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For new businesses, finding the right commercial space is critical — especially in the cannabis industry. There are a number of issues that can impact commercial landlords who lease to cannabis businesses. While the factors will vary, depending on the jurisdiction and the terms of the lease, it’s essential to understand that negotiating a lease with a cannabis business is unlike any other lease negotiation. Here are several crucial considerations landlords should keep in mind when leasing property to cannabis tenants.
Although cannabis is legal in the state of California, many cities and counties have their own rules and regulations when it comes to land use and zoning. Under California state regulation SB94, each jurisdiction can determine whether cannabis businesses are permitted and the type of commercial activity that is allowed. Some locations might provide zoning ordinances for cultivation and not retail, or vice versa. There may also be zoning laws in place that limit the number of cannabis businesses in the area or require a cannabis business to keep a certain distance from school grounds.
Usually, commercial landlords prefer to have longer lease terms with their tenants. However, due to the risk involved with cannabis business tenants, it may be best to consider a shorter lease term. The lease should also clearly establish the type of marijuana business activity permitted on the premises and state that use of the property is conditioned upon the tenant’s compliance with any applicable laws.
Due to the risk that can be involved with cannabis tenants, it’s vital for landlords to negotiate an “escape clause” which would allow for early termination in specific situations. For instance, this provision would require the tenant to vacate the property promptly if there are any threats from a governmental authority for criminal or civil penalties.
Another important consideration when drafting a commercial lease for a cannabis tenant is the landlord’s access rights. Standard lease forms generally provide landlords with the right to enter the leased property at any time with reasonable notice to the tenant for maintenance and inspection purposes. However, cannabis tenants are different — they must maintain rigorous safety protocol. If a landlord has unrestricted access to a limited access area, the tenant could be in violation of the Medicinal and Adult Use Regulation Safety Act. In the event a tenant’s license is jeopardized, neither party benefits.
Most cannabis licenses in California are linked to the location in which the business conducts activity. Accordingly, as part of the licensing process, California requires cannabis tenants to provide a written confirmation from their landlord affirming their right to use and occupy the leased premises for commercial cannabis activity. While some landlords may be hesitant to provide this written acknowledgment, a landlord who knows their tenant’s business is tied to cannabis may be in breach of their own lease obligations if they refuse to provide it. Importantly, under Assembly Bill 1159, leases for commercial cannabis activity conducted in compliance with California and local laws are considered enforceable contracts.
Landlords who do not own their property outright must take their contractual mortgage obligations into consideration before leasing to a cannabis tenant. Regardless of California’s legislation, cannabis is still classified as a controlled substance under federal law — and a bank may call a loan if the property is being used for illegal activity. This means that the lender would have the right to declare the entire mortgage due and owing immediately.
In most cases, a cannabis tenant will need to make certain modifications to the premises in order to conduct their business operations. It’s critical to ensure the lease specifies the types of alterations that are permitted and address the consent that must be obtained from the landlord. A landlord should have a solid understanding of the tenant’s needs so the permitted improvements can be negotiated and written into the lease to avoid any disputes that could later arise.
Most cannabis businesses are start-ups with little to no financial history. Since this can make it difficult to determine the tenant’s ability to pay rent in the future, it’s a good idea to require that the lease is guaranteed by a third party. With a guaranty, a third party agrees to pay the rent if the tenant is unable to meet their financial obligations.
If you’re a commercial landlord who is considering renting property to a cannabis business, a knowledgeable real estate attorney can guide you through the process and help you avoid any pitfalls. The attorneys at White & Bright, LLP have extensive experience handling a broad scope of commercial real estate matters — including those involving cannabis business leases. Call (760) 747-3200 to schedule a consultation to learn how we can help.
