Approximately three years ago...
The title companies around the country were advised to stay away from the cannabis industry.
Here is a recap with updates that may impact you and your business:
Recap: 2017 Title and Escrow Changes
On April 18, 2017, national title companies received Underwriting Bulletin No. 2017-RC-04, closing yet another door to the cannabis industry: title & escrow.
The Bulletin stated that if the title company received any notice from the broker, seller, buyer or anyone else, that the Land is — or would be — used in some capacity for growing, producing, distribution or dispensing of any type of marijuana or marijuana products, the title company was not allowed to:
1. Be involved in the handling of any escrow or other funds of any type
2. Issue any type of zoning coverage
3. Issue title insurance
This 2017 mandate from title & escrow affected anyone who may have wanted to purchase property and rent space to cannabis operations — therefore, this applied to those with no tie to the industry, other than something as simple as a lease.
Updates: 2019 Changes
After the Bulletin was first released, title insurance was available with the inclusion of an exception related to violation of federal law. The current practice is to disallow the issuance of title insurance altogether. Additionally, title companies used to provide a marijuana buyer with a list of the subject property’s known encumbrances. However, as of recent, even this request has been denied.
So, why the change?
We were told that the possible reason for the title companies’ sudden change of heart was because of comments made by former Trump staff, including Sean Spicer and Jeff Sessions, coupled with the current administration’s unpredictability as to the topic.
What is the industry's reaction?
The cannabis industry has grown accustomed to forced creativity in order to simply retain some semblance of normalcy in business.
Typically, financial institutions acting as lenders require the purchase and sale be closed by a title company. The borrower has to negotiate a very unusual exception to close a bank-financed transaction outside of a title company.
The good news
As long as the real estate transaction doesn’t involve bank financing, law firms with real estate experience and licensed Limited Practice Officers (LPO) can close real estate transactions.
These transactions are forced to close without title insurance. Even though title companies have determined that closing real estate transactions for land that may be used for cannabis growing, processing or retail sale is too risky, JDSA is well-prepared to help ease some of the risk.
You can mitigate the risk by doing a title search and retrieving all of the documents that are of record with the County in question. The Seller will then certify that the property is only subject to the listed encumbrances and that if there are any challenges to title, the seller will indemnify and hold the buyer harmless. This does not replace title insurance, but it is a method used to mitigate the risk of purchasing property without title insurance.
Lindsey Weidenbach is a partner with the law firm Jeffers, Danielson, Sonn & Aylward, P.S., practicing in many areas of law including agriculture, business, cannabis, estate planning, tax and 1031 exchanges. She can be reached at Lindseyw@jdsalaw.com or call 662-3685.