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American College of Mortgage Attorneys — Partner with the Best®

Formed in 1974, the American College of Mortgage Attorneys (ACMA) is comprised of over 500 lawyers in North America who are experts in mortgage law.

United States

Washington

Although mortgages and real estate contracts may be used, deeds of trust are the preferred form of security instrument for encumbering real property collateral in Washington. There is an exception for property used principally for agricultural purposes (see RCW &sect; 61.24.030(2) for definition of “agricultural purposes”). While a deed of trust may be used to encumber agricultural property, if the instrument encumbers property used principally for agricultural purposes on both the date the deed of trust is granted and the date of foreclosure it must be foreclosed judicially.&nbsp; RCW &sect; 61.24.030. Accordingly, most lenders use mortgages to encumber agricultural property.&nbsp; A deed of trust granted on agricultural property still creates a valid lien, but it must be foreclosed judicially RCW &sect; 61.24.020.

SECURITY INSTRUMENT USED

A deed of trust, mortgage or real estate contract must be in writing executed by the party to be bound and acknowledged, although the same may be valid between the parties if not acknowledged. RCW &sect;&nbsp;64.04.020. To be recordable, the first page of a deed of trust (or mortgage) must contain the name of the document that fully evidences what it represents (e.g., security&nbsp; agreement, fixture filing, etc., if those elements are a part of the document), the names of the grantor and grantee, an abbreviated legal description, a reference to the page or exhibit on which the complete legal description is contained and the assessor's property tax parcel numbers. RCW &sect;&nbsp;65.04 should be consulted for additional strict formatting requirements of recorded instruments which include no notations of any kind within the one-inch margins of the document to be recorded. Washington historically had a Torrens land registration system subject to the Torrens Registration Act (RCW &sect;&nbsp;65.12).&nbsp; Very few properties were or continue to be registered under this system, and if applicable it compelled an enforcement procedure different from the typical procedure outlined in RCW &sect; 61.24 and related statutes.&nbsp; However, in June of 2022, the Torrens Act was repealed and a multi-step process was enacted to remove registered property from that system and enroll it in the State's standard recording system. HB 1376.SL All documents to be recorded in Washington are required to be acknowledged. RCW &sect;&nbsp;64.08 contains the forms of notarial acknowledgments. Note that under RCW &sect; 64.08.060 and 64.08.070, an alternative notary “short form” as specified in RCW &sect; 42.45.140 is also permissible.&nbsp; Washington has adopted the Revised Uniform Law on Notarial Acts (RCW &sect; 42.45).

RECORDING REQUIREMENTS

We are unaware of any statutes that should or in fact could effectively be waived at the inception of a mortgage loan transaction. Indeed, Washington case law casts doubt on a party's ability to waive statutory requirements of the Washington Deed of Trust Act, see Schroeder v. Excelsior Mgmt Grp., LLC et. al., 177 Wn2d 94, 297 P.3d 677 (2013). After default, in the workout agreement context, the mortgagor's redemption rights may be waived if supported by proper consideration. RCW &sect; 6.23.020.

