Arizona is now one of approximately 30 states that have legalized marijuana in some form. The growth and sale of marijuana in the Grand Canyon State shows no signs of slowing down, and many commercial landlords, along with their tenants, are cashing in. Indeed, landlords have realized that leasing to dispensaries can be financially rewarding as they often can charge higher rents. The legalization of marijuana also has allowed landlords to fill commercial space that was previously difficult to lease. So why don’t more commercial landlords sign leases with dispensaries or manufacturing facilities? And, if there are risks associated with leasing space to a marijuana-related business, what can be done to minimize them?
While the sale of marijuana is permitted under state law, the sale and distribution of marijuana violates federal law. Specifically, since 1970, marijuana has been an illegal Schedule I substance under the Controlled Substances Act. The Act enables the federal government to seize any property that is used for cultivating, manufacturing and/or selling marijuana and to prosecute both landlords and tenants. State laws that contradict or are inconsistent with the Act, such as Arizona’s marijuana laws, do not provide a defense due to the Supremacy Clause in the U.S. Constitution (the Constitution and federal laws take priority over any conflicting rules of state law). Consequently, unless the federal government changes or amends the Act, the marijuana business remains a risky one.
Most landlords leasing to marijuana businesses already know that they need to obtain the consent of their lenders. They also know that their leases need to include an early termination provision that allows the landlord to terminate the lease if there are any federal or state prosecutions of the business owners; a clause that requires the tenant to indemnify the landlord for damage done to the building, the common areas or other tenants’ space as a result of burglaries, water intrusion issues or nuisance claims; and a personal lease guarantee in the event the tenant itself is forced out of business.
In order to remove some of the risks associated with leasing commercial space to a marijuana related business, landlords should also consider the following:
Articulating what constitutes an event of default under the lease. Most commercial leases generally address events of default, such as the nonpayment of rent or failure to remain open, but a marijuana lease should specifically identify additional events of default. For example, a landlord may wish to consider including a federal or state enforcement action filed against the tenant or any of its principals, and/or if a marijuana license is revoked or not renewed.
Landlord’s disclaimer of interest in the tenant’s product. In many leases, one of the landlord’s standard remedies is the right to keep and/or sell certain inventory, equipment or personal property if the tenant is in default. In a marijuana-related lease, a landlord should include a provision that all marijuana and products are owned by the tenant and the landlord disclaims any interest in such items.
One man’s trash is another’s treasure. Landlords should consider requiring that tenants have a private trash disposal agreement. Dumpster diving for marijuana and/or equipment has increased around dispensaries and manufacturing facilities. This can result in injuries and expose landlords to personal injury claims.
It is imperative that commercial landlords consider the impact of federal, state and local laws regulating the use, production and sale of marijuana. The suggestions outlined above represent just a handful of the issues landlords face when leasing to marijuana businesses. Numerous additional provisions should be addressed and negotiated to minimize the landlord’s risk.