On June 10, 2019, Texas Governor Greg Abbott signed House Bill 1325 (HB1325) into law. HB 1325 authorizes the production, manufacture, inspection and retail sale of hemp crops and products, including cannabidiol (CBD), in Texas, subject to statutory and forthcoming regulatory requirements, a small sampling of which are discussed in this article.
So, Pot Is Now Legalized in Texas, Right? Wrong!
HB 1325 adopted the federal 2018 Farm Bill’s definition of hemp:
Plant Cannabis sativa L. and any part of that plant, including . . . cannabinoids . . . with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.
Although hemp and marijuana are both strains of cannabis, both Texas and federal law require that legal hemp can only have a concentration of 0.3 percent or less of tetrahydrocannabinol (THC). Under federal and Texas law, legal hemp is now carved out of the definitions of marijuana, an illegal controlled substance.
But marijuana remains an illegal controlled substance under federal and Texas state law, with some extremely limited medical exceptions in Texas under the Texas Compassionate Use Act. Marijuana for adult recreational use is now legal in at least 11 states and Washington, D.C. At least 33 states have legalized medical marijuana in some form.
THC vs. CBD: What’s the Difference?
THC and CBD are both cannabinoids found in cannabis. A cannabinoid is a naturally occurring compound that reacts with cannabinoid receptors found in our nervous system that are part of our endocannabinoid system, involved in appetite, mood, and sensing pain.
THC is a psychoactive cannabinoid in marijuana that produces a “high.” CBD is a non-psychoactive cannabinoid and may have some health benefits, but more studies are needed to establish these benefits.
A consumable hemp product in Texas is a food, drug, device, or cosmetic that contains industrial hemp or hemp-derived cannabinoids, such as CBD, and must not contain more than 0.3 percent THC concentration to be legal. Retailers of consumable hemp products, including CBD, will need to be registered in accordance with Texas law, and comply with all adopted rules and regulations. The Texas Department of State Health Services (DSHS) has not yet adopted its rules for consumables, including for registration. DSHS will also be implementing a random testing program to ensure compliance. Retailers may currently possess, transport or sell a consumable hemp product that becomes part of their inventory before DSHS adopts its registration rules and requirements.
Keep in mind that the FDA has a different stance on CBD in food products, determining that it is a prohibited act to introduce or deliver for introduction into interstate commerce any food to which THC or CBD has been added.
HB 1325 establishes a framework for a hemp growing program in Texas, pursuant to the 2018 Farm Bill, which authorizes states to develop plans for the commercial production of hemp. The Texas Department of Agriculture (TDA) is developing such plan for Texas for federal approval by the USDA. Until the plan is developed and approved and the permit and licensing program is adopted, growing hemp remains illegal in Texas. The TDA anticipates launching the permit application and licensing process for hemp growing sometime in 2020.
Legal, Contractual & Real Estate Considerations
You or your clients may be thinking of jumping into the industry or you or your clients may already be conducting business with hemp partners. Below are just a few of the myriad hemp- and CBD-related legal and contractual concerns that should be considered:
- Products. Is it legal hemp? No more than 0.3 percent THC concentration?
- Permits/Licenses. How do you know if your business counterparts in the industry are properly licensed? Are they contractually obligated to verify legal status to you, including by providing permitting and/or licensing verification upon request?
- Testing. How do you know its legal hemp? Who is testing and how? What does your contract say about testing? Can you access test results and prove test reliability if authorities ask?
- Advertising. How far is product marketing going? Is it misleading?
Potential legal considerations for real estate are abundant and complex. CBD stores are popping up everywhere—in Texas and elsewhere. Landlords and tenants need to understand all state and local requirements for legal operations, including state permitting and licensing requirements, as well as any applicable local zoning laws and ordinances.
Landlords should have lease terms ensuring tenant compliance with all state and federal laws, including hemp and CBD regulations and licensing and registration requirements, and landlords should work to verify legal status of their CBD- and hemp-industry tenants. Landlords will want to also ensure that they have escape-hatch termination rights built into their leases in the event a tenant is not in legal compliance, including providing for any future changes in the law. Tenants should check their leases and confirm they meet all contractual and statutory or regulatory requirements to protect their retail investments and operations.
On the flipside, landlords need to likewise ensure their property investments remain protected upon leasing to CBD and hemp businesses or, for that matter, any legal cannabis business, including working carefully with their insurers and lenders to address, on the front end, any coverage exemptions or loan default provisions that could potentially be implicated.
Landlords, and tenants, should also check any applicable covenants that may restrict property use in relation to CBD/hemp or legal cannabis. Landlords and tenants also need to consider any heightened security risks for the premises related to on-site product, or cash, that may be targeted by criminals.
The potential of the hemp industry in Texas is exciting. The CBD market alone is expected to hit $20 billion by 2024 in the United States. With the passage and implementation of HB 1325, Texas, and other states legalizing hemp, are poised to have their share of that market and more.
Karen L. Hart is a partner at Bell Nunnally & Martin LLP based in Dallas, Texas.
This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice.
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