STATUTES TO BE WAIVED

Lender Statute of Frauds. Washington has a statute of frauds, which gives lenders protection against alleged oral agreements to extend credit, provided that the lender has provided the borrower substantially the following conspicuous, written notice “simultaneously with or before a credit agreement is made”: ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. The notice must be in type that is bold face, capitalized, underlined or otherwise set out from surrounding written materials so that it is conspicuous. RCW &sect;&sect;&nbsp;19.36.100 - .140. Inclusion of the notice is recommended in notes, deeds of trust and other documents that could be deemed to be agreements regarding credit. Casualty Insurance Cap. RCW &sect;&nbsp;48.27.010 prohibits a lender from requiring casualty insurance in excess of the replacement cost (less depreciation) of the property (regardless of the loan amount) determined as of the effective date of the policy or any renewal thereof. Dragnet Clauses. A deed of trust may be used in Washington to secure additional and protective advances. However, care must be taken in inadvertently securing obligations that are intended to be unsecured (and thus unsatisfied by the foreclosure of the deed of trust) due to the operation of the deficiency protections of the Washington Deed of Trust Act (“DTA”). See RCW &sect; 61.24. In a case interpreting a deed of trust that purported to “secure” all loan documents (including a guaranty), the Washington Supreme Court has held that guarantors of commercial loans whose own property has not been foreclosed on are not protected from deficiency judgments under the DTA, RCW &sect; 61.24, after the borrower's property has been non-judicially foreclosed. Federal v. Harvey/ Washington Federal v. Gentry, 182 Wn.2d 335 (2015). Given the narrow facts of this case, Washington lenders still generally provide in the guaranty and the deed of trust that the guaranty is not secured. Separate Environmental Indemnity. Under RCW &sect; 61.24.100(10), obligations or the “substantial equivalent of those obligations that are not secured by the deed of trust will survive a nonjudicial trustee's sale. It is common in Washington for lenders to utilize a separate, unsecured “environmental indemnity” to attempt to preserve those indemnity obligations following a non-judicial foreclosure.&nbsp; Under the statute referenced above, for this strategy to succeed it is advisable to establish in the related loan documentation that none of the provisions of the deed of trust purport to secure those environmental indemnities or contain representations or covenants that are their “substantial equivalent.”&nbsp; Some lenders want the benefit of the collateral to secure the borrower's obligations to reimburse the lender for costs associated with the environmental indemnity and so attempt to bifurcate the obligations into secured and unsecured portions.&nbsp; We are unaware of case law construing either approach. Assignment of Leases and Rents. It is customary for Washington real estate lenders to incorporate an assignment of leases and rents into the deed of trust, although a separate stand-alone instrument is also acceptable. An assignment of “unpaid rents and profits of real property intended as security” is immediately perfected upon recording and no further act is required to protect the assignment from avoidance in bankruptcy due to absence of perfection.&nbsp; RCW &sect; 7.28.230.&nbsp; Any such lien shall when recorded, be deemed specific, perfected and choate. RCW &sect; 7.28.230 (3). Thus, care should be taken in characterizing assignments of rents in Washington as absolute assignments if the lender seeks to obtain the benefit of immediate perfection under RCW &sect; 7.28.230. Definition of Beneficiary. The DTA defines the “beneficiary” of a deed of trust as “[t]he holder of the instrument or document evidencing the obligations secured by the deed of trust, excluding persons holding the same as security for a different obligation” RCW &sect; 61.24.005. The beneficiary foreclosing a deed of trust, including appointing a trustee to proceed with a nonjudicial foreclosure of the deed of trust, must be the actual holder of the promissory note or other instrument or document that evidences the obligations secured by the deed of trust.&nbsp; The DTA does not expressly provide for the holder of the instrument or document evidencing the obligations secured by the deed of trust to appoint an agent, an indenture trustee, a nominee or any other representative to act as beneficiary. The decision of the Washington Supreme Court in Bain&nbsp;v. Metropolitan Mortgage Group, Inc., et al., 175&nbsp;Wn.2d&nbsp;83, 285&nbsp;P.3d&nbsp;34 (2012), created some uncertainty as to the ability to foreclose or otherwise enforce a Washington deed of trust if the deed of trust names as beneficiary an agent, an indenture trustee, a nominee or any other representative or person other than the actual holder or holders of the instruments or documents evidencing the obligations secured by the deed of trust. In Bain, the Supreme Court responded to a question certified to it by the United States District Court for the Western District of Washington as to whether Mortgage Electronic Registration Systems, Inc. (“MERS”) was a lawful beneficiary under two deeds of trust where MERS was named as beneficiary but never held the notes that evidenced the obligations secured by the deeds of trust.&nbsp; The Supreme Court stated that only the actual holder of the promissory note or other instrument evidencing the obligations secured by a deed of trust may be a beneficiary with the power to appoint a trustee to proceed with a nonjudicial foreclosure on real property, and concluded that MERS was an ineligible beneficiary under the DTA if it never held the promissory notes or other debt instruments that were secured by the deeds of trust in question.&nbsp; Although the Supreme Court stated that nothing in its opinion should be construed to suggest that an agent cannot represent the holder of a note, at least for some purposes, it found that on the record before it MERS was not a beneficiary by contract or under agency principles.&nbsp; The Supreme Court stated that nothing in its opinion should be interpreted as preventing the parties from proceeding with judicial foreclosures.&nbsp; However, the Supreme Court also stated that it did not consider that issue, which must await a proper case. Accordingly, if a deed of trust identifies the beneficiary as an agent or nominee for lenders and is not the holder of the promissory notes or other instruments or documents evidencing the obligations secured by the deed of trust, then consideration should be given to naming as beneficiary or beneficiaries, in the Washington deed of trust, either the holders of such promissory notes or other instruments or documents, or at a minimum property identifying the beneficiary in its agent or nominee capacity for the holders of the debt obligations. Non-Agricultural Use.&nbsp; A deed of trust encumbering real property used principally for agricultural purposes may not be foreclosed nonjudicially.&nbsp; RCW &sect; 61.24.030(2).&nbsp; The same restriction applies if a deed of trust does not contain a statement to that effect.&nbsp; Accordingly, in order to foreclose a deed of trust nonjudicially a representation and warranty should be added to the deed of trust providing that “[t]he real property conveyed is not used principally for agricultural purposes.”&nbsp; Absent such a statement, a deed of trust may not be nonjudicially foreclosed. The prohibition against non-judicial foreclosures of agricultural property may not be waived by the parties to the security instrument. See Schroeder v. Excelsior Management Group, et&nbsp;al., 177 Wn2d 94, 297 P.3d 677 (2013). Securing&nbsp; Future Advances. A deed of trust may be used to secure additional and protective advances.&nbsp; However, because of the anti-deficiency provisions of the DTA as explained above, it is important to avoid inadvertently securing unrelated obligations.&nbsp; Any future advances will not necessarily enjoy the same priority position as the advance at closing.

UNUSUAL TREATMENT OF STANDARD PROVISIONS

The qualifications of the trustee are specifically set forth in RCW &sect;&nbsp;61.24.010 and include: (i)&nbsp;any domestic corporation or domestic limited liability corporation organized under Title 23B, 25, 30, 31, 32 or 33 of the RCW (provided the corporation has at least one officer who is a resident of Washington state); (ii)&nbsp;a title insurance company authorized to insure title in Washington state; (iii)&nbsp;any title insurance agent licensed under RCW &sect;&nbsp;48.17; (iv)&nbsp;an attorney who is an active member of the Washington state bar at the time named; (v)&nbsp;any Washington-formed professional corporation, professional limited liability company or partnership, all of whose shareholders, members or partners are licensed attorneys; (vi)&nbsp;any instrumentality or agency of the United States; or (vii)&nbsp;any bank or savings and loan association chartered under the laws of the United States. The text of trustee statute, RCW &sect;&nbsp;61.24.010, presently contemplates one trustee at any time (although there are various provisions for resignation and substitution), accordingly, it is unclear how a court would rule where a lender's deed of trust text purports to allow a lender/beneficiary to appoint multiple, concurrent, trustees and the prudent lender's counsel will revise the loan documents to allow one trustee at any given time.&nbsp; The trustee may not also be the beneficiary (although there is an exception for agencies of the US government) and may not bid at a trustee's sale. RCW &sect; 61.24.20. The trustee must have a street address in Washington where personal service of process may be made and a physical presence and telephone service at such address before a notice of trustee's sale is given and that address must be maintained through the date of the trustee's sale. RCW &sect; 61.24.030(6).

