The legal marijuana business is booming and landlords are taking notice because these businesses have a solid cash flow and are able to pay a premium in rent. Too good to be true? Of course! Unless the following critical steps are taken to avoid risk.
Important: Before you start
Before you or your landlord client even entertain an offer, it’s imperative that you ask your client to first get confirmation (in writing!) from her lender and insurer that:
(a) any damages or losses arising out of having a tenant in the marijuana business is covered by her insurance policy; and
(b) the nature of the tenant’s business will not affect her insurance or lending terms.
If the landlord gets written confirmation, then and only then should you start talking about the lease terms. If you don’t, you risk any or all of the following:
(a) lost time as the deal could never happen;
(b) causing your client significant legal and financial hardship;
(c) your reputation; or
(d) a lawsuit for professional negligence.
Some of the clauses you must address
a) Permitted use:
Precision is key. Stating that the tenant can only use the space for “lawful uses” related to cannabis is not enough. As laws around the marijuana business change, you may be exposed to lawful uses you never intended or wanted. Examples include cultivating marijuana, dispensing or even smoking marijuana on your property.
The solution: state that the landlord is leasing the space to a marijuana business and then itemize the related activities the tenant may conduct on the premises. Some examples include:
- Sale of the following prescription products to eligible persons: dried marijuana, fresh marijuana and cannabis oil;
- Sale of recreational marijuana (if permitted in the province);
- Growing and harvesting (enumerate the number of plants permitted); and
- Treatment and processing of marijuana and permitted related.
Next, explicitly state what isn’t a permitted use (be sure to use the language of “such as, but not limited to…”). For instance, some landlords don’t want tenants or clients to use marijuana or cannabis on or near the premises or building, regardless if such use is ingested, snorted or smoked.
b) Covenant to comply with all laws
While boilerplate language is useful to ensure compliance with building code and disability access laws, it doesn’t cover all of the legal dynamics of marijuana leasing. For example, there are local, provincial and federal laws regulating security, licensing, programming, zoning and even building rules.
The solution is simple: make the language as broad as possible, requiring that the tenant comply with all federal, provincial and local laws and licensing, as it relates to the physical use of the property (zoning, noise), as well as the tenant’s business. Ensuring that your tenant is compliant with all of these laws is critical, as you don’t want to be responsible for an unlicensed dispensary or a police raid!
c) Owner’s early termination rights
The status of the marijuana industry is still grey – many dispensaries popping up in urban areas do not have the required licensing in place. This means that the landlord is exposed to the following risks:
- Criminal prosecution for conspiracy to sell, produce or transport an illegal drug;
- Seizure of the building/property under federal laws providing for forfeiture of assets by those involved in drug trafficking;
- Getting hit with a “nuisance” claim for the smoke, odours, loiterers or other unsavoury aspects of the marijuana tenant’s use;
- Bank foreclosure: claims that landlord defaulted on her mortgage by leasing to an illegal marijuana business;
- Actions by other owners or tenants of the commercial property for alleged violations of restricted covenants (for example, a covenant to lease only to “first class” business operations); and/or
- Tenant mutiny.
Managing – not eliminating – these risks can be done by adding in an Early Termination right. Essentially, this right allows the landlord to terminate the lease if any of the events listed above may occur or are threatened to occur. Ensure that you list any event that may impact the landlord negatively. Do not state that these events “must” occur for the landlord’s termination right to kick in; rather that it may or there’s a threat that the event may occur (why wait until the problem exists?).
d) Landlord’s inspection rights
The security rules around the marijuana industry are aggressive and may limit the landlord’s right to inspect the premises. It’s reasonable for the landlord to agree to a procedure to inspect the property without causing the tenant to be in breach of any regulatory requirements and, if the landlord must access “sensitive areas”, then he can do so only while accompanied with a tenant representative. The landlord, however, should not give up its rights to take photos or videos during inspections and the tenant should be charged for any additional expenses incurred by the landlord for carrying out such inspections.
The marijuana business has the reputation of being run by “shady” characters. Typically, an indemnity is a good method to protect the landlord from a “shell” tenant. However, the indemnifier in this scenario may be unable to fulfill the obligations under the lease (pay rent!). The solution: require that the tenant obtain a letter of credit. If the company is legitimate, secure and has the “approval” of the bank, the tenant is a better gamble and the landlord can manage its risk.
Clearly allocate any and all responsibility and liability related to the business to the tenant, regardless of whether or not the landlord has acted negligently. A strong “one way” indemnity clause and no liability clause are required and your client is wise to get legal advice on the terminology.
g) Additional costs
If the landlord has to police the site or add extra security measures, ensure that these costs are being charged back to the tenant.
h) Self-help rights
Giving the landlord strong self-help rights is critical to ensuring that tenant mutinies are avoided, as well as any legal risks listed above. Self-help rights may be to monitor, control, inspect, call the police, hire security or enter the premises.
As this article demonstrates, the biggest mistake landlords and agents make is solely focusing on the rent. In order to capitalize on the burgeoning marijuana industry, landlords and tenants should start to turn their minds to the “how” of working together and minimize risk with thoughtful planning.