In many real estate transactions, title insurance companies
fulfill a variety of roles, from providing title reports and
issuing title policies to acting as the escrow agent for the
closing, any holdbacks, and construction draws. However, when it
comes to transactions involving cannabis companies and/or
properties that will be used for cannabis-related purposes, title
companies are significantly limited in the services they offer.
Historically, title companies would simply decline to be a part
of any cannabis-related transaction due to the conflict between
federal and state laws. In states with legalized cannabis, many
title companies even include language similar to the following in
title commitments: „Notice: Please be aware that due to the
conflict between federal and state laws concerning the cultivation,
distribution, manufacture or sale of marijuana, the Company is not
able to close or insure any transaction involving Land that is
associated with these activities.” Additionally, while hemp is
legal, many title companies are hesitant to partake in transactions
related to hemp, because the risk to the title company is not
insignificant if the insured on a title policy fails to comply with
the regulatory restrictions contained in the 2018 Farm Bill.
Notwithstanding the continued conflict between state and federal
law, certain title companies are beginning to explore ways to be
involved in cannabis-related real estate transactions. For example,
while title companies are unwilling to act as escrow agents for
such transactions, some title companies are willing to insure the
fee owner of real property that is leased to a cannabis company.
The issuance of these title policies, however, usually requires
approval by a title company’s senior underwriting committee,
and the proposed insured may be required to deliver additional
affidavits (e.g., an Affidavit of Land Use) and evidence of proper
licensing for lawful operation under the laws of the state in which
the property is located.
Furthermore, the title company will not issue certain
endorsements and may include additional cannabis-related exceptions
on the owner’s policy, such as the following:
Any loss or damage, costs, attorneys’ fees, or expenses, or
lack, failure, or loss of Title, or any defect in or lien or
encumbrance in the Title or unmarketability of Title, that arises
out of (i) any violation or enforcement, heretofore or hereafter,
of any federal or state civil, criminal, or forfeiture laws, and/or
any federal or state licensing, permitting, authorization, or
regulation, whenever existing as may be amended from time to time,
including, without limitation, any laws or regulations relating to
marijuana (cannabis), hemp, drugs, and/or controlled substances, or
(ii) any failure to comply with the guidelines and/or restrictions
set forth in the Agriculture Improvement Act, as the same has
existed heretofore or shall exist hereafter, including, without
limitation, the version of the Act passed in 2018 (otherwise known
as the Farm Bill), as the same may be amended from time to
time.
Despite the additional title requirements and cannabis-related
exceptions, it is still worthwhile for fee owners and lessees to
obtain title policies insuring their interest in the real property,
because the title policy protects against certain title-related
claims and thereby reduces the time and expense of due
diligence.
Finally, although title companies may issue a title policy,
title companies remain unwilling to act as escrow agents or handle
funds. A title company generally receives a small fee for its
services as escrow agent, and the risk related to acting as escrow
agent in cannabis-related transactions outweighs the potential
financial benefit. As such, buyers, sellers, landlords, tenants,
and, in rare cases, lenders involved in cannabis-related
transactions should be prepared to exchange funds directly rather
than relying on the title company.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.