CORPORATE OR INDIVIDUAL; RESIDENCY REQUIREMENT

RCW &sect;&nbsp;61.24.010 provides that the trustee does not have fiduciary duties to the borrower or other persons having an interest in the property subject to the deed of trust, but that the trustee does have a duty of good faith to the borrower, grantor, and beneficiary. In Meyer v. U.S. Bank Nat. Ass'n, 530 B.R. 767 (W.D. Wash. 2015), the court held that the trustee violates its duty of good faith to the grantor when it fails to investigate conflicting information received regarding its right to initiate foreclosure or when the beneficiary's declaration contains an inherent ambiguity. Id. at 780. The court also held that a trustee's duty of impartiality is not so capacious as believed previously. Id. at 779. Collusive actions relating to a non-judicial foreclosure can expose any person involved therein, including the trustee, to a consumer protection action claim under RCW &sect; 19.86. See RCW &sect;&nbsp;61.24.135.

DUTY OF GOOD FAITH

Washington has granted the trustee the ability to minimize expenses when it is named as defendant in a lawsuit, where the deed of trust is the subject, by filing and serving a declaration that it is a nominal party. If the other parties do not file a timely objection, then the trustee's time for filing an answer is tolled. RCW &sect;&nbsp;61.24.180.

NOMINAL PARTY STATUS

BRIEF DESCRIPTION OF PROCEDURE; TYPICAL LENGTH OF PROCEDURE

A judgment for deficiency is similar in all respects to other judgments for the recovery of money and collection is enforced in the same manner. See RCW &sect;&nbsp;61.12.080. The present statute of limitations for collection of a judgment for a deficiency is 10 years from the date the judgment is entered. See RCW &sect;&nbsp;4.56.190. The amount of the deficiency is the amount of the judgment that remains unsatisfied after the sheriff's sale (which amount can only be determined after the sale is confirmed). As described above, at any time up to confirmation of the sale, the borrower can ask the court to set an upset price, or the court, as a condition to confirmation, may require that the fair value of the property be credited against the judgment. See RCW &sect;&nbsp;61.12.060. As discussed above, for a deed of trust securing a commercial loan, to the extent the fair value of the property sold at the trustee's sale to the beneficiary or any affiliate of the beneficiary is less than the unpaid obligation, the beneficiary may pursue an action for a deficiency judgment against the borrower or grantor (so long as they are given the required statutory notices) for (i) any decrease in the fair value of the property caused by waste to the property committed by the borrower or grantor after the deed of trust is granted; and (ii) the wrongful retention of any rents, insurance proceeds or condemnation awards by the borrower or grantor that are otherwise owed to the beneficiary See RCW &sect;&nbsp;61.24.100(3). As noted above, these limitations do not preclude a commercial lender from proceeding against other collateral for the same debt following a non-judicial foreclosure against the property (see RCW &sect;&nbsp;61.24.100(3)(b)) or for pursuing a deficiency judgment against a guarantor under an unsecured guaranty (see RCW &sect; 61.24.100(10)).

DEFICIENCIES

Washington law is not entirely clear on the effect of foreclosure on junior leases and it may depend on whether the foreclosure action is a judicial or nonjudicial action. A trustee's sale under a nonjudicial foreclosure may extinguish junior leases - which is what careful practitioners assume. The deed of trust statute provides that a junior lease of record or under residential leases will be foreclosed and terminated by foreclosure but only if the tenant is given the statutory notice of trustee's sale. See RCW &sect; 61.24.040(1)(b) and (13). This does not address non-residential leases which are not of record. There are also references in the foreclosure statutes indicating that the trustee will have the right to elect whether to eliminate individual leases. See RCW &sect; 61.24.040 (1)(b). In a judicial foreclosure action, there is a dearth of case law, but the leading commentary on the issue concludes that a lender may pick and choose whether to retain or eliminate leases in the action (see Synder J. King, The Effect of a Mortgsage Foreclosure on a Lease Executed Subsequent to the Mortgage, 17 Wash. L.Rev. 37 (1942)).&nbsp; In a judicial foreclosure, the relief requested by the lender should identify which leases it wants eliminated by foreclosure and which it chooses to survive and the lender should join tenants to the foreclosure with that in mind. In any event, subordination, non-disturbance and attornment agreements can be very important in addressing the outcome, especially from significant tenants. Occupants whose interests are foreclosed can ordinarily be evicted upon 20 days' notice following the trustee's sale; for residential tenants, this post-foreclosure eviction period is 60 days. See RCW &sect;&nbsp;61.24.040(9); RCW &sect;&nbsp;61.24.146. Please note that leases of real property in Washington for terms of more than one year must be acknowledged. RCW &sect;59.04.010 and RCW &sect; 59.18.210.

EFFECT OF FORECLOSURE UPON LEASES

RCW &sect;&nbsp;19.52.020 provides that unless exempt, any rate of interest is legal so long as it does not exceed the higher of 12% per annum or four percentage points above the equivalent coupon issue yield (published by the Federal Reserve) of the “average bill rate for 26-week treasury bills as determined at the first bill market auction conducted during the calendar month immediately preceding the later of (i)&nbsp;the establishment of the interest rate by written agreement of the parties to the contract, or (ii)&nbsp;any adjustment in the interest rate in the case of a written agreement permitting an adjustment in the interest rate.” The statute also permits certain set-up charges.

