Get 10 Protections When Leasing to a Marijuana Business

By Glenn S. Demby, Esq.

While it may be the most controversial business in America, growing and selling marijuana is legal in many states. Marijuana businesses have a popular product, lots of capital, and a need for commercial space. And they’re willing to pay premium rents. So if you have property in the right state, leasing to a legal and properly licensed marijuana business may deliver a handsome return. But it also carries big legal risks. Although legal risk is an inherent part of any commercial lease, marijuana businesses aren’t like your other tenants. Their businesses pose unique legal challenges that the standard commercial lease form you ask other tenants to sign doesn’t adequately address. Here’s how to tweak your lease so that it works for a marijuana tenant.  

Context: The Contradictory & Confusing Marijuana Laws

Is it even legal to lease to a marijuana business? Answer: Yes, sometimes . . . but not really. . . but actually, yes. . . The legal situation is incredibly complex. Here’s a quick rundown of the key legal facts owners need to understand if they’re thinking about getting into marijuana leasing. 

Fact 1: Marijuana is illegal in most states—but that’s changing fast.

Fact 2: Twenty-three states (and the District of Columbia) have laws allowing doctors to recommend and patients to use marijuana for specific medical conditions. In all but two of these states, licensed businesses can grow and sell the medical marijuana patients need. These businesses are your potential tenants. Two medical marijuana states—Colorado and Washington—have also legalized recreational marijuana use by adults 21 and over. Several other states are considering legalizing medical or recreational marijuana. (See "States Where Marijuana Businesses Are and Aren't Legal," below, for a state-by-state survey of marijuana laws.)

Fact 3: Marijuana is illegal under federal law. So leasing to a business that grows or sells marijuana makes you part of an illegal enterprise and can get you into trouble with your local U.S. attorney, the U.S. Drug Enforcement Agency (DEA), and other federal agencies, including the IRS. It can also get the bank that holds your mortgage into trouble with federal banking regulators. That’s why you need to talk to your bank and get its consent before entering into a lease with a marijuana tenant.

Fact 4: The federal government can enforce its anti-marijuana laws anywhere in the U.S., including in states with medical marijuana laws. In other words, the fact that leasing to a marijuana business is legal under the laws of your state is no defense against a federal charge. In fact, U.S. attorneys have gone after owners for leasing to medical marijuana businesses in medical marijuana states like Montana and California.

Question: Given these facts, why would any owner ever lease to a marijuana business? For the answer, see Fact 5.

Fact 5: Current federal policy is to live and let live and not carry out enforcement activities against marijuana businesses in states where those activities are legal under state laws, provided that the state takes effective action to keep legal marijuana out of the hands of kids and neighboring states where it’s illegal. Congress is also trying to cut off DEA funding for federal raids in marijuana states.

THE 10 LEASE PROTECTIONS YOU NEED

The current dormant state of federal enforcement makes it not only possible but profitable for owners in marijuana states to lease to marijuana businesses. But it’s still risky. And the usual protections you rely on when leasing to other commercial tenants won’t protect you if the tenant proposes to use the property to carry out a marijuana business. Here are the 10 lease clauses you need to revise when leasing to a marijuana tenant. 

1. Permitted Use

Problem: Normally, owners insist on a use clause that clearly lists the activities a tenant can conduct on the premises. Unfortunately, when it comes to marijuana, owners tend to get squeamish and try to gloss over these crucial details. “They let their personal misgivings get in the way of their business judgment,” according to an Arizona attorney. “I’ve seen one-line use clauses vaguely allowing the tenant to operate ‘a lawful cannabis business,’” she explains. “I’ve even seen clauses that don’t mention cannabis at all!”

Solution: Having a precise use clause is crucial when leasing to a business as volatile as marijuana. As in our Model Lease Clause: Make Sure Your Marijuana Lease Protects You from Legal Risks, indicate that you’re leasing to a marijuana business and list the marijuana-related activities the tenant may conduct on the premises, including:

• Prescription sale—list product form, e.g., bud, leaf, edible, drinkable;
• Recreational sale (if you’re in Colorado or Washington)—list product form;
• Cultivation—list maximum number of plants;
• Processing of plant parts and resin into products; and
• Storage for transport [Clause, Sec. 2].

