where a GSA’s restrictions have caused a measurable reduction in the economic value of an agricultural property, the regulatory takings framework under Article I, Section 19 of the California Constitution provides a potential avenue for just compensation. The standard for a regulatory taking in the water rights context is fact-specific, but the firm’s published expertise in inverse condemnation and constitutional property rights is directly applicable.
Where a property is being bought, sold, or financed and groundwater value is a significant element of that transaction, the legal characterisation of those rights, whether they are overlying or appropriative, whether they are dormant, and how they interact with any applicable GSP, is material to the transaction.
The firm’s track record in preserving subsurface rights, including its result preserving subsurface oil and gas rights in a conservation easement context, reflects the kind of analysis that applies with equal force to subsurface water rights. The firm’s results in complex property rights matters demonstrate the breadth of subsurface and constitutional property rights work the firm has handled.
Frequently Asked Questions
Do I automatically own the groundwater under my property in California?
In most cases, yes. Under California law, the owner of land overlying a groundwater basin has overlying rights to pump percolating groundwater for reasonable beneficial use on that land. No state permit is required to exercise those rights. However, in basins that are subject to a court adjudication or that have a Groundwater Sustainability Agency with an approved Groundwater Sustainability Plan under SGMA, those rights may be subject to specific pumping allocations that limit how much water can be pumped. The right exists but its exercise may be regulated.
What are overlying water rights and how are they different from appropriative water rights in California?
Overlying rights belong to landowners whose property overlies a groundwater basin. They arise from property ownership and carry higher legal priority than appropriative rights. Appropriative groundwater rights apply where water is pumped for use on land that does not overlie the basin, or where water is exported from the basin entirely. Appropriative rights follow the first in time, first in right priority system and are subject to forfeiture for non-use. In a dispute between an overlying owner and an appropriator, the overlying owner has priority. In a dispute among overlying owners in a shortage, the rights are shared proportionally in a correlative system.
How does the Sustainable Groundwater Management Act affect the right to pump water on a property?
SGMA requires the formation of Groundwater Sustainability Agencies in critically overdrafted, high priority, and medium priority groundwater basins as designated by the Department of Water Resources. Those agencies must adopt Groundwater Sustainability Plans that bring pumping into alignment with a basin’s sustainable yield. For a property owner in an affected basin, a GSP may assign a specific pumping allocation that is lower than the owner’s historical use. California Water Code Section 10720.5 expressly provides that SGMA does not change the underlying groundwater rights framework: overlying rights remain what they were. What SGMA regulates is how those rights may be exercised within the sustainable yield limits of the basin. The March 2026 Las Posas Valley adjudication rulings confirmed that adjudication proceedings and SGMA frameworks can operate together, with courts adjudicating water rights within the sustainable yield parameters established by a GSP.
If land is acquired through foreclosure, does the buyer automatically acquire the water rights associated with that land?
Yes, under the rule confirmed by the Fifth District Court of Appeal in Sandton Agriculture Investments III, LLC v. 4-S Ranch Partners, LLC, with the operative final opinion issued on August 8, 2025 on rehearing. Percolating groundwater is part of the land in its natural state. Once water seeps into an aquifer and becomes percolating groundwater, it loses its status as personal property regardless of how it arrived there. The right to extract percolating groundwater is appurtenant to the overlying land and passes with any real property transfer, including a foreclosure sale. A prior owner cannot retain groundwater rights after losing the land unless those rights were expressly severed from the real property before the transfer.
What options exist if a water district or government agency is restricting groundwater use in California?
Several legal avenues are available depending on the circumstances. A property owner whose pumping allocation under a GSP does not reflect their overlying rights and historical use may challenge that allocation through the administrative process or in court. Where a groundwater sustainability agency’s restrictions have deprived a property owner of a constitutionally significant portion of their water rights, a regulatory takings claim under Article I, Section 19 of the California Constitution is a potential avenue for just compensation. In basins heading toward adjudication, participating in that process is essential to preserving established water rights. The Las Posas Valley rulings confirmed that courts will adjudicate rights in the presence of SGMA, and that dormant rights that have not been actively exercised are subject to subordination.
This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is created by reading this content. Contact Kassouni Law for a consultation regarding your specific situation. Past results do not guarantee similar outcomes.
