Growing and selling marijuana may be the most controversial business in America, but, due to changing public opinion and the current political climate, it shows no signs of slowing down. Unless the Federal government decriminalizes the manufacture, sale and use of marijuana, it remains a very risky business, not just for the business owners but also for the landlords who lease commercial space to them. However, more and more landlords are considering taking these calculated risks in exchange for premium rents.
Since 1970, marijuana has been an illegal Schedule I substance under the Controlled Substances Act (the “Act”). But in the past few years, public opinion of marijuana has changed to the point that some states, such as Colorado and Washington, now allow adult recreational use of marijuana. In 2010, Arizona passed an initiative to allow the sale and use of marijuana for medical purposes. There are now 24 states that have legalized marijuana in some form.
Because of the Supremacy Clause in the U.S. Constitution, these state laws have no effect on federal drug laws. However, there seems to be a softening on the issue at the federal level as well. For example, in recent years the Department of Justice has published a series of notices explaining that they are unlikely to use federal resources to prosecute activities that are legal under the state law in which the activity is taking place. But the notices reinforce the fact that marijuana remains illegal at the federal level, and the DOJ clearly retains its right to prosecute illegal activity. At the same time, the Drug Enforcement Agency is currently looking into possibly reclassifying marijuana into a lower tier schedule.
The State of Arizona has 88 licensed medical-marijuana dispensaries at the present time, and the Department of Health recently announced that this summer it will begin accepting new applications for dispensary operating certificates. This will be a first since the lottery was held for the initial certificates in 2012. Leasing to dispensaries can be enticing because landlords can charge premium rents (often 40 to 60 percent higher) due to the inherent risks. Also, some landlords are willing to take these risks because it enables them to fill commercial space that may otherwise be difficult to rent.
So why don’t more landlords lease to medical marijuana dispensaries? Primarily because, although the sale of marijuana may be legal in Arizona through a certified dispensary, the sale and distribution of marijuana still violates federal law and both the landlord and the tenant may be prosecuted for violating the Controlled Substances Act — which enables the federal government to seize any property that is used for cultivating, manufacturing or selling marijuana. However, there are landlords banking on the fact that as long as the tenant is in compliance with state law, the federal government will not disturb them.
For those willing to take the plunge, there are a few things that can provide some additional protection. First, the landlord should obtain the consent of his or her lender before signing the lease. Leasing to a dispensary may be a violation of the terms of the loan documents, which could allow the lender to call the loan due and foreclose on the real estate. Next, the landlord should consider adding lease provisions that will offer additional protection, such as the following:
A specific permitted use provision that outlines what the dispensary is allowed to do and what it is prohibited from doing, such as distributing to minors.
A covenant for the tenant to comply with all state and local laws as well as with all federal laws to the extent they are not inconsistent with the tenant’s right to use the premises.
An early termination rights provision so that the landlord can terminate the lease if there is any federal criminal prosecution of the business, seizure of property, foreclosure by the bank, or if the landlord receives any nuisance claims regarding the business.
A clause that prevents employees or customers from using marijuana anywhere in the premises or common areas.
An indemnity clause that requires the tenant to indemnify the landlord for any damage done to the building, common areas and other tenants’ premises as a result of robberies, break-ins or burglaries.
As growth of the marijuana business in Arizona increases, so will the demand for commercial space. Although it is possible to lease to these businesses, such a decision should not be made lightly. Before signing a lease with a dispensary, landlords should consult with an attorney to thoroughly evaluate the risks.
C. Adam Buck has been certified as a Real Estate Specialist by the State Bar of Arizona. He is a partner at The Frutkin Law Firm, PLC located in Scottsdale, Arizona. His practice is focused on real estate transactions and litigation.
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