Arizona case could point way on enforcement of commercial leases for medical marijuana dispensaries

by Thompson Coburn LLP

Thompson Coburn LLP

Just across the California-Arizona border, there’s an appellate case worth paying attention to, because it could signal whether California courts will hold that a commercial lease to operate a medical marijuana dispensary is void from its inception.

Green Cross Medical, Inc. v. Gally (April 18, 2017) was a case of first impression in Arizona, highlighting how new case law is in this area.

Gally is the owner of commercial property in Winslow, Arizona (see, The Eagles, “Take It Easy”). He entered into a lease with Green Cross to allow Green Cross to operate a medical marijuana dispensary. Less than two weeks after entering into the lease, landlord Gally’s lawyer sent a letter, revoking the lease. After initial skirmishes, the landlord argued that he was entitled to judgment as a matter of law because the lease was illegal and, therefore, unenforceable. The trial court entered judgment in favor of landlord Gally, holding that the lease violated both federal and state law, and was therefore void for illegality.

On appeal, the Court set forth: “The issue presented is whether a contract for the lease of real property to a party applying to operate a medical marijuana dispensary is void for illegality.” First, the Court held that the lease was not illegal under Arizona law. The Court held that the Arizona Medical Marijuana Act (“AMMA”) protects the rights of dispensaries to enter into leases as long as they are in compliance with the AMMA. The AMMA provides, in part, that a registered dispensary is

not subject to prosecution ... and may not be denied any right or privilege ... by a court or ... entity, for acting pursuant to [the AMMA] and department regulations to acquire, possess, cultivate, manufacture, deliver, transfer, ... sell or dispense marijuana or related supplies ... to ... qualifying patients [or] ... designated caregivers.

The Court of Appeal held that a trial court may not void or refuse to enforce a dispensary’s lease with a landlord “simply because the dispensary would be supplying marijuana in compliance with the AMMA.” The Court, rejecting other arguments by the landlord under the AMMA, concluded:

We emphasize that nothing in the AMMA requires a landlord to rent a property to a proposed dispensary. Gally was free not to enter into the lease if he was uncomfortable with the proposed use of the Property. But once he chose to do so, he was not free to rescind his contractual commitments without facing potential monetary liability. Accordingly, leasing property to a medical marijuana dispensary that is in compliance with the AMMA is not illegal under Arizona law.  

The Court then went on to discuss whether the lease could be enforced in view of the federal law. The Court recognized that the sale and use of marijuana for medical purposes is illegal under the federal Controlled Substances Act (“CSA”). However, “balancing the federal government’s interest in enforcing the CSA with Arizona’s interest in effectuating the AMMA leads us to conclude that the contract action seeking damages is not barred simply because the lease would violate the CSA.” 

In explaining its balancing of the interests, the Court explained that the federal policy of enforcement has been “in flux for years,” that the Department of Justice (“DOJ”) had instructed U.S. Attorneys not to prosecute persons acting in compliance with state medical marijuana laws, and that Congress had barred the DOJ from using funding to prosecute people using or distributing medical marijuana in compliance with state laws.

In a footnote, the Court recognized that the ban on using federal funds to enforce prohibitions against medical marijuana “might not survive into the next Congressional term. However, we cannot predict the future and must apply the law as it exists at the time we render our decision.” 

In the end, in view of the current enforcement policy of the federal government, the Court of Appeal held that the lease was enforceable, at least for purposes of a damages lawsuit for its breach.

We have not yet seen a similar case in California. However, California does have a similar statute regarding its medical marijuana laws. Specifically, Section 19317 of the Business & Professions Code provides:

(a) The actions of a licensee, its employees, and its agents that are (1) permitted pursuant to both a state license and a license or permit issued by the local jurisdiction following the requirements of the applicable local ordinances, and (2) conducted in accordance with the requirements of this chapter and regulations adopted pursuant to this chapter, are not unlawful under state law and shall not be an offense subject to arrest, prosecution, or other sanction under state law, or be subject to a civil fine or be a basis for seizure or forfeiture of assets under state law.

(b) The actions of a person who, in good faith, allows his or her property to be used by a licensee, its employees, and its agents, as permitted pursuant to both a state license and a local license or permit following the requirements of the applicable local ordinances, are not unlawful under state law and shall not be an offense subject to arrest, prosecution, or other sanction under state law, or be subject to a civil fine or be a basis for seizure or forfeiture of assets under state law. 

We will keep you advised of California court decisions regarding the intersection of commercial real property and marijuana as this area of the law develops.

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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