Real Estate

The Perils of Bad Cannabis Leases

cannabis lease

The landlord-tenant relationship is probably the most challenging relationship in the cannabis industry. We’ve seen a lot of deals go south over the years, and while partnership disputes are very common, landlord-tenant disputes are also frequent and in some cases are even more common than partnership disputes. There are a lot of factors at play that make cannabis leasing challenging for both landlords and tenants, which you can read about in my two prior posts below:

  1. Cannabis Leases: Eight Important Tenant Considerations
  2. Cannabis Leases: Six Important Landlord Considerations

Cannabis lease disputes are tough to avoid, even with a solid lease agreement. But they are all but guaranteed with a bad lease agreement or a lease agreement that does not adequately address common cannabis pitfalls that I discuss in those above articles. Unfortunately, it’s extremely common to encounter bad cannabis form lease agreements and landlords who won’t change them.

I want to be clear when writing this that references to form agreements does not necessarily mean that any form lease is bad. There are many form commercial lease agreements that work well for cannabis leases with a few adjustments or addenda to address some of the cannabis-specific issues.

One of the most common issues we see is where landlords refuse to hire an attorney and draft leases from scratch themselves. We’ve seen everything from leases that are just a few pages long and contain hardly any of the terms necessary for a cannabis lease, to leases that are far too long and onerous with landlords who are concerned with cannabis tenants.

Given that most commercial landlords don’t understand the nuances of state and local cannabis laws, many landlord-prepared leases we’ve seen end up with provisions that may be inconsistent with state/local law or at least make compliance with it more challenging for tenants. For just one example, if a landlord tries to take a percentage of revenues as rent or tries to take any interest in underlying cannabis goods, that can raise a host of legal and regulatory issues that could even end up hurting the landlord.

We’ve also seen a lot of situations where landlords refuse to budge and negotiate on the terms of their forms at all, leading to serious potential issues from their tenants. Given the points above, this is always a concern. While many commercial landlords believe that property is theirs and that if tenants are coming to lease from them, the tenants will need to do so on their terms, cannabis leasing is not the same as any other commercial lease. Landlords need to be flexible in order to avoid regulatory issues.

Landlords also need to be less attached to forms for cannabis leasing to avoid non-regulatory issues that come up all the time in leasing situations. For example, if a landlord’s property is mortgaged and the lender has objections to leasing to a cannabis tenant, that could put the landlord in default under its mortgage and result in the lease falling apart (or worse).

Another good is example is changes of ownership of the tenant. This is a very common practice for cannabis businesses , and comprehensive leases will have provisions that clearly govern approval rights of a landlord and what information the landlord is entitled to from new owners. A five-page lease is all but guaranteed not to address this and lead to fighting between the landlord and tenant.

A comprehensive cannabis lease may cost more than one a landlord can pull out of another deal. However, it’s generally well worth the expense given the myriad issues and disputes that can arise from poorly drafted cannabis leases.