The emerging California cannabis industry is ripe for an explosion of cannabis-based businesses across the state. Although legal in California, Cannabis is still technically classified as a controlled substance under federal law and as such is still deemed to be a crime at the federal level. This understandably creates a lot of apprehension for California landlords in leasing to cannabis businesses.
However, when representing landlords in commercial real estate leases, we have found a few provisions that provide for a mitigation of risk when leasing to tenants who operate cannabis-based businesses.
Define the Permitted Use Clause
It is crucial to define the particular type of use that is permitted at the Landlord’s property, and even more so when dealing with cannabis tenants. Because Cannabis company’s and tenants are required to obtain licensure to operate, and even more important, the licensure required is issued based on a particular type of cannabis business (i.e. retail, delivery, cultivation, etc), it is important that the use permitted is specified in the lease and matched to the type of license the tenant possesses in regard to its cannabis operation. The concern for Landlord’s here is that tenant may operate its business in a manner that is beyond the scope of its license authority, and in doing so, effectively operates a criminal business at the property, and opens up the Landlord and its property to fines, seizure and/or criminal liability. It is also good practice for landlords to understand the particular type of cannabis license its tenants possesses, so as to avoid zoning violation issues that may arise if the type of cannabis operation the tenant is conducting is not properly zoned for at that property.
Termination Clause
In relation to the risks outlined previously, and in conjunction with the risk of a cannabis tenant inappropriately operating its business in violation of law, all landlord’s must retain the ability to deem the lease terminated if tenant’s cannabis license is in jeopardy of revocation or even suspension. Generally, landlord and tenants will intensely negotiate what licensure violation or at what point in the adjudicative process will a tenant’s revocation or suspension of license be deemed an incurable event of default with the result of an immediate termination of the lease. Regardless of the adjudicative timeline determining what constitutes the necessary violation, landlords must in some degree provide for itself a way out of the lease if the tenant does in fact lose its right to operating as a cannabis company.
Civil Forfeiture & Indemnification
On top of obtaining a general indemnification from the tenant, it is recommended that landlords should seek obtaining additional protections from tenant in the form of a civil forfeiture indemnification right. Although threats of federal enforcement actions against California compliant cannabis companies seems to be remote, the actual risk will still remain so long as cannabis remains illegal under federal law. In that regard, landlords are wise to require a tenant to indemnify the landlord from civil forfeiture actions (i.e. where law enforcement seizes the real property) under the federal Controlled Substances Act, which would result in the tenant being responsible for the legal defense of the landlord and covering the landlord’s losses in the event that the federal government takes enforcement action against the landlord for renting to a cannabis business.
At KAY GHAD LLP, we are dedicated to assisting and advising landlords and tenants of all different classes and types of real estate assets, including in the cannabis space. For help in your real estate transaction, or any other business need, please contact us at [email protected] or (213) 529-2900.
Recent Comments