When loans go wrong: Washington cannabis property foreclosure

When loans go wrong: Washington cannabis property foreclosure

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For many companies and individuals who lend to or want to lend to cannabis companies, it is difficult to talk about the growth of cannabis in Washington without considering real estate issues. As indoor marijuana growing facilities flourish in Washington State, a growing question for private and institutional lenders is which foreclosure method should be used when borrowers default on their loans—judicial or non-judicial?

Under normal circumstances, when the lender lends funds, the borrower must provide the lender with corresponding real estate as collateral, so that the lender can foreclose the real estate if the borrower defaults. Trust deeds with the right to sell are usually prepared to obtain a lien; and, in the event of default, the lender can choose judicial or non-judicial foreclosure rights.

In Washington State, the main form of foreclosure is non-judicial foreclosure. The corresponding regulations can be found under Chapter 61.24 RCW of the Washington Trust Deed Act. Non-judicial foreclosure is considered to be more friendly to lenders because it is a more effective and faster method of real estate foreclosure.

However, the lender must be careful! If the real estate is mainly used for “agricultural” purposes when executing the trust deed and when selling the property, then the lender will not be able to use more effective and faster methods to foreclose the collateral. The lender will need to resort to judicial foreclosure, which It may take longer; through judicial foreclosure, the defaulting borrower will have a redemption period and have the ability to harvest crops on the property.

RCW 61.24.030(2) broadly defines that if immovable property is “used to produce crops, livestock or aquatic products”, then the immovable property is used for “agricultural purposes”. If the real estate is used “primarily” or “primarily” for “agricultural purposes” at the relevant time, the property must be foreclosed by justice.

Obviously, outdoor hemp cultivation is agricultural in nature. But for indoor cannabis cultivation facilities, the question will be whether the real estate is mainly used for “agricultural purposes.” Because the definition of the law is so broad, the possible result is that if the property is used as a cannabis planting facility when the trust deed is executed and when the trustee deed occurs, then the lender will need to foreclosure judicially.

Due to the complexity of foreclosure regulations, lenders need to consider this factor before lending to borrowers who will operate cannabis cultivation facilities on real estate. Because of the relative bargaining power between the lender and the borrower, the lender can and should specify the most advantageous terms, including in bad circumstances where the lender requires foreclosure.



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