How many happy endings involve the death of a main character? Not many, we think, but that's just what happens here. But we'll get to that in a second.
First, we'll tell you that the epilogue to Watership Down gives us lots of info about how everything turned out for everybody. It's like one of those high school movies that ends with captions telling how everyone ended up after graduation. Except instead of graduation, it's the war with Woundwort that they just survived.
But once we've gotten all that where-are-they-now nonsense out of the way, the epilogue focuses on Hazel, who gets older and then dies. But it's not a "boo-hoo, the hero is dead" sort of ending. In fact, Hazel is visited by some rabbit spirit (who we believe is El-ahrairah). This rabbit spirit invites Hazel to join his Owsla, where they can pull tricks and raid gardens and watch over all the young rabbits in Watership Down from rabbit heaven:
It seemed to Hazel that he would not be needing his body any more, so he left it lying on the edge of the ditch, but stopped for a moment to watch his rabbits and to try to get used to the extraordinary feeling that strength and speed were flowing inexhaustibly out of him into their sleek young bodies and healthy senses.
"You needn't worry about them," said his companion. "They'll be all right—and thousands like them. If you'll come along, I'll show you what I mean." (Epilogue.8-9)
The whole book has been about Hazel founding a new home for rabbits, and the epilogue seals the deal: he has succeeded in that goal. Watership Down will continue without him because he's given the rabbits of Watership Down all of his strength and speed (and hopefully cleverness, too). Even El-ahrairah notes that they'll be okay here, so we don't have to worry about them. That's a pretty happy ending.