2. Covenant to Comply with All Laws

Problem: Because marijuana is illegal under federal law, boilerplate clauses requiring tenants to comply with all laws and making any illegal activity by the tenant a default of the lease won’t work.

Solution: You need to modify the standard compliance covenant to deal with the weird legal dynamics of marijuana leasing:

• Rewrite the covenant so that it requires the tenant to comply with all applicable state and local laws, including but not limited to the state marijuana licensing and program rules and local zoning ordinances;
• Since compliance with all federal laws is impossible, require compliance with all applicable federal laws to the extent they’re not inconsistent with the tenant’s right to use the premises to run a marijuana business; and
• Leave in the parts of the boilerplate that require the tenant to comply with other federal laws that are not directly related to the growth, storage, and sale of marijuana—for instance, the duty to make reasonable accommodations for the disabled under the ADA [Clause, Secs. 5.1 and 5.2].

3. Owner’s Early Termination Rights

Problem: Because marijuana is illegal under federal law even in states where it’s legal under state law, leasing to a marijuana business exposes you to legal risks that don’t arise and thus aren’t addressed in standard commercial leases, including:  

• Federal criminal prosecution for conspiracy to sell, produce, or transport an illegal drug;
• Seizure of your property under federal laws providing for forfeiture of assets by those involved in drug trafficking;
• Getting hit with a “nuisance” claim for the smoke, odors, loiterers, or other unsavory aspects of the marijuana tenant’s use;;
• Foreclosure by your bank, which claims that you defaulted on your mortgage by leasing to a federally illegal marijuana business;
• Actions by other owners of your commercial property for alleged violations of restricted covenants (for example, a covenant to lease only to “first class” business operations); and/or
• Tenant rebellions.

Solution: Insert an exit clause giving you the right to terminate the lease immediately if the hammer does come down. Specifically define the bulleted items above as “Early Termination Events” that trigger your right to immediate termination [Clause, Sec. 1.1].

4. Mode of Lease Payments

Problem: Boilerplate leases typically require tenants to pay rent by check or other financial instrument from a bank. But because banks are federally regulated, they’re not allowed to offer loans, checking, credit cards, and other financial services to marijuana businesses. The Obama administration has loosened the restrictions. But even under the new policy, most marijuana businesses still can’t get access to financial services and have to do business entirely in cash.

Solution: Be prepared to modify your lease to allow marijuana tenants to pay rent and other charges in cash.

5. Warranty of Suitability

Problem: Many boilerplate leases include an owner warranty that the premises are suitable for the tenant’s proposed use. While it may be fine for other businesses, a suitability warranty is a bad idea for a marijuana lease. That’s because making premises suitable for a marijuana tenant often requires significant alterations, as well as approval under building codes and zoning, state licensing, and other regulations.

Solution: Remove the boilerplate warranty of suitability and list the improvements necessary to make the premises suitable. Agree to cooperate, but make the tenant solely responsible for securing any necessary permits, licenses, and other approvals [Clause, Sec. 3].

6. Tenant Improvements

Problem: Like casinos, marijuana establishments are subject to elaborate security requirements. To get (and keep) an operating license, they must configure themselves like fortresses, with exterior walls, access barriers, wall-to-wall surveillance camera systems, exterior lighting, etc. And if the business intends to grow marijuana on the property, it will also need to install special lighting, heat lamps, and other elaborate systems.

Solution: Make it clear that:

• The tenant must make all necessary improvements and alterations at its own expense;
• You don’t have to reimburse the tenant for any improvements that are unique to the operation of a marijuana business and have no value to subsequent tenants; and
• Once the lease ends, the tenant must, at its sole expense, dismantle and remove the improvements you want removed [Clause, Secs. 3, and 8.1 to 8.3].