USURY CEILING

Usury is not a significant concern for most commercial lenders in Washington. Under RCW &sect;&nbsp;19.52.080, there is no statutory right to assert usury as a defense to repayment of loans: (i)&nbsp;to corporations, partnerships and certain other enumerated entities; or (ii)&nbsp;to “persons” if the “transaction was primarily for agricultural, commercial, investment or business purposes.” The statute makes it clear that the usury limits do apply to a consumer transaction of any amount. “Consumer transaction” is defined in the statute to mean a “transaction primarily for personal, family or household purposes.” Because lenders are entitled to rely on representations from borrowers as to the intended use of loan proceeds (see The Revocable Trust of Harold Strand v. Wel-Co. Group Inc., 120 Wash. App. 828 (2004), unless the lender is on notice that the representation is false, most commercial debt instruments will contain a representation as to the business purpose of the loan.&nbsp; Washington has not overridden the federal usury preemption for loans secured by first liens on residential real property.

USURY EXEMPTIONS

UCC-1 financing statements are filed with the Uniform Commercial Code Division of the Washington Department of Licensing (See RCW &sect; 62A.9A-501), except financing statements for fixtures, as-extracted collateral, or timber to be cut, which are filed with the county recorder where the real estate is located. The deed of trust or mortgage may serve as a fixture filing so long as the security instrument complies with the requirements of RCW &sect; 62A.9A.502(c).

LOCATIONS FOR FILING; SECURITY INSTRUMENT AS FIXTURE FILING

UNUSUAL PROVISIONS OR REQUIREMENTS; STATUTES TO BE WAIVED; SPECIAL PROBLEMS IN ENFORCEMENT OF GUARANTY; ISSUES AND GUIDELINES RELATED TO SEEKING/OBTAINING DEFICIENCY JUDGMENTS: A trustee's sale under a deed of trust securing a commercial loan does not preclude an action to collect or enforce an obligation against a borrower or guarantor if that obligation or “substantial equivalent thereof” was not secured by the deed of trust.&nbsp; See RCW &sect; 61.24.100(10). In light of this provision, unsecured guaranties and environmental indemnities are common in Washington.&nbsp; A deed of trust, however, must be properly drafted to clearly state that the deed of trust does not secure the obligations of borrower or any guarantor under a guaranty, environmental indemnity or substantial equivalent thereof. RCW &sect; 61.24.042 provides the requirements for notice to a guarantor for default, trustee's sale and foreclosure of a commercial loan.&nbsp; The failure of a beneficiary to provide any guarantor notice, however, does not invalidate the notices given to the borrower or the grantor, nor invalidate a trustee's sale. Waivers of suretyship defenses in guaranties are generally enforced in Washington, although there is no statutorily prescribed language for the enforceability of such waivers.&nbsp; Both guarantors and indemnitors under environmental indemnities should consider obtaining reimbursement agreements from the borrower. RCW &sect; 61.24.100(11) provides that, regardless of whether a non-judicial foreclosure will prevent the lender from collecting a deficiency directly against the borrower, a trustee's sale does not impair any right or agreement of a guarantor to be reimbursed by the borrower for a deficiency judgment obtained by the lender against the guarantor following non-judicial foreclosure. A guarantor who pays a guaranteed obligation is entitled to reimbursement by the borrower and is entitled to be subrogated to the rights of the lender against the borrower, including its collateral. See McAllister v. Pier 67, Inc., 1 Wash. App. 978, 985-86, 465 P.2d 678 (1970). A deficiency judgment is not available against a guarantor that is the grantor of a deed of trust to secure the guaranty of a commercial loan except to the extent of the same statutory exceptions applicable to deficiency judgments available against borrowers (i.e., any waste or wrongful retention of rents, insurance proceeds or condemnation awards by borrower or grantor that are otherwise owed to the beneficiary of the deed of trust. RCW &sect; 61.24.100(6)).&nbsp; If the guaranty is secured by a deed of trust on the grantor's principal residence, the guarantor is entitled to the sales proceeds in an amount equal to the homestead exemption provided in RCW &sect; 6.13.030 prior to the application of the bid or the sales proceeds to the secured obligation. See RCW &sect; 61.24.100(3)(a)(1) and RCW &sect; 61.24.100(6).

GUARANTY

The following actions must be commenced within six (6) years:&nbsp; (a) an action on a written contract, (b) an action on an account receivable, and (c) an action for the rents and profits or for the use and occupation of real estate.&nbsp; See RCW &sect; 4.16.040.&nbsp; &nbsp;An action for enforcement of a deficiency against a borrower or guarantor after non-judicial foreclosure, however, must be commenced within one (1) year after the date of the trustee's sale (or a later date to which the liable party otherwise agrees in writing with the beneficiary after the notice of foreclosure is given). See RCW &sect; 61.24.100(3)(c). Washington does not give statutory authority, nor does the state have precedent case law, as to whether a waiver of the statute of limitations is enforceable in the loan documents.

STATUTE OF LIMITATION PERIOD

A lien or mortgage must be satisfied by written instrument, executed, acknowledged, and recorded by the proper person. A deed of trust must be reconveyed in similar fashion by the trustee upon written request for reconveyance by the beneficiary. If a beneficiary fails to request the trustee's reconveyance within 60 days of the date the borrower or grantor demands reconveyance and the beneficiary has received from escrow payment in full of the amounts as specified in the beneficiary's payoff statement, a title insurance company or agent, licensed escrow agent, or attorney admitted to practice law in Washington, who has been paid in full from escrow, may upon request the trustee of record to reconvey the deed of trust.&nbsp; A beneficiary's failure to release the lien of a deed of trust within 60 days of satisfaction subjects the party to damages and payment of attorneys' fees. If the trustee of record is unable or unwilling to reconvey the deed of trust within 120 days following payment to the beneficiary, the title insurance company or agent, licensed escrow agent or attorney may record in each county where the original deed of trust was recorded a notarized declaration of payment, a copy of which must be sent by certified mail to the beneficiary and the trustee of record not later than 2 business days after the date of recordation. The beneficiary or trustee of record has 60 days to record an objection, and if no objection is recorded within such period of time, then the lien of the deed of trust shall cease to exist. See RCW &sect; 61.16.030 and 61.24.110.

