By Jana Weltzin
Given the conflict between state and federal law, marijuana-related business owners face a unique challenge obtaining real property leaseholds. Cannabis-friendly landlords are in a predicament.
They are torn between their motivation to do business with the cannabis industry and the risk of civil forfeiture, if the Feds were to enforce the Controlled Substances Act.
This balancing act leads to one of two conclusions by a landlord. They either determine the risk is too great and opt to not engage in any business with cannabis entrepreneurs, or they calculate the risk into the cost per square foot of space and charge a substantial premium.
The Cole memorandums, particularly the one released in August 2013, has given some comfort to land owners and has increased their willingness to lease to businesses in the cannabis space.
Obtaining a property to cultivate or dispense from is essential for success, and the difficulties of obtaining the right to use said property places the bargaining power in the hands of the landlords. Unfortunately, landlords, as of right now, have what the industry wants — land to operate from. Therefore, a marijuana business will likely not have the bargaining power a non-cannabis business would have, and is at risk for being subjected to less than favorable terms. It is important for business owners in the cannabis space to understand the demand and respect the risk the landlord is taking by renting to a cannabis-related business. But, the canna-business should fight against terms that are so unfair and unreasonable that such leasehold would have a material adverse interest on their business model and operation. Both parties should hire representation well versed in federal law, state law and the Cole priorities to negotiate the lease. At a minimum, those in the cannabis industry should be familiar with certain key terms of commercial leasing to ensure some level of protection for the business.
The Cole priorities make it clear that the best way to avoid federal intervention is to comply in full with state law. All commercial real estate leases have a “permitted use” clause, which contains the description of how the property may be used. Cannabis-related businesses may feel the urge to be vague about their activities, and maybe even misleading. However, misleading statements could likely work against a business owner in this provision. The language should clearly indicate what will be taking place on the property. If the space is going to be used to cultivate cannabis, then that is exactly what should be spelled out, even if the landlord objects or tries to make the language vague as to the use. If the permitted use is not clear and unambiguous, and the cannabis use is not specifically stated, the business could be found as violating the terms of the lease.
One helpful clause to include in a cannabis-related lease is “force majeure.” This clause refers to events that are totally out of control of either parties, when the event affects either party’s performance under the lease. This clause provides a bit of breathing room to perform duties under identified time frames, which may be impossible or delayed due to the unpredictable event. This clause is specifically useful to commercial leases for cannabis businesses as state law is often rapidly changing without notice and local zoning and/or permitting requirements may affect the eligibility of the property to be used as a cannabis establishment. When properly drafted, including this clause in the commercial lease can give the canna-business the time to obtain permits/zoning approvals without breach of the lease.
Clauses that specify the venue and applicable law that governs the lease are advisable as well. Including a provision that specifically restricts interpretation of the lease and adjudication of the lease to be limited only to current state law and not federal law can help avoid the lease being held as void against public policy or as contrary to existing law. The lease should also address what happens in the event of federal intervention. The fairest and cleanest way to handle this situation is to include in the lease the agreement that the landlord and tenant may cancel the lease, without penalties on either side or further obligations, in the event the federal government intervenes. This is essentially a “walk away” clause, where each party agrees to cancel the lease and terminate the tenant/landlord relationship.
The major takeaway is simple — boilerplate commercial leasing terms simply will not adequately protect either the landlord or the cannabis business. Take the time and invest the money and hire the right professional to negotiate and create a commercial lease that is applicable and tailored to the cannabis industry and the real property. Otherwise, you will likely end up with a governing lease, with terms that are too inflexible to be fairly applied and may result in severe inequities.
Jana Weltzin is a member of Rose Law Group’s medical marijuana and zoning/land use departments. She advises clients in the cannabis industry in Arizona and Alaska. Rose Law Group assists its clients with business structure, compliance with state and local laws, zoning approval and use permits, site selection, and product regulations.