RE; COMMERCIAL LEASES – CANNABIS OPERATIONS

I receive calls every month by landlords wanting to know the risks associated with leasing to a tenant in the business of cultivation, production, and/or distribution of cannabis.

Cannabis businesses must obtain both (1) a California permit and (2) a city/county license to operate. Not all cities/counties allow cannabis business to operate in their cities/counties. In those cases, leasing to a cannabis operation would be unlawful from the start.

It is important for every landlord to understand that even if the tenant complies with all state and local laws regarding cannabis, it still violates federal law. Federal law prohibits a landlord from “knowingly leasing property for the purpose of making, distributing or using any controlling drug.” See 21 USC section 881(a)(7).

This means that landlord’s property could be seized by the federal government at any time even though the tenant’s use complies with California cannabis law. California law is in direct conflict with federal law.

Commercial Leasing.

If a landlord understands the risk that his property may be seized by the federal government, and wants to proceed to lease to a cannabis tenant anyways, then landlords should consider the following points in negotiating a cannabis lease.

1. Commencement Date. Since California will not issue a license to any cannabis tenant without a signed lease, it is important to condition any lease agreement on the tenant obtaining necessary state permits and local licenses for its cannabis business. Since this process can take several months, landlord will want to negotiate some amount of monthly rent during this contingency period. This means that the tenant will be paying rent prior to actually receiving permits and licenses required for its cannabis operation.
2. Early Termination Rights. The lease should require tenant to provide copies of valid
permits and licenses for tenant’s cannabis operation. The lease should require tenant to forward any notices, violations of cease and desist letters from any federal, state or local government affecting tenant’s cannabis operation. The lease should provide that landlord has a right to early termination if the tenant is no longer in compliance with state, local or municipal laws necessary for tenant to lawfully operate a cannabis business. This would allow landlord to terminate the lease if tenant’s cannabis operation becomes unlawful at any point during the term of the lease.
3. Operating Expenses. Cannabis operations usually result in excessive electricity and water usage, as well as increased insurance premiums for the landlord. It is critical to make tenant exclusively responsible for all utilities in addition to increased insurance premium due to tenant’s cannabis operation. If the tenant’s business is operated from a multi-tenant building, then additional risks relate to other tenants at the project.
4. Compliance with All Laws. The lease should include a provision placing the burden solely on the tenant to comply with all federal, state and local laws, including zoning and landlord use ordinances existing at the time of lease commencement or become effective thereafter. Landlord should have early termination rights if tenant breaches this provision.

These are just a few of the concerns for landlords leasing to any cannabis operator. The take home message is that landlord’s property is always at risk of seizure by the federal government when leasing to a cannabis operator, even if the operator is 100% compliant with state law.

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