Marijuana Commercial Leaseholds: Any Resemblance to Regular Leaseholds is Purely Coincidental

Because of federal prohibition, canna-businesses know that obtaining commercial leaseholds can be extremely difficult. The Federal Controlled Substances Act puts landlords at risk of their property being forfeited if they are caught by the feds leasing to marijuana businesses. This risk means most commercial landlords will not take the chance of leasing to a marijuana business and those that do typically charge more than if they were leasing to any other sort of business. Still, because of the August 2013 Cole memo, and in states with heavily regulated cannabis regimes, landlords are becoming more willing to rent to marijuana businesses. More importantly for our clients, in states with marijuana regulatory programs, it’s almost always a requirement that marijuana businesses demonstrate to the state that they have a right to use their proposed real property as a marijuana facility.

Despite the challenges, getting a marijuana commercial leasehold is paramount. And, if you are fortunate enough to obtain that lease, you at minimum need to become familiar with the following lease provisions necessary to protect your marijuana business:

  • Permitted Use. Every lease contains a permitted use provision to govern the activities that can take place on the leased property. The permitted use should accurately and succinctly identify the types of activities you are allowed to undertake on the property. For example, if you are a retailer of marijuana, your permitted use should be something like “the retail sale of marijuana.”  If the permitted use is not clear, you run the risk of breaching the lease by conducting an activity not permitted on the property. In well-regulated marijuana states, you are generally going to be better off being upfront about your state-legal marijuana activities than in trying to obscure them with an ambiguous permitted use clause.
  • Defaults. Leaseholds essentially create codes of conduct between the parties in relation to the property. Defaults are those actions that constitute breaches of the lease (for example, the failure to pay rent on time). In a typical Commercial Broker’s Association lease, any illegal activity on the property constitutes a default. To navigate and surmount this kind of provision in states where marijuana is legal, landlords and tenants should both agree that the lease be upheld pursuant to only state and not federal law. In the marijuana industry, lease defaults should also cover (among other things) hours of operation, tenant’s treatment of its surrounding commercial neighbors, loitering, odor, the use of hazardous substances, the number of people permitted on the property, and compliance with any and all regulatory rules and the most recent Cole memo.
  • “Force Majeure.” When events happen over which neither party has any control, a typical lease will have what’s called a Force Majeure clause. That kind of clause relaxes certain provisions in the leasehold, giving both parties a “reasonable amount of time” to perform their duties under the lease which may have been delayed by the unpredictable event. In the marijuana industry, a good example of when a Force Majeure clause comes in handy is when local governments change their regulatory rules over zoning and/or permitting that may affect the eligibility of the property as a marijuana facility. In this scenario, the Force Majeure clause could give the landlord or the tenant the time to obtain the necessary permits without invalidating the leasehold.
  • Escape clauses. Federal prohibition complicates every leasehold. It has become a sort of trend with U.S. Attorneys that they issue cease and desist letters to marijuana landlords before trying to take the landlords’ property under applicable federal forfeiture laws. Of course, that “trend” can change depending on the U.S. Attorney, but the bottom line is that marijuana leaseholds should account for what happens to the lease and to the relationship between the parties in the event of federal intervention. Most often in that context, parties agree that the lease should be cancelled with both parties walking away without any further obligation to each other. Going a step further, conservative landlords will also address local and state intervention in their leases — if the tenant’s business becomes illegal under local and/or state law, certain duties and obligations will trigger for the tenant.

The above is not meant to be an exhaustive list regarding the main issues with cannabis leases. Whether you are a landlord or an aspiring tenant, there are many more issues you should address for any marijuana leasehold. Due to looming federal prohibition and the fluidity of marijuana regulatory schemes, the takeaway here is that using a standard lease agreement for a marijuana lease is not likely to end up well for either party.