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.