REQUIREMENTS FOR RELEASE OF LIEN

Homestead is established under RCW &sect;&nbsp;6.13 and permits an exemption for real estate comprising the debtor's principal residence (including mobile homes, manufactured homes and improvements). The amount of the exemption is stated to be the greater of (i) $125,000 or (ii) the county median sales price of a single-family home in the preceding calendar year. RCW &sect; 6.13.030. There are, however, various exceptions, including: (i)&nbsp; debts secured by security agreements describing as collateral the property being claimed as the homestead; (ii) debts secured by mechanic's, laborer's, construction, material supplier's or vendor's liens arising out of and against the property being claimed as the homestead, and (iii) judgments in favor of any state for failure to pay that state's income tax on benefits received while a resident of the state of Washington. If a judicial foreclosure is pursued, the borrower may occupy the property during redemption period under claim of homestead. See RCW &sect;&nbsp;6.23.110. Any attempt to require a waiver of homestead by creditor is probably unenforceable. The homestead is subordinate to consensual liens created by mortgage or deed of trust, if the mortgage or deed of trust secures repayment of a loan obtained by the party claiming the homestead. If, on the other hand, the mortgage or deed of trust secures a guaranty of someone else's loan (e.g., SBA loan guarantees from the principals of the business) the homestead applies.

HOMESTEAD ISSUES

Washington is a community property state. Property acquired during a marriage or registered domestic partnership is community property unless acquired by gift, bequest, devise, decent, inheritance, or designated as separate in a written agreement between spouses or domestic partners. Rents, issues, and profits therefrom remain separate property. RCW &sect; 26.16.010 and RCW &sect; 26.16.020. Either spouse or domestic partner may manage and control the community property with a like power of disposition, but any agreement to buy, sell, convey, or encumber community real property requires the signature and acknowledgement of both spouses or domestic partners. RCW &sect; 26.16.030(1)-(5). Only a single signature is required if the real property is owned by a community business but is solely managed by the spouse or domestic partner who signs the encumbrance or conveyance. RCW &sect; 26.16.030(6). Lenders relying on all or any portion of community property assets to underwrite a loan or guaranty must obtain a spouse's or domestic partner's consent. Nichols Hills Bank v McCool, 104 Wn.3d 78, 701 P.2d 1114 (1985).

COMMUNITY PROPERTY

MORTGAGE TAX

None. TRANSFER TAX (on foreclosure sale; on deed in lieu of foreclosure; sales of real property; sales of controlling interests in entities owning real property): Washington imposes a Real Estate Excise Tax upon the gross fair market value of real property interest being transferred. The excise tax is applied to the sale of real property and the sale of a controlling interest in an entity owning an interest in real property in Washington (for the latter, the State Department of Revenue (“DOR”) will look at aggregate transfers of ownership and options to transfer ownership over a 36 month period). RCW &sect; 82.45.&nbsp; The excise tax is based on a graduated rate scale plus a local tax rate ranging from 0% to 0.50% (depending on the locality) of the gross fair market value of real property interest being transferred. RCW &sect; 82.45.060(1)(b)(ii)-(iv) and RCW &sect; 82.45.060(2)(b). However, property that is predominantly used as timberland or agricultural at the time of the sale, even if buyer changes its use, receives a flat 1.28% rate. RCW &sect; 82.45.060(c). The graduated state excise tax rates effective March 1, 2023 (note the 0-0.5% flat tax is assessed by the localities in addition to the amounts listed below and inquiry should be made of the locality in which the property is located), are as follows: Sales price below $525,000: 1.10% Sales price from $525,000 to $1,525,000: 1.28% Sales price from $1,525,000.01 to $3,025,000: 2.75% Sales price over $3,025,000: 3.00% *Every four years these listed sales prices will be increased by the lesser of CPI-shelters increase or 5.00% Certain types of transfers are excepted. See RCW &sect; 82.45 and WAC 458-61A(200)-(306). Notable transfers excepted are: <ul>
 <li>Deed of trust in a foreclosure proceeding</li>
 <li>An order of sale by a court in any mortgage, deed of trust, or lien foreclosing procedure</li>
 <li>Deed in lieu of forfeiture or foreclosure</li>
 <li>Deed given by public officials in furtherance of their duties (g., Sheriff's Deed)</li>
 <li>A cancellation or forfeiture of a vendee's interest in a contract for the sale of real property</li>
</ul>

DOCUMENTARY STAMP TAX

Washington courts have adopted the Restatement (Second) Conflicts of Laws &sect;&nbsp;187 (1971), which will enforce the parties' choice of law unless Washington law would otherwise apply, there is a lack of substantial relationship or other reasonable basis for the choice; or the chosen law would be contrary to a fundamental policy of the state (e.g., usury or franchise protection). See Shanghai Comm'l Bank Ltd. v. Chang, 189 Wn.2d 474, 404 P.3d 62 (2017), Erwin v. Cotter Health Ctrs., Inc., 161 Wn.2d 676, 167 P.3d 1112 (2007); Freestone Capital Partners L.P. v. MKA Real Estate Opportunity Fund I, LLC, 155 Wash. App. 643, 230 P.3d 625 (2010) (split choice of law in loan documents enforced). As an example of a Washington state law that would probably negate a choice of law to the contrary, RCW &sect;&nbsp;19.52.034 provides that, whenever a loan or forbearance is made outside the state of Washington to a person then residing in this state, Washington usury laws shall apply as if the loan or forbearance was made in this state. As a drafting note, in the 2017 Shanghai Bank case, the Court emphasized that the choice of law provision in the contract included the parties' agreement that another jurisdiction's laws would govern not only interpretation but also enforcement; accordingly, it may be prudent to analyze choice-of-law clauses to ensure that they recite that the selected jurisdiction's laws govern both interpretation and enforcement.

