United States: Don't Get Smoked In Your Next Commercial Marijuana Lease

Last Updated: March 7 2018
Article by Tori Campbell and Gregg M. Dorman

Twenty nine states plus the District of Columbia have legalized medical marijuana and eight of these states plus D.C. have legalized recreational marijuana.  Additional states are considering some form of legalized marijuana use.  This has created a new and growing demand for leasing industrial, agricultural and retail properties for growing, manufacturing and dispensing cannabis.  Given this growing demand for real estate, it is important to reflect on how many boilerplate provisions in commercial leases are not suited to covering a use that continuously puts state law at odds with federal law.

Despite the ground swell of support for the legalization of recreational marijuana coming from state governments, the federal government remains antagonistic and recent statements from Attorney General Jeff Sessions suggest the possibility of increased enforcement of federal laws prohibiting the production, distribution, sale, purchase and/or possession of marijuana.  Three days after California's legalization of recreational law went into effect, the Attorney General rescinded the "Cole Memo," which had directed U.S. attorneys not to use limited federal resources to prosecute violations of marijuana laws, and it remains to be seen how the federal government will proceed in enforcing the Controlled Substances Act with respect to the producers and distributors of medical and recreational marijuana.  With that in mind, below are several boilerplate provisions that deserve, if not require, a fresh look in commercial marijuana business leases.

  • Governmental Compliance. It is common in commercial leases to have tenants covenant that they will comply with all applicable federal, state, county, municipal and other governmental statutes, laws, ordinances and regulations.  The possession, production, distribution, sale, purchase and possession of marijuana remains a federal crime, so a tenant would be in automatic default under a typical commercial lease for non-compliance with federal law if this covenant is not revised accordingly.

Further, the lease should address the contingency that the tenant may not be successful in obtaining the necessary permits and licenses for operating a marijuana business.  As a condition precedent to tenant and landlord's obligations under the lease, the lease should require that tenant obtain all necessary governmental licenses and permits for the operation of the tenant's specific marijuana business.  If the tenant is not successful in its application, both parties should have the option to terminate the lease, and the landlord may want to seek liquidated damages to compensate for any costs incurred by the landlord in connection with the transaction.

  • Early Termination. As with any lease for property used for an industry of questionable or conflicting legality, what both parties understand to be a legally enforceable contract for a legally permitted use may not be enforceable in two years, six months or tomorrow.  Beyond the early termination right relating to the a tenant's permit contingency,  landlords and tenants should consider drafting other early termination rights into the commercial marijuana lease.  For example, the parties should be able to terminate the lease if there is a judgment entered by a court having jurisdiction over the premises that the use of the premises constitutes a public or private nuisance or if there is a change in applicable state or federal law that would materially limit the ability of the tenant to conduct its business on the premises or subject the landlord to unreasonable risk of forfeiture of the premises.
  • Common Area Maintenance and Utility Costs. Businesses producing and/or selling marijuana often incur increased utility and security costs due to the energy- and water-intensive nature of producing marijuana and the strict regulations required by licensing agencies.  A commercial marijuana lease should address the equitable allocation of these costs, especially in multi-tenant buildings.
  • Prohibited Use and Nuisance Provisions. Another common provision in commercial leases is a prohibition on uses that constitute a nuisance for neighboring tenants or property owners.  Generally, leases will include prohibitions on uses that emit an offensive or obnoxious odor, fume, dust, vapor, noise or sound that can be heard or smelled outside the premises, but in other commercial leases, there can be more specific use restrictions for certain types of businesses, for example, liquor stores.   A landlord will need to make sure that permitting marijuana production or sale uses will not violate any of the landlord's other leases for neighboring properties or any documents recorded against the premises, and a tenant will want to make sure that any nuisance provision in its lease contains a carve-out for the operation of a marijuana production facility and/or dispensary.
  • Rent Payments. Retail leases often include a "percentage rent" provision through which the landlord receives a percentage of the tenant's gross sales above a certain threshold in addition to base rent.  Landlord may want to avoid this arrangement, since it may subject them to scrutiny by the applicable governmental agency licensing the marijuana business.  If the landlord is deemed to be receiving some portion of the profits from the marijuana business as rent, the agency may require certain disclosures from the landlord, since the agency could take the position that the landlord is receiving the benefits of an owner of the marijuana business.
  • Insurance. As part of the boilerplate language, commercial leases often require tenants to maintain property insurance for the replacement of tenants' personal property, including inventory.  Not all insurers, however, would cover the loss of marijuana inventory.  Since marijuana is illegal under federal law, commercial leases for a marijuana businesses should contain an alternate insurance provision to control for a potential denial of coverage.  The insurance provision could be revised to allow the tenant to self-insure or to require the tenant to obtain supplemental insurance through marijuana industry-specific insurance companies to cover any property the primary insurer won't cover.  At the minimum, a tenant should be deemed to self-insure and must waive all claims against the landlord for loss or damage to its personal property, including inventory, that will apply if any portion of the tenant's personal property is destroyed by casualty.  In any event, the tenant should be required to disclose to the insurance company that it is a marijuana business.
  • Arbitration. Of further concern, given the increasingly national nature of legal marijuana production and distribution, is the potential for any dispute over a commercial marijuana lease to be removed to federal court, in which case the entire contract could be held unenforceable under federal law.  A commercial marijuana lease should address this concern by providing for mandatory arbitration or, in the alternative, designating the state court in the state where the premises are located (and the use legal) as the mutually agreed upon and exclusive venue.
  • Considerations Beyond the Lease. Outside of the lease itself, a landlord will also want to consider whether leasing space to a marijuana business violates the terms of any existing security instrument affecting the property, and how a marijuana business lease may affect the landlord's future ability to get financing secured by the premises.  There is also the risk that the premises could be subject to civil forfeiture if federal prosecutors can establish a "substantial connection" between the premises and a federal crime.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Tori Campbell
Similar Articles
Relevancy Powered by MondaqAI
Farella Braun & Martel
McLane Middleton, Professional Association
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Farella Braun & Martel
McLane Middleton, Professional Association
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions