Navigating Real Estate Waters in a Cannabis World
September 14, 2017
By: Heidi C. Quan
With the legalization of cannabis in California, cannabis businesses will need to address their real estate needs. As not many businesses can afford to buy a building outright, leases will need to be negotiated and executed. However, cannabis related real estate leases will need to be handled more carefully than a normal commercial lease. Once you have identified the proper location for your cannabis business, which complies with all state and local regulations, keep these practical considerations in mind before executing your cannabis real estate lease:
1. Consider whether the landlord is someone who understands the nature of your business. Be upfront to avoid any surprises in the midst of your tenancy, like an eviction notice for conducting illegal activity on the property. Typical lease terms will contain specific permitted use language governing the allowable activities on the leased property. The allowable activities should be specific to your cannabis business. Be cautious of vague language which could leave tenants at risk of breaching the agreement. As well, typical leases will forbid illegal activity from taking place on the property and will constitute a breach and default of the agreement. Instead, the cannabis real estate lease will need to exclude lawful activities under state law from that provision.
2. Be prepared to pay a premium. There are landlords who know the risk that they are taking by knowingly leasing space to a business deemed to be illegal under federal law and they want to pass on the cost of that risk. There are landlords who charge a premium on commercial space to cannabis tenants because they can. Regardless of the type of landlord that you may encounter, the bottom line is be prepared for the likelihood of paying exponentially more than another industry for the same amount of space.
3. Depending on the type of cannabis business, a tenant may want to negotiate terms that its landlord will assist them if new regulations or ordinances require unforeseen requirements on the business during its tenancy. For example, if there are additional requirements placed on a cultivator as it relates to electricity, a tenant will want to know that the landlord will assist or allow them to make the necessary changes for compliance with any unforeseen regulatory changes.
4. Given the nature of the business and the uncertainty of federal legal implications, you may want to consider negotiating a shorter lease term than a normal commercial lease, which is generally a minimum of five years.
5. Consider including an arbitration clause in the cannabis lease agreement. Litigating in court over a cannabis lease agreement (or any cannabis related contract for that matter) may not be the best venue for your dispute. When you do not know the views of the jury or the judge, you do not want to leave the fate of your dispute in the hands of those who may have negative views of cannabis or the cannabis industry. If you can arbitrate the dispute, you can identify an arbitrator or mediator who has familiarity with the industry.