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California Commercial Cannabis Leases: Planning in a Time of Uncertainty


marijuana lease california
Leave yourself some room to maneuver with that cannabis lease.

The year 2018 began with a mixed bag. California, the nation’s most populous state and its most powerful economic engine, finally began issuing licenses to medicinal and adult use commercial cannabis businesses under the state’s new regulatory regime. Days later, the Attorney General issued a memorandum rescinding the 2013 Cole Memo enforcement guidelines, despite indicating to the contrary several months prior. There has since been bipartisan backlash against Mr. Sessions’ decision, and there are now numerous legislative proposals in congress as to how the federal government will move forward with respect to cannabis.

In the meantime, property owners still have to plan for the future, whether that means deciding how to use their property, or whom to rent commercial space to and under what terms. Operators and landlords alike are uncertain what to expect: on the one hand, state governments are issuing cannabis licenses freely; on the other, the federal government is telling its prosecutors to pursue any and all of them as they see fit–  regardless of any state’s laws. One strategy for approaching all this uncertainty is by building early termination contingencies into the lease. Below are a few of many contingencies that commercial cannabis landlords and tenants alike should consider including as part of a potential tenancy.

  1. Federal enforcement actions. This is what keeps state-legal operators up at night and what many legislators are currently trying to protect against. As long as cannabis remains federally illegal in all forms, however, this will remain a risk. One way to potentially mitigate that risk is by allowing for mutual early termination options in the event of any actual or specifically threatened enforcement actions, such as civil asset forfeiture. If the federal government’s goal is for cannabis operations on the premises to cease, then allowing each party an opportunity to force termination of the lease should be helpful.
  2. Changes in federal law and/or enforcement priorities. Similar to federal enforcement actions, the parties may want to include options to terminate the lease early if something changes at the federal level to an extent that both parties no longer feel comfortable with state law compliance alone. How significant that change would need to be is up to the parties’ negotiations and levels of risk tolerance. For example, while the Cole Memo has been rescinded, the Rohrabacher-Blumenauer amendment protecting state-compliant medicinal operations is still in effect (if only barely), so the recent federal action may not necessarily be cause for parties to end a tenancy.
  3. Cole Memo priorities as affirmative lease obligations. Just because the Cole Memo has been withdrawn does not make it irrelevant. The Cole Memo is essentially a well-thought-out list of the federal government’s highest priorities for enforcement against cannabis operators, such as preventing sale to minors, diversion to non-cannabis-legal states, and revenue to criminal organizations. Keeping these priorities in the lease as affirmative obligations that the tenant must comply with, and giving the landlord an early termination option if any one is violated, adds an extra layer of protection for both parties and helps further the state’s goal of elevating good actors and sorting out the bad. Also, we’ve already seen some federal prosecutors issue statements to the effect that existing enforcement priorities (i.e. the Cole Memo) will guide future enforcement decisions.
  4. Change in local laws/nonconforming use designation. Federal enforcement and changes in federal law are not the only things to pay attention to. California law gives cities and counties final say in whether and to what extent cannabis operations will be allowed in their jurisdictions. If something changes in local law, such as a zoning ordinance, and the proposed use becomes nonconforming and unlawful, then whether or not operations have commenced, the parties may want an option to exit the tenancy rather than fight the local government.
  5. Secured interests. Just as with residential mortgages, contracts supporting secured interests on commercial property often contain “compliance with all laws” provisions. In light of the recent federal action, lenders may be less comfortable with cannabis uses on the property securing their investment, and may be more prone to call the loan due in full, creating a problem for both landlord and tenant. In such event, the landlord may want an option to terminate the lease early without penalty.

We don’t know where the state-vs-federal conflict will go from here, and for now the cannabis industry will have to continue dealing with uncertainty. So far it seems the market is betting on the states to come out ahead. In the meantime, there are some meaningful items to include in a commercial cannabis lease that may mitigate some uncertainty and risk.

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Oregon Cannabis: Leases Galore


Oregon cannabis marijuana lease
Same advice for pot leases.

For any marijuana business not fortunate enough to own its land outright, there are few documents more important than the lease. Not only is the lease the only transactional document reviewed by the Oregon Liquor Control Commission (OLCC) prior to licensure, but it sets fundamental operating parameters than can determine the success –and even life cycle — of the business. Problematic lease arrangements can sink a ship fast.

In Oregon, there are four main varieties of leasehold: the residential lease, the commercial lease, the ground lease and the agricultural lease. We steer most of our pot industry clients toward commercial and agricultural leases, depending on the circumstance. That said, we have had people walk in with just about everything.

Below is a brief summary on each type of lease, what to look for, and when to use them.

