For any lease, there are always numerous potential concerns and pitfalls. However, when dealing with a cannabis lease, landlords must flesh out one significant concern that does not exist with traditional leases. This concern stems from the illegality of cannabis at the Federal level.
Typically, a landlord has already entered into many business relationships and documents pertaining to its property, years before contemplating leasing to a cannabis facility. The landlord has likely executed financing and insurance documents, which may be jeopardized by a cannabis lease. As discussed below, a landlord may inadvertently breach provisions in those documents by executing a lease for a cannabis facility.
The loan documents were probably executed well before it was ever envisioned that marijuana (whether medicinal or recreational) would be legal under various states’ laws. Those documents may very well contain a provision noting that the landlord/borrower will not use the property in connection with any illegal activity. As the cultivation and use of marijuana is illegal under Federal law, the mortgagee has an argument that leasing to a cannabis facility automatically breaches the loan documents.
Another possible concern relates to insurance policies. The landlord will generally hold various types of insurance policies related to property damage and liability. Those policies very likely have language excluding or limiting coverage for illegal or non-permitted activities. Therefore, those policies should be thoroughly reviewed and modified through endorsement to ensure full and adequate coverage.
It may also be the case that a landlord has existing leases on the property with other tenants containing certain restrictions or exclusives. Perhaps an existing tenant has a provision in its lease in which the landlord agreed that no illegal activity would be conducted on the property. Again, technically, the activity of having a cannabis facility is illegal under federal law and may give the other tenant the right to rescind or terminate its lease.
Everyone involved in the transaction should thoroughly consider the aforementioned issues before entering into a lease for a cannabis facility. The tenant needs to be aware that it may be required to sign a lease with the landlord in which the tenant remains responsible for any additional costs and liability incurred by the landlord as a result of the cannabis lease.
This is why both cannabis tenants and landlords should have the counsel of an experienced cannabis real estate attorney who can devise and recommend creative and balanced solutions for the legal issues and implications of entering into a cannabis lease.