West Coast Real Estate Update - May 2017 - #2

by Holland & Knight LLP
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Federal Court Upholds Termination of Navy Lease Bid Due to Environmental Concerns

In Open Spirit, LLC v. United States, No. 15-370C (Fed. Cl. filed April 28, 2017), the U.S. Court of Federal Claims upheld the cancellation of a bid process for a lease of federal property shortly before the contract was to be awarded. In May 2014, the U.S. Department of the Navy issued an open solicitation for bids from companies that wished to lease approximately 100,000 square feet in a building on Naval Base Point Loma in San Diego. A source selection evaluation board eventually recommended the lease be awarded to Open Spirit LLC. However, shortly before the lease was due to be awarded, the Navy canceled the bid process.

Open Spirit filed suit, alleging that the Navy improperly cancelled the bid process so that it could continue to lease the property to Lockheed Martin, which had been the tenant since 1994. The court disagreed, finding that environmental concerns — and accompanying health and legal concerns — justified cancellation of the bid process.

At the outset of the bid process, the Navy warned bidders about the presence of the volatile organic compound trichloroethylene, or TCE, in the building. During the bid process, the regional authority of the U.S. Environmental Protection Agency effectively reduced by half the recommended permissible level for workplace exposure to airborne TCE, and also a broken water main on the property caused flooding that excavated contaminated soil. At that point, a Navy environmental group recommended several changes to the lease to mitigate concerns over health and legal risks associated with TCE contamination, but with the changes coming so late in the bid process, the Navy decided to cancel the bid process altogether. Subsequent testing resulted in the Navy vacating the building, taking remedial measures and indicating that it no longer intends to lease out the space at all.

Arizona Case Could Set Precedent for Enforceability of Leases Involving Marijuana-Related Businesses

In Green Cross Medical, Inc. v. Gally, No. 1 CA-CV 16-0019 (Ariz. Ct. App. April 18, 2017), the Arizona Court of Appeals upheld the enforceability of a lease to a medical marijuana dispensary. The case was one of first impression for the court, showing the relatively nascent nature of the medical marijuana business and how many courts have yet to address its concomitant legal issues.

The case involves a lease that allowed Green Cross Medical Inc. (Green Cross) to operate a medical marijuana dispensary on property owned by John Gally. Less than two weeks after the lease was signed, Green Cross received a letter from Gally's attorney that informed the company that the lease was revoked. Green Cross sued for breach of contract, and the trial court found in favor of Gally, holding that the lease violated both federal and state law and was therefore unenforceable. However, the appellate court found that the Arizona Medical Marijuana Act (AMMA) protects the rights of dispensaries to enter into commercial leases so long as they are in compliance with other provisions of AMMA.

On the question of whether the lease violated federal law, the court noted that the sale and use of marijuana for medical purposes is illegal under the federal Controlled Substances Act (CSA). However, the court balanced the federal government's interest in enforcing the CSA with Arizona's interest in effectuating AMMA, holding that the lease was not automatically unenforceable simply because it violated the CSA. The court relied upon the federal government's policy of not enforcing federal marijuana-related laws against those who comply with state medical marijuana laws.

Section 19317 of the California Business and Professions Code is similar to AMMA. Accordingly, California courts could be persuaded by this case to uphold similar leases for medical marijuana dispensaries in California.

Beverly Hills Set to Enforce Recent Rent Stabilization Measures

The words "Beverly Hills" may conjure up images of mega-mansions, but not every property in the California city is a 10,000-plus-square-foot homage to manicured lawns, marble floors and 15-seat private screening rooms. There are more than 1,130 rental properties in Beverly Hills, and in January 2017, the Beverly Hills City Council unanimously voted to enact rent protections for tenants in those properties. The ordinance limits annual rent increases to 3 percent and requires landlords to provide tenants monetary relocation assistance for "no-cause" evictions, including special compensation for tenants who are disabled or live with tenants who are over age 62 or under age 18. Similar rent controls exist nearby in Los Angeles, West Hollywood and Santa Monica.

Recently, the Beverly Hills City Council approved $250,000 to implement the ordinance enacted earlier in the year. In addition to enforcing the provisions of the ordinance, the funds will be used to create a registry of all rental properties in the city, enabling enforcement officials to track the conditions and compliance of the properties.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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