WATER LEASE AGREEMENT
This Water Lease Agreement (“Agreement”) is between Denver Wells, LLC, a Colorado limited liability company (“Lessor”), and Eldorado Artesian Springs, Inc. a Colorado corporation (“Lessee”). Lessor and Lessee may sometimes be referred to individually as a “Party” or collectively as the “Parties.” Lessor agrees to lease to the Lessee and Lessee agrees to lease from Lessor certain water under the terms and conditions as described below.
1. Term .
Unless earlier terminated as provided herein, this Agreement shall be for an initial term of two (2) years commencing as of the Effective Date as defined herein (“Term”). The Agreement may be extended upon mutual written agreement of the Parties executed at least three (3) months prior to the then expiring term.
2. Water to be Leased .
Lessee leases and shall take delivery at Lessor’s Webber Well No. 1 as described on Exhibit A attached hereto and incorporated herein, of 100 acre feet annually of nontributary ground water (“Annual Delivery”), which water is leased to Lessee (the “Leased Water”). Lessor may, provided no additional cost is incurred by Lessee, substitute the place of delivery to Webber Well No. 3 or other nearby well site. The Leased Water will be derived from and by means of the exercise of rights to withdraw and use nontributary ground water owned or controlled by Lessor and are a portion of the water rights decreed in Case No. W-8780-77 (the “Water Rights”). Lessor agrees to lease water derived from the exercise of a certain limited portion of the referenced Water Rights to Lessee. Subject to Lessee’s right of termination set forth in this Agreement, and the future judicial approvals set forth herein, Lessee agrees that the Leased Water is suitable, both legally and physically, for Lessee’s intended use.
The Leased Water shall be produced under and by means of the referenced Water Rights from certain deep wells constructed or to be constructed by Lessor. Lessor shall, prior to the scheduled delivery of the Leased Water, complete such well and/or additional wells and infrastructure needed to perform its obligations hereunder. Lessee shall pay for any costs for materials and installation of equipment necessary to transfer water from the well to Lessee’s trucks. Such improvements include, but are not limited to, spigots and a road base for truck parking and a separate water meter. Lessor shall begin delivery of Lessee’s full water demand on October 21, 2006 (“Delivery Date”).
Lessee agrees to provide Lessor a monthly and annual accounting of all water extracted form Lessor’s well, it being expressly acknowledged that Lessee shall not withdraw more than 100 acre fee of water per year. Lessee shall pay rent based on 100 acre feet regardless of whether Lessee’s actual withdrawal of water is 100 acre feet per year or less. Lessor agrees to lease to Lessee between 101 and 300 acre feet of water if needed by Lessee. Payment shall be $600 per additional acre foot per year in Year 1 and $650 per acre foot in Year 2, paid each month in arrears of use above 100 acre feet of water each lease year.
Lessee acknowledges that its access to the well may be limited to 6:00 p.m. through 6:00 a.m. and further limited during the National Western Stock Show. Lessee will abide by all of Lessor’s rules and regulations regarding access to and use of the well. Further, Lessee agrees to abide by the terms of all access and other easements which apply to the well site.
3. Augmentation .
The parties understand and agree that Lessee shall use the Leased Water for augmentation purposes. Upon execution of this Lease, Lessor shall instruct its water counsel to commence appropriate legal proceedings to obtain a change of use water decree specifically allowing for the Leased Water to be used for augmentation purposes. Also, upon execution of this Lease, Lessee shall instruct its water counsel to amend the application pending in Case No. 02CW292 to add the Leased Water as augmentation source and to seek approval of such augmentation plan and a corresponding substitute water supply plan to allow use of the Leased Water by Lessee pending judicial approval of the said augmentation plan. In the event the use of the water for augmentation purposes is denied by a final an appealable order of a court of competent jurisdiction, Lessee may terminate this Lease and receive a prorata refund of any lease payment paid as of the date of such termination.
4. Contract to Purchase .
Lessor hereby agrees to sell to Lessee and Lessee agrees to buy 300 acre feet per year (and only 300 acre feet per year) of At Closing, Lessor shall convey by Special Warranty Deed, 300 acre feet of water decreed in Case No. W-8780-77, to be drawn out of Webber Well No. 1, Webber Well No. 3, at Lessor’s option, from an existing and operating well or wells under the terms and conditions set forth as follows:
a. Term . The Term of this Contract to Purchaser shall be the term of the Lease. Lessee shall provide notice to Lessor thirty (30) days’ prior written notice of its intent to Close and then set a closing date no later than October 29, 2008.
b. Earnest Money . Contemporaneously with the execution of this Lease, Lessee shall pay Lessor the sum total of $90,000 representing a nonrefundable earnest money deposit. The deposit shall be nonrefundable except in the event Lessor is unable to obtain a change in the use of the water adjudicated in Case No. W-8780-77 to include augmentation. In the event Lessee Closes hereunder, the earnest money shall be applied to the Purchase Price.
c. Purchase Price . The Purchase Price shall be $10,000 per acre foot if Closing is on or before December 31, 2006. The Purchase Price shall increase by .5% per month thereafter.
d. Closing . At Closing, Lessor shall convey 300 acre feet of water decreed in Case No. W-8780-77 to Lessee by Special Warranty Deed.
e. Contract Personal to Lessee . Lessee may not assign the right to purchase, granted herein, without the prior written consent of Lessor.
f. Joint Operating Agreement . The parties shall enter into a joint operating agreement providing that Denver Wells, LLC shall be the operator of the well until such time as it no long owns any of the Water Rights.
g. Easement/License . At Closing, Lessor shall grant Lessee certain easements and/or licensees to use its wells and associated easements to give Lessor reasonable access and use of the water being conveyed.
h. Change of Use . Lessor shall use commercially reasonable efforts to obtain a change of use to include augmentation of the 300 acre feet of water which is the subject of this Contract. Lessee shall cooperate with Lessor’s efforts in this regard.
i. Remedy. Lessor’s exclusive remedy for Lessee’s failure to Close on the Contract to Purchase shall be to retain the earnest money.
5. Payment Terms .
All Leased Water shall be paid for in advance of delivery as follows:
Year 1 — $60,000, payable on October 1, 2006.
Year 2 — $65,000, payable on October 1, 2007.
The annual lease invoice shall include any amounts due Lessor for additional