February 28, 2019 Practice Points

A Quick Guide to Leasing to a Marijuana-Related Business

It is important for both parties to be represented by counsel well versed in local, state and federal laws for the parties to have a successful long-term relationship.

By Stanley S. Jutkowitz

"Marijuana is a very dangerous drug. Some people smoke it just once and go directly into politics."
Barry Crimmins

Marijuana is now legal in 33 states and the District of Columbia. As a result, this means that a growing number of commercial property owners will be faced with the question of whether to lease space to a marijuana business that “touches the plant,” referred to in this article as a marijuana-related business (MRB). Do you, or don’t you? This Practice Point will outline some of the considerations in making that decision, as well as issues that should be addressed in an MRB lease.

At the outset, it is important to recognize that under federal law, the use, possession, sale or processing of marijuana is illegal. Marijuana is a Schedule 1 substance under the Controlled Substances Act, 21 USC § 801 et seq. Another federal law known as the Crack House Statute, 21, USC § 856, makes it a felony to knowingly open, lease, rent, use or maintain any place for the purpose of manufacturing, distributing, or using any controlled substance. Still with me? Despite federal law, hundreds of property owners lease or operate property for the growing, processing and sale of marijuana.

Assuming a property owner is willing to proceed with an MRB tenant, a gating issue is whether there is a mortgage on the property securing bank or other institutional financing. If there is, the loan agreement will almost certainly have a clause that reads something like this: “borrower, the property, and its use will comply with all applicable laws, rules and regulations.” That should kill the deal, since an MRB violates federal law and very few, if any, banks are willing to allow a borrower to lease space to an MRB in violation of federal law. This also means that if a property owner leases to an MRB, it will likely be unable to obtain conventional financing on the property as long as that lease is in existence.

If a property owner does not have a mortgage on the property, however, and is still willing to lease to an MRB, there are still several issues to address.

  1. Banking and Payment of Rent. Does the MRB intend to pay rent in cash? If so, this may raise questions with the property owner’s bank. In fact, banks have been known to “fire” customers who have any connection to marijuana businesses, whether the customers, themselves, are in the business.
  2. Computation of Rent. Will the rent be fixed or, like many retail rents, percentage rent? If the latter, the landlord will be considered “in the business” and possibly more at risk to being “fired” by its bank or coming under greater federal scrutiny.
  3. Licensing Contingency. This is a question of local law. Does the prospective tenant have the necessary state or local license to operate its business? In many jurisdictions, an applicant for a marijuana business license must secure a location before applying for the license. Such a prospective tenant will want to secure a lease contingent on obtaining the license. An owner should be familiar with local and state laws to know how long a contingency is appropriate.
  4. Zoning. Will the MRB’s use of the property comply with zoning regulations? Given the sensitivity of the use, local jurisdictions often strictly regulate where dispensaries and other MRBs may be located. An owner must be certain that its property is within a zoning classification that allows MRBs.
  5. Inspection Rights. Leases typically allow a landlord the right to inspect the premises at any time. While this may be especially important in the case of an MRB tenant, a landlord’s access rights must be consistent with local cannabis laws. Local law may impose restrictions on third party access that are not typical for most commercial uses.
  6. Availability of Insurance. Both the property owner and the MRB tenant must consult with their insurance brokers before signing a lease to make sure that there is appropriate insurance available consistent with the lease and that the insurance companies are aware that the insurance is for a marijuana related business. While insurance for the marijuana industry is becoming more widely available, an insurance company may not hesitate to deny a claim based on the fact that the claim arises out of an illegal use and is therefore not covered by the insurance policy.
  7. Subleasing and Assignment of Lease. Many landlords will allow a tenant to sublease the premises or assign its lease, but only with the consent of the landlord “which consent will not be unreasonably withheld.” In the context of an MRB, what does not unreasonably withholding consent actually mean? Because this is such a new industry, the rules are still being written, so if a property owner enters into a lease with an MRB and is willing to allow subleasing or assignment, it should be very specific about the conditions pursuant to which it will do so.

These issues are only some of the issues both landlords and tenants must address in a lease involving an MRB. It is important for both parties to be represented by real estate counsel well versed in local, state and federal marijuana laws for the parties to have a successful long-term relationship.

Stanley S. Jutkowitz is senior counsel and head of cannabis practice with the Washington, D. C. office of Seyfarth Shaw LLP.


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