Cannabis is on fire. And as more and more jurisdictions move to legalize marijuana for medical and/or recreational use, would-be players in the cannabis space are lining up to sign leases on commercial property from which they hope to operate. Which begs the question: do these cannabis-related leases require any unique terms given the nature of the business? The answer is a definitive yes.
A critical concern for any storefront retailer, including those operating a cannabis business, is the lease agreement. To be sure, given the unique circumstances presented in the pot biz—namely, the interplay of federal and state laws, banking and insurance industry aversion, and the relative unknowns presented by a new and burgeoning industry—leases for dispensaries and associated retail operations require special considerations. Here’s an overview.
Compliance with Law
Most commercial leases require tenants to comply with all federal, state and local laws. That’s a problem for players in the marijuana industry because the use, sale and possession of most cannabis products are illegal under federal law. That being said, real property leases entered into by cannabis businesses should specifically exclude the requirement that the tenant abide by all federal laws, including the Controlled Substances Act(21 U.S.C. § 811), whichrenders the medical and recreational use of cannabis illegal on the federal level.
By way of a use provision ordinarily present in a commercial lease, the tenant typically ensures that the landlord permits the intended use of the premises. In the case of a marijuana dispensary or similar enterprise, tenants would be wise to demand a lease provision stating that the landlord expressly acknowledges and authorizes the tenant’s cannabis-relateduse of the subject property.
A standard commercial lease often contains a cooperation clause that requires the landlord to cooperate with the tenant in furtherance of the tenant’s business. For instance, a tenant might need its landlord’s cooperation when performing construction work or obtaining licenses and permits. With that in mind, all tenants in the cannabis business should demand robust landlord cooperation provisions in their leases obligating the landlords to sign any documents and make necessary acknowledgments in furtherance of the tenants’ core operations. In fact, the cooperation clause should mandate that the landlord use diligent efforts and take cooperative action as soon as practicable upon a tenant’s request.
Because the state of the law as it pertains to marijuana is ever-evolving, the termination provision in any cannabis-centric commercial lease should allow for the right of the tenant to terminate early in the event of a change in the law or enforcement patterns, nuisance claims, or other occurrences that serve to disrupt or hinder the purpose of the lease. Bottom line: if a tenant is no longer allowed to operate in the cannabis business, it must have a means of relief from future payment obligations.
In some instances, a cannabis business is required to present an executed lease in order to qualify for a license to operate or obtain necessary financing. In such a circumstance, where the lease is signed as a pre-condition, the tenant should negotiate for a contingency provision allowing for early termination in the event it fails to obtain the license or financing contemplated when the lease was executed.
Commercial leases routinely contain provisions that require tenants to provide proof of specified types and levels of insurance. But there’s more. Those insurance requirements usually include thresholds regarding the perceived market quality of the insurer (for example, an “A-rated” insurer). Nevertheless, not all insurance companies issue policies to cannabis businesses. Consequently, such tenants should ensure that their lease agreements allow them to obtain coverage from any insurer willing and able to write the risk, regardless of rating.
What About the Landlord’s Perspective?
It’s no surprise that landlords will have their own set of priorities when negotiating key provisions in cannabis-related leases. First and foremost, tenants shouldn’t be surprised when they’re asked to pay a premium to lease commercial real estate. Many landlords still have reservations about the legal marijuana industry, and they may insist upon a greater income stream in exchange for any increased risk undertaken, perceived or otherwise. Also, it’s not unusual for a landlord to require an indemnification provision that is much stronger than is the norm in order to protect against such perceived risks or, alternatively, to require additional insurance coverage limits.
If you’re a prospective in the cannabis sector, no need to fear. Simply recognize the forgoing issues—understanding that this list of provisions above isn’t exhaustive—and approach commercial lease negotiations diligently. Of course, as with any legal transaction, it’s recommended that you first consult with experienced legal counsel.
Bryan Johnson is a partner at Michelman & Robinson, LLP, a national law firm with offices in Los Angeles, Orange County (California), San Francisco, Chicago and New York City. He is a commercial and real estate litigator and business transactional attorney who represents small and medium-sized companies in a range of industries, including cannabis. Bryan can be contacted at [email protected] or (312) 638-5671.
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