7. Owner’s Right to Inspect

Problem: State security rules require marijuana establishments to limit access to storage, sales, and other sensitive areas. Result: The tenant may not be allowed to let you exercise your normal right to enter and inspect the premises to ensure that it’s complying with all lease requirements.

Solution: Modify the boilerplate inspection clause and establish a procedure enabling you to do inspections without forcing the tenant to violate its duty to limit access to sensitive areas. In many states, owners can carry out inspections of leased marijuana facilities as long as they’re accompanied by authorized tenant personnel. Make sure the lease requires the tenant to pay for any additional expenses you incur in carrying out inspections and reserve your right to take photos and videos during inspections [Clause, Sec. 4].

8. Utilities & Other Operating Expenses

Problem: Indoor growing and storage of marijuana consumes copious amounts of water and energy. According to Forbes, an indoor module for handling four marijuana plants uses as much electricity as 29 standard refrigerators.  

Solution: Require the tenant to pay for excessive consumption of water and electricity, as well as any other extraordinary operating expense its marijuana business directly causes you to incur, such as night-time security guards, extra janitorial service, or supplemental HVAC maintenance [Clause, Secs. 6 and 7].

9. Common Areas

Problem: Having a marijuana growing or selling facility on your property is likely to create problems in parking lots and common areas that may not be addressed in your standard lease.

Solution: To minimize risk of collateral damage to common areas, make sure the lease requires the tenant to:

• Prevent employees and customers from consuming marijuana anywhere in the premises or common areas;  
• Use ventilation or other mechanical devices or systems to minimize odors and keep them out of shared air circulating systems;
• Implement measures to prevent loitering; and
• Appropriately dispose of waste products.

10. Indemnity Clause

Problem: The standard lease clauses requiring tenants to indemnify and hold owners harmless for various kinds of harms within the premises aren’t enough to protect you from the special risks you incur when leasing to a marijuana business.

Solution: In addition to the standard indemnity, add language requiring the marijuana tenant to indemnify you against: 

• Damage done to the building, common areas, and other tenants’ premises as a result of robberies, break-ins, and burglaries—for all the security required, cash and high-quality cannabis make marijuana facilities a favorite target for robbers; and
• Criminal prosecution, forfeiture seizures, and the other events triggering default and immediate termination rights discussed in Section 2 above [Clause, Sec. 9].

About the Author

Glenn S. Demby is a corporate attorney and award-winning legal journalist who specializes in explaining the law in plain English and helping business leaders overcome their regulatory challenges. He can be contacted at glennsdemby@gmail.com. He thanks Professor Michael N. Widener, of Bonnett, Fairbourn, Friedman & Balint, P.C., in Phoenix, Ariz., for his help in preparing this article.

 

States Where Marijuana Businesses

Are and Aren’t Legal

You can’t lease to a marijuana business unless growing and selling marijuana is legal under your state’s laws. Nearly half of the states allow this—in most states, medical is the only form of legal marijuana. Here’s a look at the legal landscape, as of October 2014:

Legal to grow and sell medical and recreational marijuana:

Colorado

Washington

Legal to grow and sell medical marijuana:

Arizona

California

Connecticut

Delaware

Illinois

Maine

Maryland

Massachusetts

Michigan

Minnesota

Nevada

New Hampshire

New Jersey

New Mexico

New York

Oregon

Rhode Island

Vermont

Legal to use but not sell and grow medical marijuana:

Alaska

Hawaii

Montana

Illegal to grow and sell marijuana:

Alabama

Arkansas

Florida

Georgia

Idaho

Indiana

Iowa

Kansas

Kentucky

Louisiana

Mississippi

Missouri

Nebraska

North Carolina

North Dakota

Ohio

Oklahoma

Pennsylvania

South Carolina

South Dakota

Tennessee

Texas

Utah

Virginia

West Virginia

Wisconsin

Wyoming

Notes:

• It’s legal to sell and grow medical marijuana in Washington, D.C.
• Florida and Pennsylvania are considering medical marijuana.
• California, Arizona, and Oregon are considering recreational marijuana.