CHOICE OF LAW AGREEMENTS

Washington's receivership statute (RCW &sect;&nbsp;7.60) distinguishes between a general receivership, in which the receiver takes possession and control of “substantially all of a person's property with authority to liquidate that property,” and a custodial receivership, in which the receiver is “appointed to take charge of limited or specific property of a person or is not given authority to liquidate property.” See RCW &sect;&nbsp;7.60.015. When the receiver is appointed by the court in conjunction with a judicial or non-judicial foreclosure of real property, the Court will “appoint the receiver as a custodial receiver.” See RCW &sect;&nbsp;7.60.015. The Court is required to appoint a receiver, after commencement of a judicial or non-judicial proceeding to foreclose real property or for forfeiture of any interest in real or personal property, upon the application of a party with an interest in the property, if the loan documents provide for the appointment of receiver or if the appointment is reasonably necessary to effectuate or enforce an assignment of rents or other revenues from the property. See RCW &sect;&nbsp;7.60.025(1)(b)(ii). Otherwise, the lender's ability to obtain a receiver will require findings by the court that the property or its revenue-producing potential is in danger of being lost or materially injured or impaired, that the appointment of a receiver is reasonably necessary and that other available remedies either are not available or are inadequate. RCW &sect; 7.60.025.&nbsp; The receivership statutes do not expressly permit or preclude a secured creditor from pursuing a deficiency judgment against the grantor and/or guarantor after a court-approved received sale of the grantor's property securing the loan. (See Umpqua Bank v. Shasta Apartments, LLC, 194 WnApp 685 (2016), in which a deficiency judgment was awarded). The fact that a receivership sale is a court ordered judicial sale provides support for the ability of a creditor to recover a deficiency in such a proceeding.

RECEIVERSHIP

To have the advantage of Washington's lender-liability statute of frauds (discussed above and found at RCW &sect; 19.36.100 et seq.), all loan applications should contain the following language to act as an enforceable merger provision: “ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.” Loan fees or commitment fees will be included in determining the interest rate, which need to be considered if the exemptions to usury are not applicable.

ANY PROHIBITION OR SPECIAL RULES REGARDING LOAN APPLICATION, LOAN FEES OR COMMITMENT FEES

There are no unusual provisions or requirements for modifications of existing commercial deeds of trust or mortgages.

MODIFICATIONS OF EXISTING MORTGAGE LOANS

The Department of Ecology (“DOE”) may file a lien against real property for unrecovered costs by the State of Washington relating to hazardous waste clean up of real property. RCW &sect; 70A.305.060(2). The DOE lien takes priority over all other liens except (i)&nbsp;local and special district property tax assessments, and (ii)&nbsp;mortgage liens recorded before liens or notices of intent to conduct remedial actions are recorded with the county auditor in the county where the real property is located. RCW &sect; 70A.305.060(2)(a)(i),(ii). Except for emergency remedial actions, the DOE must provide notice to the potentially liable parties prior to initiating remedial actions. RCW &sect; 70A.305.060(2)(e). If the DOE records this notice along with a legal description of the property on which the remedial action will take place and subsequently files a lien, the effective date of the lien will be the date the notice was recorded. RCW &sect; 70A.305.060(2)(f).&nbsp;&nbsp;&nbsp; Before filing a lien, the DOE must give notice of its intent to file a lien to the real property owner, mortgagees and lienholders of record. The notice must include: (a)&nbsp;a statement of the purpose of the lien; (b)&nbsp;a brief description of the real property affected; (c)&nbsp;a statement of the remedial action costs incurred by the DOE; (d)&nbsp;a statement of facts showing probable cause that the real property is the subject of the remedial action costs incurred by the DOE; and (e)&nbsp;the time period within which any notice recipient legally affected by the notice may comment on the notice. Any comments on the DOE's notice of intent to file a lien must be received by the DOE within 30 days of the notice. RCW &sect; 70A.305.060(3)(a)-(d). &nbsp;If no comments are received, the lien may be filed immediately. If comments are received, the DOE must determine if there is probable cause for filing the certificate of lien, and upon finding such probable cause, may file the lien. The DOE may file the lien prior to giving notice if exigent circumstances exist, such as an imminent bankruptcy filing by the real property owner, or the imminent transfer or sale of the real property, or both. RCW&nbsp;&sect; 70A.305.060(3)(e). The lien is effective when a statement of lien is filed with the county auditor where the real property is located and must include a description of the real property and the amount of the lien. The lien continues until the liability for the remedial action costs have been satisfied through sale of the real property, foreclosure, or other means agreed to by the DOE. RCW &sect; 70A.305.060(4), (5).

ENVIRONMENTAL LIEN LAW ISSUES

The Legal Opinions Committee of the Business Law Section of the Washington State Bar Association (“WSBA”) published the Amended and Restated Report on Third-Party Legal Opinion Practice in the State of Washington (the “WSBA Opinion Report”). The WSBA Opinion Report contains a form opinion letter which has many of the specific opinions frequently requested in business transactions and commentary from the committee. It can be found at https://www.wsba.org/sections/join-a-section/business-law/third-party-legal-opinions.

