Concerns on both sides when drafting a commercial lease for a medical marijuana business.

In the upcoming year, medical marijuana businesses will be applying for permits to conduct business in Pennsylvania as either a grower/processor or a dispensary. In my previous blog, I commented on how it may be significantly more costly to rent property for a medical marijuana business than a non-marijuana business as result of the risks landlords may face.

Because of the risks associated with leasing to medical marijuana business, it is in the best interests of both the landlord and potential medical marijuana tenants to tailor a commercial lease to address some of those risks.

From a landlord’s perspective, there are specific concerns which should be addressed in a commercial lease.

1. Use of the Premises. Pennsylvania will issue permits for both grower/processors and dispensaries. Any lease should designate what state lawful purpose the premises will be used for.

2. Indemnification. The business of growing, cultivating, and selling marijuana remains illegal under the federal Controlled Substance Act. A landlord should include in any commercial lease an indemnification clause requiring the tenant to defend and indemnify the landlord from any federal action against the tenant, including forfeiture.

3. Early termination. A landlord should seek to include an early termination provision in the lease which allows the landlord to terminate the lease should: 1) the tenant fail to comply with any state or local law; 2) the commencement of any action against the tenant; 3) entry of a judgment against the tenant; 4) seizure by any government authority, and 5) any event that cause the closure of the building.

4. Improvements. The MMA has specific requirements for any property housing medical marijuana businesses, including access and security requirements. Any potential lease should require the tenant to comply with all state and local regulations and ordinances, secure any all licenses, at the tenants own expenses, and require the tenant to remove, at its own expenses, any improvements and modifications made by tenant.

5. Utilities. Utility expenses for a medical marijuana business are likely to be very high, especially for a grower/processor. A landlord should require a tenant to reimburse landlord and/or pay directly if possible any all utilities that out of the ordinary and excessive.

6. Access. Under the MMA, there are very strict rules as to who may have access and enter into a medical marijuana business. The right of a landlord to enter the premises must be clearly outlined and comply with state law.

7. Environmental, debris and waste. Under the MMA, there are very strict procedures for storage and removal of marijuana waste which any lease will have to incorporate. Additional, any grower/processor will have to store, use, and dispose of materials which are subject to environmental regulation including pesticides and fertilizers. Any commercial lease will require compliance with all environmental laws and regulations.

From a tenant’s perspective, a tenant should address in a commercial lease the following.

1. Term. With the federal government’s position towards marijuana unclear and the state’s position on marijuana evolving, a tenant may not wish to lock into 5 – 10 year lease terms with multiple automatic renewals. Shorter 2- 3 year terms and less automatic renewal periods may be more practical.

2. Permits. Medical marijuana businesses will be granted permits from the state after application and compliance with all state regulations. Any commercial lease should require a landlord to reasonably cooperate with tenant in complying with all regulations in the application process and not to take any action which could negatively affect the tenants application for a permit, operation and renewal of the permit.

3. Occupancy and commencement. Any potential medical marijuana business will have to present an operating plan and a lease to obtain a permit from the state.  The problem is there is no guaranty that a permit will be granted by the state. A tent should look to include an out clause or contingency clause to allow the tenant to terminate the lease should tenant not be granted a permit. The tenant should also look to include a rent abatement provision pending approval of the tenant’s application for a permit.

4. Dispute resolution. Typically commercial leases will have a confession of judgment clauses and specify where the dispute will be heard and under what laws a dispute will be decided. A tenant will have to be careful and tailor any confession of judgment clause so it  is not triggered by a violation of federal law and/or violation of the CSA. Additionally, a tenant may want all disputes to be submitted to private arbitration and have Pennsylvania state law govern due to the federal illegal status of marijuana.

Both landlord and tenant will need to make sure there are medical marijuana related outs drafted into the commercial lease to protect from federal prosecution. Additionally, any lease should incorporate a waiver by both parties acknowledging that neither will use against the other marijuana’s illegal status under federal law as a claim or defense to any dispute arising under the lease.

When drafting a lease, both landlord and tenant will have to carefully navigate federal, state, and local statutes and ordinances.  The aforementioned are just some concerns which should be considered by both landlord and tenant in drafting a medical marijuana lease.

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Filed under Business Law, Landlord/Tenant, Marijuana Law, Uncategorized

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