June 13 and 14, 2017, marked the respective deadlines for public comment on California’s proposed medical cannabis manufacturing regulations and proposed regulations for medical cannabis cultivation (see more at the California Bureau of Medical Cannabis Regulation).

Although the proposed regulations are not law, they provide some guidance as to what landlords and tenants should be cognizant of when developing the premises and preparing the lease for cannabis operations.

The following highlighted items are intended to put landlords and tenants on notice of certain application and site regulations that affect the landlord-tenant relationship, so that they may modify their development and lease strategies to align with the regulations. The manufacturing and cultivation regulations will be discussed in conjunction unless stated otherwise.

Premises diagram

The license application submitted to the California Department of Public Health must include a diagram of the contiguous area that is owned or leased by the applicant where the cannabis activities will be conducted, known as the “premises”. §40100; §8000. The diagram shall include the bounds of the property and the proposed premises to be licensed, showing all dimensions, partitions, room, windows, and exclusive and shared entrances and exits. If the proposed premises consists of only a portion of a property, the diagram shall identify the remaining property use. §40128; §8300. Additionally, the regulations require certain security, construction and design standards. §40200; §40236.

Under the regulations, a landlord must only consent to the manufacturing or cultivation of cannabis on the property, not premises alterations. §40128; §8103. To help ensure a smooth application process, tenants should obtain diagram approval, including alterations to be constructed, from their landlord prior to submission. Additionally, the parties should agree to work with each other in reporting any diagram changes to the Department. §40178; §8114.

Multiple licenses under one roof

There are some ambiguities in the proposed manufacturing regulations regarding multiple licenses within the same building, but it appears that multiple licensees could operate under a single roof given that the premises diagram contemplates the possibility of a “portion” of the property being used by the licensee and the remaining portions being used by others. See §40128. Landlords should proceed with caution prior to allowing multiple manufacturing licensees upon the property before the ambiguities of the foregoing provision are resolved.

The cultivation regulations expressly permit multiple licensees and license types to be located on the same property if each licensed premises has a unique entrance and immovable physical barriers between uniquely licensed premises. §8206. If landlords desire to have multiple licensees on the property, they must be willing to modify the property to meet the foregoing requirements.

Subleasing and license transfer restrictions

The manufacturing regulations are clear that only one licensee shall occupy the premises and the licensee may not sublet. §40100; §40175. Although subletting is not permitted under the manufacturing regulations, change in license ownership is upon approval of a “material change request”. §40178. Therefore, it would be advantageous for a tenant if a change in ownership were not considered an assignment requiring landlord consent. A material change request is not available for a relocation of the manufacturing premises. §40125; §40178. In other words, eviction can be detrimental to the tenant’s business—if forced to relocate, a new application must be submitted.

Like the manufacturing regulations, only one licensee may occupy a cultivation premises and a new application must be submitted for every new location. §8000; §8202. The cultivation regulations do not directly address subleasing, but subleasing is likely not available, as the premises may only be occupied by the licensee. See §8000. Unlike the manufacturing regulations, if a cultivator wishes to transfer its license, by change of ownership or otherwise, a new application must be submitted. §8113. Tenants should take care prior to any transfer of licensure ownership as well as requesting landlord consent for any contemplated sublease.

The above list discusses only a few aspects to consider prior to and during property development and lease negotiation, especially those concerning approval power of the landlord. Leases should be reviewed in conjunction with the proposed regulations to set up for possible scenarios.