Commercial Leasing Considerations for the Adult Use of Marijuana Act

Commercial Real Estate, Landlord/Tenant Disputes, and Legal Update by Peter N. Brewer, Esq.

This November, Californians will vote on Proposition 64, the “Adult Use of Marijuana Act” which will effectively legalize the recreational use of marijuana to people over age 21.

California’s Marijuana Legalization Initiative enumerates extensive modifications to the state’s Business and Professions Code regarding the registration and licensing of retail marijuana businesses.

It has been a decade since California passed Proposition 215, legalizing the use of medical marijuana at the state level.  Since then, property owners have faced a host of concerns in leasing to medical marijuana businesses.  Marijuana remains illegal under federal law, and the specter of federal seizure remains even in jurisdictions where it is legal at the state level.  Very reasonably so, landlords did not want to run the risk of forfeiture by being tied to drug trafficking.

Additionally, given the high level of risk, marijuana dispensaries paid well above market rates (already expensive in California) to have space.  These businesses are also cash businesses, which meant not only increased security concerns at the property, but also that the landlord and vendors and employees would likely need to be paid in cash.   Banks also then had to file suspicious activity reports for anyone depositing such large sums of cash, which could include the landlord.

To work around these obstacles, marijuana enterprises often needed to buy a building outright and as they were not eligible to borrow from federally insured banks, the businesses often seek private money sources to finance the building.

Most standard form leases are not sufficiently specific to deal with marijuana businesses as tenants.  For one thing, the lease provisions usually do not state the rent payments can be made in cash.  More importantly however, the leases all have a provision that requires the tenant to be in compliance with the law.  This covenant needs to be drafted in such a way to mandate compliance with state law and non-related marijuana federal law.

Will any of these issues change under the passage of Proposition 64? It’s unclear.  The text of the bill is extremely long (full text here: https://www.oag.ca.gov/system/files/initiatives/pdfs/15-0103%20(Marijuana)_1.pdf? )

If passed, most of the bill’s provisions will go into effect in 2018.  One of the key things to watch is legislation at the city level. Section 3(d) of the Adult Use of Marijuana Act allows local governments to ban businesses that deal in the recreational pot business.

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