LEGAL OPINIONS

LABOR AND MATERIAL (L&M) LIEN CLAIMS—PRIORITY ISSUES

&nbsp; RCW &sect;&nbsp;60.04.226 provides that a mortgage or deed of trust has priority from the date the security instrument is recorded and first attaches to the real property, to the extent of all sums secured by the mortgage or deed of trust, regardless of whether advances are mandatory or discretionary. If the lender's mortgage or deed of trust expressly provides that protective advances (such as to pay delinquent taxes or to force-place insurance) are included in the sums secured, RCW &sect;&nbsp;60.04.226 will give such advances priority from the date the mortgage or deed of trust is recorded and first attaches to the real property.&nbsp; The Washington Supreme Court has held, however, that the lien priority protection covered by RCW &sect; 60.04.226 applies only in the context of a construction financing. See In re General Receivership of EM Prop. Holdings, 199 WN.2d 725 (2022).&nbsp; In the EM Property Holdings decision, the Washington Supreme Court held that advances made under a real estate secured loan that is not a construction loan are governed by the common law in Washington that distinguishes between mandatory and optional advances.&nbsp; Under this ruling, any advances that are optional may lose priority to any intervening liens absent an express subordination agreement with a junior lienholder, particularly if the senior lender has actual knowledge of the intervening junior lien. &nbsp;

MORTGAGE PRIORITY

Under RCW &sect;&nbsp;60.04.061, the priority of a mechanic's lien relates back to the date when the claimant first commenced its work or made a first delivery of materials or equipment on the project. Due to the “relation-back” of a mechanic's lien, a mortgage or deed of trust will be junior to a mechanic's lien claimant who began to furnish labor, services, material or equipment to the project before the security instrument was recorded. Note, however, that pre-construction activities of professionals, such as architects and engineers, that are not visible from an inspection of the site are excepted from this “relation-back” rule. If providers of pre-construction services fail to record prior notice of their right to claim a lien, they will be subordinate to mortgagees who record their mortgage or deed of trust without notice of the professional services being provided. See RCW &sect; 60.04.031(5). If a lender's mortgage has been recorded and attached before the potential lien claimant commenced its work or deliveries, the mortgagee will have priority over subsequently recorded mechanic's liens. See RCW &sect;&nbsp;60.04.226.&nbsp; The Washington Court of Appeals clarified the limits of Washington's mechanic's lien statute, holding in Colorado Structures, Inc. v. Blue Mountain Plaza, LLC, 159 Wn. App. 654, 246 P.3d 835 (2011), that a contractor's lien did not predate deeds of trust because it failed to satisfy three of the four distinct elements of a valid claim under RCW&nbsp;&sect; 60.04.021: (1)&nbsp;furnishing services or equipment (2)&nbsp;for improvement of real property (3)&nbsp;at contract prices (4)&nbsp;at the behest of the owner or owner's agent. First, minor preparatory activities do not amount to “improvement” of realty; the lien claimant's activities must constitute an “improvement” of the land as defined in RCW &sect;&nbsp;60.04.011(5), which suggests that the resulting improvements will be permanently affixed to or part of the realty. Second, lien claimants who furnish labor, materials, or professional services at the request of a person other than the owner of the property or the owner's construction agent (e.g., parties in the direct chain of contractual privity with the owner, including a general contractor or a subcontractor at any tier) are not entitled to a mechanic's lien. Finally, to claim a mechanic's lien, a contract for the labor, materials, or professional services must exist. All mechanic's lien claimants are required to record a notice of claim of lien against the property no later than 90 days after the last date the claimant furnished labor, services, material, or equipment (or the last date when labor-related employee benefit contributions were due). See RCW &sect;&nbsp;60.04.091. The claim of lien becomes void unless an action to foreclose it is commenced in superior court of the county in which the lienable work is furnished within eight calendar months of the date when the claim of lien is recorded. See RCW &sect;&nbsp;60.04.141. A construction lender can lose its priority over mechanics lien claimants under the “stop notice” statute. This statute applies to interim or construction financing where there is not a payment bond of at least fifty percent (50%) of the amount of the construction financing.&nbsp; See RCW &sect;&nbsp;60.04.221. If the “stop notice” statute applies, a potential lien claimant who does not receive a payment within 5 days of the date it is due may, within 35 days of the due date, serve a “stop notice” on the construction lender, the owner and, where appropriate, the prime contractor. RCW &sect; 60.04.221 provides for the elements of a proper “stop notice,” which includes a statement of the amount owed to the claimant and a demand for the construction lender to withhold the stated amount from its next advance. A lender who receives a properly served “stop notice” is obligated to withhold amounts only to the extent that sufficient construction funds remain un-disbursed from the loan, and only if the lender does in fact make another advance. If the lender complies with the stop notice and withholds the stated amount from its next advance, the claimant can look to those withheld funds for payment, either through a subsequent written agreement of the claimant, owner and prime contractor or by a court order directing the disposition of the withheld funds. If the lender fails to withhold the amount stated from its next advance, a properly served “stop notice” will subordinate the lender's mortgage to the claimant's mechanic's lien to the extent of the amount stated in the notice, plus entitle the claimant to costs and attorneys' fees.

MORTGAGE PRIORITY VS. MECHANICS LIENS

Effective December 16, 2021, the 2021 ALTA Owner's and Loan Policy (07-01-2021) are issued in Washington.

Forms Available to Lender

In commercial transactions, most, if not all, the ALTA endorsement forms are available to lenders, dependent on the type, character and features of the property being insured. Major title companies generally will not require a current survey to issue an ALTA 9.6 endorsement, but will, however, include an exception to the title policy for matters disclosed on a survey.

