As more and more states continue to legalize cannabis for medicinal and/or recreational purposes, new issues are seemingly arising for landlords who wish to lease their property to businesses for the purpose of growing, manufacturing and/or selling cannabis. This blog discusses some issues landlords need to consider when leasing their premises for cannabis related activities.
As discussed in a prior blog, a landlord must ensure that the lease does not violate any of the landlord’s pre-existing contractual obligations. Of particular concern, it needs to ensure that the lease with the cannabis business does not violate any provisions that the landlord has in financial documents with banks and/or its policies with its insurance carrier.
A significant, yet sometimes overlooked issue relates to environmental concerns. If manufacturing is being done on the premises, does the landlord understand what is being produced as well as how it is being produced? Does the landlord understand what products/chemicals are involved?
A landlord can request a copy of the tenant’s standard operating procedure and/or other relevant cultivation planning documents to determine how waste disposal and other environmental concerns are being addressed. Many companies may already have this information available.
What happens when the tenant vacates the premises is also an important consideration when assessing environmental concerns. After the lease expires or terminates, what reporting and/or remediation responsibilities exist for the property. The landlord and tenant should negotiate who is responsible for what reporting/remediation activities before the lease is executed. A landlord should also be concerned about making sure the tenant has the resources to perform its obligations.
Security is another potential concern. It is possible that significant sums of cash may be on the tent’s premises and a landlord should determine if this presents any additional type of risk. A prospective landlord may wish to contemplate additional security measures such as cameras or security guards.
Landlords should also appreciate that sometimes business and laws evolve. The lease should explicitly state what activities can and cannot be conducted on the premises. If only selling is permitted, that should be clearly stated in the lease.
Conversely, if no retail sales are permitted, that should also be articulated. One does not want to be in a position where activities that are not lawfully allowed on the premises today are made legal in the future and the tenant is claiming a right to engage in those activities. It is impossible for anyone to accurately determine how and when the laws relating to cannabis will change. However, a lease should try and anticipate as best as possible how new legislation, which will probably be more lenient, will impact the tenant’s business, and in turn the lease.
The Landlord must account for the risks involved and have appropriate indemnification language. This would include language relating to general liability as well as environmental indemnification. In addition to indemnification language, the lease should contain appropriate language for default, termination and depending on the state, confession of judgment for possession and/or rent.
Ultimately, the landlord needs to balance all of the above referenced concerns with the fact that it is obtaining a tenant for its property often times at a higher rental than a typical tenant.
For more on our cannabis real estate and business practice, please click here.
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