A fundamental component to any marijuana business portfolio is the business’ underlying relationship with the real estate property upon which the license is located. In a best-case scenario, a business would hold title to the real estate property that houses the commercial property and the associated marijuana business license. However, the financial capital needed to own commercial real estate property, own and maintain the structure on the real estate property, and operate a marijuana business within that structure, may not be viable for all business owners.
Should a marijuana business owner be unable to own the real estate property the marijuana license is associated with, they will be required to enter into a lease agreement with the property or building owner depending upon the nature of the property owner’s relationship with the building on the property. Although commercial leases often resort to boilerplate language with the parties merely negotiating the length of the lease, rent, and allocating rights, responsibilities, and liabilities between the parties, marijuana leases require additional modifications that are not always apparent to the parties.
Failure to include marijuana-specific language to leases may result in one or both of the parties being locked into a lease that inadvertently violates state marijuana law and may result in regulatory enforcement actions or criminal charges against a party. There are two areas in commercial leases that often are problematic, addressed below.
Landlord’s Access to the Leased Premises
A staple of any commercial lease is the landlord’s right to access the leased premises for a variety of business appropriate reasons. A landlord’s contractual right-to-enter tenant’s leased space may be simply for conducting an inspection of the leased property to ensure a tenant is in compliance with the lease or showing the property to a prospective buyer or tenant. Landlord’s right of entry clauses are formulaic and usually require the landlord to provide reasonable notice, for the entry to occur during a reasonable time of day, and only to occur under reasonable conditions. In the context of a marijuana business tenant, these terms and conditions may conflict with state marijuana regulatory rules regarding a non-marijuana licensee’s unauthorized access to restricted marijuana licensed premises. Landlord and tenant should carefully review any clause regarding landlord’s right of entry and modify this clause to conform with state marijuana law.
Typically, such modifications call for a landlord to be escorted by the tenant or tenant’s representative when entering the licensed premises. Additionally, the landlord should be required by the lease to comply with any state marijuana regulations regarding access to the licensed premises, including signing visitor’s logs, wearing a visitor badge, and ensuring the landlord representatives is over the age of twenty-one. Be sure to understand what requirements your marijuana regulatory authority requires regarding unauthorized access to marijuana licensed premises to make sure your lease covers these points.
More problematic are lease provisions that permit the landlord to enter upon the leased premises at any time should exigent circumstances exist. These raise a direct conflict between landlord’s desire to be able to enter upon the leased premises to address a property-threatening emergency and the state’s public policy interest in preventing non-licensees from entering upon licensed premises unescorted by the marijuana business licensee.
Although most regulatory agencies in the marijuana states have not directly addressed the “exigent circumstance” issue, they have often rejected leases that do not comply with marijuana regulations or require the parties to modify the leases to bring them into conformity with applicable law. Invariably, however, marijuana regulatory agencies regularly approve landlord-tenant leases granting landlords the right to enter upon the premises should there be “exigent circumstances.”
Here is a sample Landlord Right of Access Clause that may need to be further modified to be compliant with marijuana regulations in any particular state.
“Landlord’s Right of Entry. Tenant shall permit Landlord and the authorized representatives of Landlord to enter the Premises during normal business hours, with a minimum of twenty-four hours prior notice to Tenant, and with an authorized representative of Tenant for the sole purpose of permitting Landlord to inspect or repair the Premises. Further, Landlord shall have the right to enter upon the Premises under exigent circumstances provided that Landlord’s entry is necessary to prevent immediate, material, and substantial damage to the Premises. Under said exigent circumstances, Landlord shall utilize its best efforts to notify Tenant of the entry prior to the entry, or as soon as possible thereafter, and shall immediately vacate the Premises once the emergency has been addressed and no longer poses an immediate threat to the Premises. Landlord shall not have the right to enter the Premises for the purposes of exhibiting the Premise to current or prospective investors or tenants.”
Reformation and Further Assurances Clause
Another critical component to a marijuana commercial lease is the ability for landlord and tenant to modify the lease to the minimum extent necessary in the event a regulatory authority identifies any issues with the lease that may result in lease rejection. Despite the parties’ best efforts, this may happen, and they would need to have a provision in place to address this issue without having to resort to termination of the lease.
There are a few areas of the lease that are susceptible to regulatory conflicts and the above Landlord’s Access to the Leased Premises clause is merely one. Regulatory authorities may also take issue with base rent formulas based on percentage of profits, landlord’s rights (statutory or contractual) to any marijuana product as security or collateral on the lease, or landlord’s right to take possession of the property in the event of tenant default as the property may still contain marijuana. These and other provisions may have gone unnoticed during landlord and tenant’s lease negotiations but may still pose an obstacle to tenant’s ability to obtain marijuana licensure on the property.
A corollary to this issue is the requirement of a further assurances clause to act as a catch-all in case there is documentation outside the scope of the lease that requires one or both parties to address in order to operate a marijuana business. The most common example are regulatory landlord or property owner consent forms whereby the regulatory authority requires the landlord or property owner to affirmatively state they consent to tenant’s use of the premises to engage in marijuana business activity.
Here is a sample Reformation Clause that may need to be further modified to be compliant with marijuana regulations in any particular state.
“Conformance of Lease to Regulatory Conditions and Approval and Further Assurances. The terms of this Lease may be subject to the approval of certain governmental authorities. Landlord and Tenant shall negotiate in good faith to conform with any guidance provided by such governmental authorities relating to this Lease, while effectuating the intent of this Lease as near as possible. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments, and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Lease and the consummation of the transaction contemplated hereby.”
Summary
Despite landlord’s and tenant’s best efforts, a marijuana regulatory authority could decide that their commercial marijuana lease may contain objectional terms and conditions and grounds for license denial. The key to any successful marijuana business lease is to bring the lease into jurisdictional regulatory compliance. We identified one clause that is critical to issue identification and one that is critical as a catch-all to unidentified issues. Of course, these two clauses only represent a small fraction of potential issues in any commercial lease.
For a full analysis of your commercial marijuana lease’s compliance in your state, please contact Clark Hill so one of our experienced marijuana attorneys may assist you. For more information on this matter, please contact Clark Hill attorney, Craig Small at 303-674-7000 or csmall@clarkhill.com.
The views and opinions expressed in the article represent the view of the author and not necessarily the official view of Clark Hill PLC. Nothing in this article constitutes professional legal advice nor is intended to be a substitute for professional legal advice.