Endorsements Available

Condominiums, subdivisions, cooperatives and other types of common interest ownership communities created in Washington on or after July&nbsp;1, 2018, are covered by the Washington Uniform Common Interest Ownership Act (“WUCIOA”) (RCW &sect;&nbsp;64.90). WUCIOA is based on the Uniform Common Interest Ownership Act but contains a number of state-specific provisions. Condominiums created before July 1, 2018 but after July&nbsp;1, 1990, are covered by the Washington Condominium Act (“WCA”) (RCW &sect;&nbsp;64.34). Earlier condominiums are governed by the Horizontal Property Regimes Act (“HPRA”) (RCW &sect;&nbsp;64.32). Subdivisions created in Washington before July 1, 2018, or otherwise exempt from WUCIOA, are subject to the Homeowners Association Act (RCW &sect; 64.38) and the Land Development Act (RCW &sect;&nbsp;58.19) but are otherwise only governed by the common law. Neither WUCIOA, the WCA, the HPRA, nor the Homeowners Association Act apply to real estate located outside of Washington. The Land Development Act applies to any sale of real estate to a Washington resident. The sale and marketing of timeshare condominiums is regulated by the Timeshare Act (RCW &sect;&nbsp;64.36). While the Washington Uniform Common Interest Ownership Act applies a uniform set of regulations to condominiums, housing cooperatives, subdivisions and other common interest ownership communities, not all provisions of the law apply equally to all types of common interest ownership communities. Certain provisions of WUCIOA also apply to WCA and HPRA communities. See RCW &sect;&nbsp;64.90.080. Certain provisions of the WCA apply to HPRA communities See RCW &sect;&nbsp;64.34.010. If dealing with an older community, it is important to check the applicability of the subsequent statutes. WUCIOA requires a public offering statement for initial sales of residential units or lots (RCW &sect;64.90.605), and resale certificates on subsequent sales of units or lots (RCW &sect; 64.90.640). The WCA has similar requirements. Under WUCIOA, the association's assessment lien has priority over prior recorded unit mortgages for up to six months of assessments plus costs and attorneys fees related to foreclosure. The assessments do not include amounts for capital improvements. The costs and attorneys fees must be incurred after giving a statutory notice to the lender and may not exceed the greater of $2,000 or the amount of the unpaid assessments. This super-priority is eliminated if the association forecloses its lien non-judicially. See RCW &sect;&nbsp;64.90.485. Slightly different requirements apply to cooperatives. The HPRA provides that the association's assessment lien is subordinate to all sums unpaid under mortgages of record. RCW &sect; 64.32.200. However, that provision was superseded by the WCA. See RCW &sect; 64.34.010.&nbsp; Under the WCA, the association's assessment lien has priority over prior recorded unit mortgages for up to six months of assessments. This super-priority is reduced to three months if the mortgage lender has delivered a written request to receive notice of delinquent assessments, or if the association forecloses its lien non-judicially. See RCW &sect;&nbsp;64.34.364. Title companies in Washington issue an ALTA Modified Form 4 condominium endorsement, which takes into account this qualified priority of mortgage lenders under Washington law. WUCIOA and the WCA impose mandatory, statutory implied warranties on any declarant or dealer (certain sellers of multiple units) who sells residential condominium units. The implied warranties only apply to the sale of residential condominium units. They do not apply to the sale of non-residential condominium units or the sale of units or lots in non-condominium common interest ownership communities. The implied warranties under WUCIOA are generally that the units and common elements are fit for their intended purpose, and that any improvements constructed by the declarant or dealer are free from defective materials, constructed in accordance with generally accepted engineering and construction practices (including applicable codes) and constructed in a workmanlike matter. Alleged defects must have an “adverse effect”. See RCW &sect; 64.90.670. The implied warranties under the WCA are generally that the units and common elements are fit for their intended purpose, and that any improvements constructed by the declarant or dealer are free from defective materials, constructed in accordance with all laws then applicable to such improvements, and constructed in a workmanlike matter. Alleged defects must have an “adverse effect”. See RCW &sect;&nbsp;64.34.445.

CONDOMINIUMS AND OTHER COMMON INTEREST COMMUNITIES

. Where the mortgage or deed of trust includes a grant of a security interest, customary practice is to provide that the mortgage or deed of trust constitute a fixture filing with regard to goods that have become so related to particular real property that an interest in them arises under real property law. This includes referencing “fixture filing” in the title of a mortgage or deed of trust and complying with the requirements of RCW &sect;62A.9A.502(b).&nbsp; Including the fixture filing in the record of mortgage will afford the same priority for fixtures as that instrument provides for the land and other improvements. RCW &sect;62A.9A.502(c) establishes a dual “fixture filing” system to perfect security interests in fixtures -- either a special form of UCC-1 or the deed of trust (or mortgage) may be filed with the real estate records. Mortgages or deeds of trust that secure construction loans should include the words “Construction Deed of Trust” or “Construction Mortgage” in order to take full advantage of the lender's priority over purchase money security interests in fixtures pursuant to RCW &sect; 62A.9A.334(h).

PRIORITY AS TO REMOVABLE FIXTURES

In Washington, manufactured homes are considered personal property (vehicles) unless and until a purchaser of the manufactured home affixes it to land owned by the purchaser, and makes application to the Department of Licensing for elimination of the vehicle title to the mobile home. See RCW &sect;&nbsp;65.20. Once the Department of Licensing eliminates the vehicle title, the manufactured home is no longer personal property but rather is part of the real estate to which it is affixed. Confirmation by the title company that this process has taken place allows it to issue the ALTA Form 7 endorsement and insure a lender that the manufactured home is encumbered by a real estate mortgage or deed of trust.

MANUFACTURED HOUSING

Reverse mortgage lending and brokerage is comprehensively regulated through a series of statutes RCW &sect;&sect;&nbsp;31.04.500-31.04.540, referred to as the Washington State Reverse Mortgage Act, which is enforced by Washington's Department of Financial Institutions and its regulations: WAC &sect;&sect; 208-620-800 through 208-620-850. For reverse mortgage foreclosures, RCW &sect;&nbsp;61.12.180 was enacted in 2018 and adds an overlay of protection and process for any legal action to foreclose a reverse mortgage on a residential real property, which is defined under that statute as single-family, a 2-to-4-unit owner-occupied dwelling, a residential condominium unit, a manufactured home, or a residential cooperative unit. Failure to comply with the requirements of this statute is a per se consumer protection act violation under RCW &sect;&nbsp;19.86.

Washington

Mortgage Law Summary

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Mortgage Law Summary for Washington

Washington

Mortgage Law Summary

Continue reading theMortgage Law Summary for Washington

Continue reading the
Mortgage Law Summary for Washington