Commercial Leasing and the Cannabis Market

Obermayer Rebmann Maxwell & Hippel LLP

Obermayer Rebmann Maxwell & Hippel LLP

Currently, 38 states (including Pennsylvania and New Jersey) have legalized the use of marijuana for medical use and 19 states (including New Jersey) have legalized its use for recreational purposes.  However, under federal law, the sale, distribution, utilization, possession, and extraction of marijuana remain illegal.[1]  It is also illegal under federal law to lease real estate for the purpose of selling or manufacturing marijuana.  Despite such federal laws, property owners lease retail and industrial space for the extraction, processing, and sale of cannabis.

How can landlords adequately protect themselves when leasing such space to tenants in this legally grey territory? If a landlord feels that the benefits of leasing to a cannabis company outweigh the risks, at the very least, the lease agreement between the parties should contain certain critical provisions. One such provision is that the tenant must agree to comply with all applicable laws (except to the extent that federal law is inconsistent with state cannabis laws). Another important provision includes an early termination clause or a mandatory amendment to the lease should applicable governmental authorities change any lease requirement or legal action arises as a result of the use of the premises. A strong indemnification provision is an additional must to protect the landlord from any liability or claim resulting from the selling or manufacturing of marijuana products on the landlord’s property.

Other considerations to take into account are whether there is or will be financing on the property.  Since banks and other lenders are regulated by federal law, this issue alone would generally be a non-starter. Additionally, will a landlord’s bank find comfort in having its customer directly linked to a cannabis business?  It is not uncommon in the retail industry for a tenant to pay rent based upon a percentage of its income.  However, in this situation, percentage rent won’t work as the landlord would then be viewed as being involved in an illegal business which again, might be inconsistent with its bank’s policies.

From a tenant’s point of view, it is imperative to make the lease contingent upon certain factors such as zoning compliance and the ability to obtain a license to sell or manufacture marijuana.  Even if a tenant is able to obtain insurance for its business, will a claim be disapproved because it arises out of a use prohibited by federal law?

It is paramount to include cannabis-specific language in your lease agreement.  Both landlord and tenant should remain abreast of any changes in regulations to ensure continual compliance with state law.  The above examples of important lease clauses are not exhaustive. Anyone seeking to participate in this new market must be mindful that state and federal law conflict, the law is continually changing, and accordingly, standard lease terms and concepts must be revisited and reconsidered as the legal landscape develops.

[1] Under the Controlled Substances Act, 21 USC § 801 et seq., cannabis is an illegal substance.  A bill decriminalizing cannabis at the federal level cleared the House of Representatives in March of this year and is now before the Senate.  It is important to note the distinction between legalization which allows the use and sale of marijuana and decriminalization which lessons the penalties, if any, for possession of the substance.   Moreover, in July, three members of the Senate introduced another bill called the Cannabis Administration and Opportunity Act which seeks to legalize marijuana at the federal level, remove the control of cannabis from the Drug Enforcement Agency and allow the cannabis industry to operate without federal involvement. The benefit to the federal government if this bill gets passed would be a hefty federal tariff on all cannabis businesses.

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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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