Residential Lease

Do not use a residential lease for a commercial cannabis operation under any circumstances. Even if you think you can revise the lease form to suit your purposes, do not be tempted; and if your landlord insists on this form of lease, say no. We are currently aware of two pieces of landlord-tenant litigation in which the parties used a residential lease for a commercial cannabis grow: those leases were upside down on everything, including the eviction process. One goes to trial next week after thirteen months of litigation.

The only time a residential lease should involve cannabis is in the residential landlord-tenant context, discussing the right of an Oregon tenant to grow up to four plants for home use (not OLCC; not re-sale) in accordance with state law.

Commercial Lease

We have written on commercial leasing a fair bit on this blog, and we have adapted a handful of excellent lease forms for various buildings and circumstances. Generally speaking, commercial leases are broken into three categories: office, industrial and retail. The latter two are used extensively by cannabis businesses.

Prior to entering into a commercial lease, the parties will commonly run some due diligence on each other. From the landlord’s perspective, that usually means looking at a business’ operating history (if any) and financials; from the tenant perspective it’s more about local zoning laws and the space. This last piece is especially important: the lease almost always disclaims any liability for premises defects with “AS IS” language.

Prior to signing a lease, the parties will often start with a letter of intent (LOI) that nails down the high-level terms: e.g. duration, rights of renewal, rental amount, occupancy commencement, rent commencement, landlord and tenant improvements, taxes, insurance, common area maintenance, etc. Once the parties agree on these deal points, the next step is to get busy drafting. Here are some cannabis-centric things to watch for at that point.

Ground Lease

Ground leases are long-term leases (think, 20 years or more) where the parties intend for the tenant to construct a building and other improvements (think, a row of cannabis greenhouses) which ultimately become the property of the landlord. These are almost always “net rent” leases, where the tenant pays all taxes associated with the property, including taxes, insurance premiums, utilities and maintenance.

Recently, we’ve seen an uptick in multi-acre property owners choosing ground leases. In some cases, a master ground lease with a series of subleases for different OLCC licensees is used to create a complex of sorts, assuming compliance with local zoning law and the availability of water rights.

Agricultural Lease

Agricultural leases are a specialized subset of commercial and ground leases, and they are used commonly in rural cannabis grows. These agreements tend to be laced with various provisions not present in other commercial leases, like irrigation, water rights, sharing of farming costs, maintenance of equipment, etc. These leases may also be tailored specifically to the nature of the land. This means that in addition to describing the property at issue, the lease will describe buildings, structures, fixtures and other appurtenances included in (or excluded from) the leasehold.

It is important to note that although commercial and agricultural leases are related in many ways, use of a commercial lease on certain types of rural property, like Exclusive Farm Use (“EFU”) land could theoretically have disastrous effects. In Oregon, “commercial activity” is banned on EFU land. More than one attorney has speculated that use of a commercial lease on EFU land could lead to that parcel’s tax benefits being removed.

Sometimes, an agricultural lease is the only way to go.

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California Cannabis: In 2018, Resolve to Make Your Leases Better


california cannabis marijuana lease
Put your lease on the list!

With the New Year upon us and California cannabis legalization in full swing, now is the time for industry players to make sure they are poised to thrive in the world’s biggest legalized cannabis market. A critical element of that strategy for commercial tenants, as well as landlords, is making sure the real property chosen for operation is properly tailored to the intended use, and is flexible enough to anticipate various adverse scenarios that can and will arise in a dynamic and rapidly changing legal landscape.

A smart and practical New Year’s resolution would be to make sure your lease is buttoned up and ready to go for commercial cannabis in 2018. Here are some points to consider towards that end:

