January 25, 2021 Articles

A Guide to Safeguarding the Cannabis Landlord-Tenant Relationship

Practical tips for lease due diligence and negotiations for cannabis uses

By Cassia R. Furman
A careful approach to the relationship with a cannabis tenant could prevent detrimental financial impacts, including litigation.

A careful approach to the relationship with a cannabis tenant could prevent detrimental financial impacts, including litigation.

Credit: stockstudioX

As cannabis legalization proliferates in states across the country, commercial landlords may find themselves weighing the risks and rewards of leasing to a cannabis tenant, turning to counsel to assist with due diligence and lease negotiations. With the COVID-19 pandemic impacting rent rolls moving into 2021, landlord interest in cannabis tenants may even increase, particularly as cannabis businesses have been widely designated as “essential businesses.” In most legal cannabis states, the complex web of local and state government controls, overlaid on federal prohibition, creates an environment of licensing scarcity augmented by limited real property in so-called green zones. Simply put, demand for cannabis licenses, particularly retail and cultivation locations, in most cases exceeds supply. Hastily conceived partnerships and ill-defined agreements are the norm.

In this environment, green zone property owners stand to benefit from renewed interest in underutilized commercial and industrial assets and the opportunity to collect above-market rents from cannabis tenants. Inevitably, however, the reward carries with it attendant higher risk. As witnesses over the years to the frequent unraveling of cannabis landlord-tenant relationships, including lease disputes and defaults, we advise both parties to take an informed, proactive approach to lease negotiations, with an eye to some unique aspects of the cannabis industry. A careful approach to forming the relationship with a cannabis tenant could prevent detrimental financial impacts, including litigation, to befall the landlord down the road.

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