The cannabis industry has been legalized at the state level in New Jersey for some time now as licenses continue to be applied for and distributed. While some cannabis businesses are purchasing their own properties at which they can operate, many are seeking leases from local commercial property owners. These commercial landlords are jumping at the chance to take advantage of the lucrative opportunities in leasing their premises to cannabis businesses for rental rates much greater than market in the areas permitting this use. However, the inherent conflict and contradictions between federal and state cannabis laws, as well as other industry-specific concerns, must impact the decisions of landlords considering doing business with cannabis enterprises.
The overwhelming majority of marijuana businesses lease their spaces rather than own them. According to the National Association of Realtors (NAR), the share of NAR members reporting purchases of real property by marijuana businesses over leasing dropped from 29% to 18% since 2021. But even as more commercial property owners become comfortable with the idea of leasing to a cannabis dispensary, they also recognize they need to carefully tailor their leases to address the legal, financial, and practical concerns unique to the cannabis industry. Failure to account for these issues could expose landlords to potential civil and criminal liability, conflicts and defaults with lenders, and the loss of substantial cash flow.
While commercial property owners should always consult with experienced counsel before leasing to a cannabis dispensary, the following are just a few of the many matters that should be addressed before signing on the dotted line.
Lender/Mortgage Concerns
If their property is secured by a mortgage, owners should carefully review their loan documents to ensure that renting their property for purposes that remain illegal under federal law does not constitute a default. Loan documents often contain language stating that the loan may be accelerated if the real property is used in connection with illegal activity. Leasing space for a federally prohibited purpose could also trigger any “bad boy” covenant in a personal guaranty and make it more difficult to refinance in the future as there could be issues finding a new lender and obtaining a loan title policy due to the federally illegal use.
Use of Premises
The lease should clearly define the permitted uses of the leased space, limiting it to the specific nature of the cannabis business allowed by the license obtained by the cannabis operator. In addition, the landlord will want to make sure that the company complies with all state and local laws, including confirming that the local municipality has approved the use. As to licensing specifically, the landlord will want to make sure that the tenant always complies with the terms of its state-issued license and continues to renew it as required by law. When it comes to the particulars of the use itself, the landlord may want to specifically prohibit the onsite use of cannabis products anywhere on the landlord’s property or other considerations based upon the nature of the property.
Cash/Rent Payments
Robust security should be a necessity at any premises involved with the cannabis industry due to the cash-intensive operations (another consequence of the failure to modify federal banking laws to accommodate cannabis businesses). The landlord may want to limit the amount of cash that is kept at the premises at any given time or require the tenant to remove such cash from the premises at specific intervals. And that cash, derived from the sale of cannabis products, should not be used to pay rent as that could be deemed a violation of the federal Controlled Substances Act. The landlord will want to require all rental payments to be made by check or wire transfer. For similar reasons, commercial landlords should never use a percentage rent formula on their dispensary leases, as it could potentially be deemed to be income from federally illegal activities.
Termination of Lease/Surrender of Premises
The commercial landlord should require that its departing tenant remove all cannabis products remaining on the premises upon the expiration or earlier termination of the lease, as a landlord never wants to be in possession or have to dispose of illegal substances. As such, typical abandonment clauses would not be ideal in this situation.
If possible, the landlord may also want to consider an early exit clause in the event of any changes in the current applicable federal laws and regulations that trigger an increased risk to the landlord or its ownership of the property.
As noted, these are the broad contours of only a few issues that commercial property owners need to consider and incorporate into their leases with cannabis operators. If you would like to discuss leasing your property to a cannabis business or need assistance drafting a lease, please contact Melanie Scroble at Ansell.Law.