  1. Stop using form leases. Yes, they’re easy and convenient, and checking boxes is certainly cheaper in the short term than writing a lease, but experience says one of two things will likely happen: either you will (1) end up spending just as much time writing addenda that cancel out, expand upon, or replace terms of the form lease, making it read more like a choose-your-own-adventure book that flips across chapters, or (2) you won’t, but you’ll be far more likely to run into costly problems down the road when you discover the lease is missing crucial pieces that would have helped you avoid a mess. Save yourself the trouble and plan ahead by working with an experienced real estate attorney who understands the proposed use and the industry in California, and can write a proper lease to fit the tenancy.
  2. Specifically describe the permitted use and define applicable law. There are important legal consequences under state and federal law for adult use cannabis operations vs. medical operations, and the state’s regulations require specific authorization from the landlord for whatever license the tenant will obtain. And of course, there remains the issue of federal illegality overhanging everything. To save everyone time and headaches down the road, make sure the parties are in clear agreement on exactly what categories of licensed activity will be allowed under the tenancy, specify that in the lease, and restrict it to that use. Simply writing “cannabis” or the evasive “any use not in violation of law” will not suffice. When it comes to applicable law, local law and state regulations should be front and center, and there should be a carve-out for inconsistent federal law, lest a tenant be in violation of the lease from day one.
  3. Keep it arm’s-length, or know the risks. Entanglement issues such as profit-sharing arrangements and equity-as-rent may be lucrative, but they require a higher risk tolerance. If a federal (or state) enforcement action occurs, the chances that the landlord will be considered part of the offending business may be higher than if the lease had been a traditional arm’s-length tenancy. Also, you might run into problems trying to enforce the lease if it amounts to asking the court to wade into cannabis business operations as opposed to enforcing an arm’s-length rent relationship.
  4. Clarify insurance obligations and anticipate increased operating expenses. Regardless of whether the landlord or the tenancy will be responsible for maintaining and paying for building and property insurance, the parties should realize that: (1) cannabis tenants will have a hard time finding quality property insurance policies right now, and (2) any new or existing policy will likely be much more expensive when a cannabis use is added to the property. In practice, this means that the parties need to decide who will be required to obtain and maintain which kinds of coverages, what the policy limits will be, what happens if that doesn’t happen, and who will bear the increased cost if it does. If it’s a multi-tenant building where common operating expenses will increase disproportionately due to the new tenant’s cannabis use, the lease should account for that and adjust accordingly.
  5. Do due diligence on the property first. Doing things like zoning and title analysis would more typically be associated with a new purchase than a lease. But with cannabis uses there are unique considerations that come into play, such as easements or CC&Rs that prohibit violation of “any laws”, water use rights (which will be a critical part of a state application, particularly for cultivators), and zoning restrictions. On that last item, it’s imperative that the proposed site not run afoul of local restrictions, and it behooves both the landlord and the tenant to have that issue ironed out before pen touches paper. The parties should consider including a due diligence period in the letter of intent, as well as including an early termination option for a variety of land use restrictions that could be triggered by cannabis use, including changes in zoning laws.
  6. Consider the neighbors. We’ve discussed at length how RICO lawsuits have found their way into cannabis land use disputes, as well as nuisance claims, and how NIMBYism will likely play a role in the California cannabis saga just as it has in other states. But similar to a zoning and title analysis, parties looking to start a commercial cannabis tenancy can and should factor the neighbors into the equation before deciding to commit to a lease. This is particularly relevant for business parks or multi-tenant buildings with non-cannabis tenants that might complain about the effect of cannabis (odors or otherwise) on their business operations. Better to know now than 3 years into a 10-year lease term. The parties can also consider including an early termination option in the event that neighbors bring a civil action.
  7. Consider the federal government. One of the most obvious reasons that form leases are wrong for cannabis tenancies is the failure to properly account for the fact that cannabis is still federally illegal, and the government can and does pursue civil asset forfeiture, putting the landlord at risk of losing the property over the tenant’s use. While there is no getting around the fact of federal illegality, one strategy is including early termination options for changes in federal law and/or enforcement guidelines, and for any forfeiture actions.
  8. Anticipate the license timeline. California has just started issuing temporary licenses to applicants who already have local approval. While those have had a relatively quick turnaround, full annual license application review could take longer, and in any event, there is the possibility that the tenant will be denied a state license and/or local approval. This uncertainty can be built into the lease in terms of rent abatement and an early termination option, depending how confident the parties are that approval will be successful.
  9. Make sure the occupancy plan stays legal. California’s new regulations dispensed with SB 94’s requirement that a licensee maintain “separate and distinct” premises for multiple licensed activities. However, licensed premises must still have a designated area dedicated to only one licensed activity at a time, with the exception of adult-use and medicinal operations being allowed to operate in the same place under certain circumstances. The new rules also contain a blanket prohibition on subletting of any licensed premises. This means that the parties should spell out in the lease exactly which activities will be conducted in which areas of the property. Whereas typical commercial tenants would have more or less free reign to use the leased premises however they choose as long as it’s within the permitted use, California’s new rules make this a more nuanced issue.
  10. Choose the right law, venue, and dispute resolution process. Limiting interpretation and enforcement of the lease to California law, restricting venue to state courts, and including a well-drafted arbitration clause are all important aspects of a cannabis tenancy that are typically missing from a form lease.

As we watch California’s regulatory and licensing process play out, landlords and tenants with properly tailored leases and well-researched land use analyses will be more likely to succeed and thrive. Many of the potential problems with the leasehold interest will have been considered and averted.

In 2018, resolve to make your leases better.

