Navigating Commercial Leases for Cannabis Businesses

Cannabis businesses have many legal issues with which to contend, from banking to bud-tending. Commercial leases for cannabis businesses raise special concerns for both landlords and tenants.

Because of the federal civil asset forfeiture program, which allows the U.S. Justice Department to seize assets of any real property used to manufacture or distribute drugs that are illegal under federal law, the typical boiler plate lease won’t cut it. That’s why in many cases, property leases that involve cannabis businesses use something known as an “escape clause,” for instances when there is federal intervention or enforcement action. This can help protect the property owner, but it’s likely to end – or at least halt – the marijuana business indefinitely, likely costing a great deal of money.

We must now also consider the recently-passed Medicinal and Adult Use Cannabis Regulation Safety Act (MAUCRSA). Structuring the business – and the commercial lease agreement – according to these provisions can help safeguard your financial investment and livelihood. 

Our Orange County marijuana attorneys are committed to helping new cannabis businesses formulate a workable business model that will help them avoid some of the most common legal headaches – including as it relates to the lease.

Some considerations you’ll want to weigh:

• Landlord ownership in tenant marijuana business. Anyone who buys and sells shares in a privately-owned cannabis company could potentially trigger either state or federal securities laws, which could turn into a regulatory issue under the state’s licensing program for marijuana. You’ll want to keep this in mind if you’re asked about accepting ownership of shares from the tenant instead of rent. MAUCRSA identifies an “owner” as someone with 20 percent or more ownership in the licensed company, or any person or who exercises any degree of management, control or direction of the company. If a cannabis business wants to hang on to its business license, all “owners” must have background checks. If there is any alteration of control or ownership, it could jeopardize the business.
• Multi-tenant cultivation. It’s becoming increasingly common for “cannabis parks” to crop up around California. However, it’s unclear whether they’ll be allowed to stay. The new law indicates only one licensee or applicant is allowed to control the premises. What’s not certain yet is if state regulators will give the green light to licensees to open up several “premises” on a single parcel of land. So if there are multiple tenants, there could be potential problems.
• Profit sharing. Many commercial leases for ordinary tenants include a provision that tenant pay a percentage of profits in addition to the rent. However, as mentioned earlier, this type of arrangement could cause headaches in terms of landlord liability because of the de facto designation as an owner – particularly if the profit is equivalent to 20 percent or more.
• Considerations of local law. California has long been a patchwork of laws when it comes to marijuana regulation. Some have very stringent restrictions, and others don’t have any at all. If there is some type of conditional use permit or another type of local approval required, your marijuana lawyer can help you sort this out.

In addition to these, there are also concerns with security, access and future build-outs. Consulting with an experienced attorney specializing in cannabis law can help you avoid some of these common pitfalls in this ever-evolving area of law.