Negotiating and executing a lease is tricky, even without the state-legal, federally-illegal cannabis industry in the mix. So what should a landlord consider if choosing to lease to a business that operates in the cannabis industry? And what should a cannabis licensee do to protect its interests? The following are six basic rules for landlords and tenants, when leasing in the cannabis industry:
(1) The landlord with a mortgage should always check with their lender before leasing to a licensee that will be touching the plant. Lying in the weeds, so to speak, and not alerting your lender to your proposed business arrangement, could result in the lender calling, or accelerating, your note. This could be a big problem, especially on a commercial warehouse with a sizable amount of debt. If you are a landlord that owns your property free and clear, you can check the box.
(2) The lease should include the operation of a state-legal cannabis company as the premises’ permitted use. This can be specific to cultivation, processing, wholesaling, retail, or all of the above. This is especially important for the tenant. It should be acknowledged in writing that the tenant will be, and is allowed to, operate as a cannabis licensee.
(3) Include cannabis-related provisions and definitions in the lease. This protects the landlord and the tenant, in that it creates clear and unambiguous rules for both actors to follow. The lease should clearly define the permitted use, a cannabis licensee, and state and local cannabis laws and regulations. The tenant should covenant to comply with all cannabis-related provisions including all applicable state and local cannabis laws and regulations. I like to attach the Cole Memorandum—the attorney general’s (federal government’s) current policy position regarding its enforcement priorities and the eight priorities every state-legal actor should follow—as an exhibit to the lease.
(4) The tenant should be required to promptly use its best efforts to obtain all necessary licenses and permits from state and local jurisdictions. If the permitted use is medical marijuana, then this should spell out the relevant statute (the Oregon Medical Marijuana Act) and all Oregon Heath Authority (OHA) rules and regulations. If instead we are talking about recreational marijuana, then the relevant statute is ORS 475B and the Oregon Liquor Control Commission rules and regulations shall govern.
(5) It is critical for the landlord to include an illegality escape (or termination) clause. Notwithstanding anything to the contrary set forth in the Lease, the landlord should have the right to terminate the lease upon thirty (30) days prior written notice if certain triggering events occur (i.e., civil forfeiture, denial of tenant’s registration, revocation of tenant’s license, if the lender accelerates the loan).
(6) Tenants should negotiate a period of rent abatement, while obtaining licenses and permits, prior to operating for its intended purpose and permitted use. Tenants should also include an early termination clause in the event that it fails to obtain licenses/permits to operate.
The preceding list contains just a handful of landlord and tenant considerations when leasing in the cannabis industry. There are many fundamental leasing concepts not addressed in this post. And there are most likely additional cannabis-related considerations based on the fact-specific circumstances of any given lease transaction. Consult an attorney to ensure you are properly protected. An understanding of both real estate and cannabis laws and regulations is critical to anticipating issues and ensuring each side of the deal is properly protected.