Tips For Landlords That Are Renting to Medical Marijuana Dispensaries
Twenty years after California voters passed Proposition 215, the medical marijuana industry in the state still resembles the “Wild West.” Many counties and cities delayed the creation and implementation of official ordinances, leaving regulation of dispensaries in a legal gray area.
The proliferation of medical marijuana dispensaries, along with expectations that voters will pass a recreational marijuana law in the general election this fall, has opened up lucrative opportunities for commercial property owners. Dispensaries are typically willing to pay premium rents for the opportunity to lease commercial space, but property owners looking to cash in on the trend should be aware of the increased risks, as well as tips on writing a lease agreement that protects them best.
Understand state vs. federal Marijuana law
Before considering a lease to a dispensary, property owners should note that while medical marijuana is legal to use, grow and sell in the state of California, it remains illegal under federal law. Leasing space to what the U.S. considers an illegal enterprise could run you afoul of the U.S. Drug Enforcement Agency (DEA), your local U.S. attorney, or other federal agencies including the IRS.
Although there are few examples of dispensary landlord asset forfeiture and arrest by the federal government (the Obama Administration’s stance on state marijuana laws has largely been “live and let live”), it remains a risk as long as marijuana is classified as a Schedule One drug (i.e. the worst of the worst).
Get specific with permitted use of medical marijuana
Commercial lease agreements usually include a clause that clearly lists the activities the tenant is permitted to conduct on the premises, but owners tend to leave this section vague when it comes to dispensaries. The best way to protect your interests is to be as specific as possible. Examples of specific activities would include: prescription sale (listing product form); cultivation (list maximum number of plants); processing (of plant parts and/or resin); and storage for transport.
Adjust the standard covenant to comply for a medical marijuana dispensary
Boilerplate clauses requiring tenants to comply with all laws don’t exactly apply to dispensaries, considering all are illegal under federal law. As such, you need to modify the standard compliance covenant to require the tenant to comply with state and local medical marijuana laws, along with “applicable” federal laws that are not directly related to the growth, storage, and sale of marijuana (for example, dispensaries must still follow federal discrimination laws).
Insert an exit clause if renting to a dispensary — for you
If you’re willing to assume the risks of leasing to a business that is legal in the state’s eyes but illegal to the federal government, you still might want the option to terminate your relationship with your dispensary tenant if federal action is taken. Adding an immediate exit clause in the lease agreement, along with a defined list of “early termination events” will mitigate your risk.
Modify lease payment policies for a medical marijuana dispensary
Federal prohibition means dispensaries don’t have the same banking access as other businesses, so it might not be possible for them to pay rent via check or other bank-issued financial instrument (debit card, credit card, etc.). If possible, add language to the lease that allows dispensary tenants to pay in cash.
Assert your right to inspect a marijuana dispensary
State regulations limit access to marijuana establishments, which means you will have to establish a procedure to carry out inspections without forcing the tenant to violate state rules. In many cases this fix can be as simple as allowing authorized tenant personnel to accompany you, but whatever you decide, make sure it is clear in writing.
Regulate common areas near a medical marijauna facility
Although public sentiment around medical (and recreational) marijuana is trending toward acceptance, dispensaries are still “controversial” in many communities. To help foster cordial relations between your tenant and their neighbors, be sure to include “common area” clauses in your lease agreement that prohibits loitering and/or consumption of marijuana in the parking lot, sidewalk, or otherwise public area outside the dispensary. It’s also a good idea to mandate specialized ventilation systems to minimize odors inside and outside the premises.
Boost your indemnity clause
Standard clauses that protect owners against various kinds of harm to the leased space need added protections when dealing with dispensaries. Specifically, you should add language addressing damage done to the building/common areas, along with events that would trigger immediate termination rights such as criminal prosecution and asset forfeiture.
Consult a lawyer when renting to a medical marijuana dispensary
Medical marijuana is a growing industry, and with recreational legalization around the corner, now is a great time to take advantage of the associated real estate possibilities. But before you do, the best way to understand complex state and local regulations and protect yourself from risk is to talk to an attorney specializing in marijuana law. The experienced attorneys at Salmu Law in San Diego can guide you through this “Wild West” of industries, so call us for a consultation today.