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When Loans Go Wrong: Washington Cannabis Property Foreclosures

It is difficult to talk about Washington cannabis grows without considering real estate issues for the many companies and individuals that lend or want to lend funds to cannabis businesses. As indoor cannabis growing facilities sprout throughout Washington state, a growing issue for both private and institutional lenders is which method of foreclosure to pursue when the borrower defaults on the loan—judicial or non-judicial?   

Generally, when a lender lends money, the borrower must provide the corresponding real estate as collateral to the lender so that in the event of the borrower’s default, the lender can foreclose on the real estate. A deed of trust with the power of sale is usually prepared to secure a lien; and, at the time of default, the lender can choose to foreclose judicially or non-judicially.      

In Washington state, the predominant form of foreclosure is nonjudicial foreclosure. The corresponding statute can be found under the Washington Deed of Trust Act, chapter 61.24 RCW.  Nonjudicial foreclosure is considered more lender-friendly because it is a more efficient and speedier method to foreclose on real estate.   

However, lenders be beware! If the real property is used primarily for “agricultural” purposes at the time the deed of trust is executed AND at the time when the property is to be sold, then the lender will not be able to use the more efficient and speedier method to foreclose. Lenders will need to resort to judicial foreclosures, which will likely take longer; and with judicial foreclosure, the defaulting borrower will have a redemption period and the ability to harvest the crops on the property.  

RCW 61.24.030(2) broadly defines that real property is used as “agricultural purposes” if it is “used in an operation that produces crops, livestock, or aquatic goods”.  If the real estate is “principally” or “primarily” used for “agricultural purposes” at relevant times, then the property must be foreclosed judicially.   

Cleary outdoor cannabis grows are agricultural in nature. But with indoor cannabis growing facilities, the issue would be whether the real estate is primarily used for “agricultural purposes”. Because the statute is so broadly defined, the likely result is that if the property was used as a cannabis growing facility at the time that the deed of trust was executed AND at the time the trustee’s deed takes place, then a lender will need to foreclose judicially.   

Due to the complexities of navigating the foreclosure statutes, a lender will need to consider this factor prior to lending to a borrower who will be operating a cannabis growing facility on the real estate. Because of the relative bargaining power between a lender and a borrower, a lender can and should dictate terms that are most favorable, including in the undesirable situation where a lender needs to foreclose on a property. 

The post When Loans Go Wrong: Washington Cannabis Property Foreclosures appeared first on Harris Bricken.

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