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California Commercial Cannabis Real Estate and the New MAUCRSA Rules

California cannabis real estate lawsCalifornia just released nearly 300 pages of new regulations for medicinal and adult-use commercial cannabis businesses. These long-awaited rules follow months of public comment, a substantial environmental impact report on cultivation, and a report from the state Water Resources Control Board on diversion and discharge relating to cannabis cultivation. Though the new regulations do not include wholly unanticipated changes, it does include the following that will impact cannabis businesses when it comes to real estate and land use:

  1. Cultivation aggregate size limits. Though there remains a 5-year prohibition on large (type 5) cultivation licenses for grows of more than 1 acre, and a 5-year limit of one medium grow license (10,001-22,000 sq ft) per person, there is no 1-acre aggregate limit on cultivation, which had been recommended in the environmental report. In other words, there is effectively no limit, other than a company’s monetary resources for license fees, that would prevent a large cultivator from converting an existing mega-farm into a cannabis farm by simply aggregating an unlimited amount of specialty (0-5,000 sq ft) and/or small grow (5,001-10,000 sq ft) licenses. This is a troubling development for small and medium-sized operators, as they had lobbied hard for an aggregate grow limit of one acre.
  2. Premises boundary demarcation. MAUCRSA allows for a person to apply for and obtain more than one cannabis license, provided the licensed premises are “separate and distinct.” We had hoped to get more guidance on this term through the regulations (e.g. does it require a wall? Nominal boundary demarcations? Something in between?), but no explanation appears in the new regulations. This means what does and does not qualify as “separate and distinct” may have to be determined through the licensing process on a case-by-case basis, since applicants all need to submit a premises plan laying out the details of their proposed operation. This could mean many indoor operators in open warehouse spaces may end up having to build extra walls and entrances.
  3. Subletting and Storage. Though we already knew from MAURCSA that California would require each “premises” to be contiguous and occupied by only one licensee, the new rules go slightly further by forbidding a licensee from subletting any portion of its licensed premises and by requiring each location where cannabis goods are stored be separately licensed. This means any licensee subletting a portion of their space must plan out a proper demarcation of their premises and think carefully about using that old garage next door to store product without an additional license.
  4. Concurrent adult-use and medicinal operations. Under the new rules, one licensee can concurrently operate under both an “M” license and an “A” license on the same premises, if certain conditions are met—mainly that there is one licensee that conducts a single type of operation on the premises but keeps labeling and records separate for medicinal and adult-use. Though this seems like a common-sense regulation (why would someone need two licenses to make the same product in the same place?), it was not clear until issuance of the new rules how adult-use and medicinal licenses would interact, and whether they would be treated as truly separate licenses requiring separate premises.
  5. Renewable energy requirements. The prior proposed MCRSA (medicinal) regulations had required 42% of the energy used by indoor or mixed-light grow licensees come from renewable sources. The new cultivation rules require only that the licensee meets the “average electricity greenhouse gas emissions intensity required of their local utility provider” under California’s existing Renewables Portfolio Standard Program. This means that rather than having indoor grows become leaders in renewable energy standards, licensees now only need to fit in with existing requirements, and even if they don’t, they can purchase allowances and offsets under California’s cap-and-trade programs. There had even been talk of increasing the percentage requirement for renewable energy, but that seems to have fizzled out.

Though the new cannabis rules contain some business-friendly updates, some disfavor small operators. It remains to be seen what effect the licensing process and the state’s enforcement of the new rules will have on the market for cannabis and cannabis real estate. We will be discussing these new regulations a bit at our Southern California Cannabis Investment Forum on November 30 in Los Angeles and it would also behoove you to stay tuned for an announcement setting the date for our next webinar, which will delve into the new regulations in detail.

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California Commercial Cannabis Land Purchases: Due Diligence, Due Diligence, Due Diligence

California cannabis real estate laws
Careful buying real estate for your California cannabis business

Last month, in California Commercial Cannabis: Beware the Residential Farm Purchase, I discussed some of the risks inherent in buying a residential farm for commercial cannabis operations. In this post, I expand on that a bit by addressing some broadly applicable pitfalls for anyone looking to buy land on which to conduct a licensed commercial cannabis activity in California (or just about anywhere else). This post focuses on some land use pitfalls unique to cannabis that our real estate lawyers often encounter during the due diligence phase of land purchase deals involving cannabis.

  1.      Easements. An easement is generally a right to access or travel across real property that belongs to someone else. Cannabis businesses need to look out for easements that benefit the purchasing owner’s dominant estate by allowing access to a neighboring property but are subject to express conditions such as “compliance with all laws” (which would include federal law). If the purchased parcel includes an express easement for parking on a neighboring property subject to “compliance with all laws,” the neighbor could seek to prevent access to the easement as long as the cannabis use remains federally illegal, which could jeopardize the business’s operations. A title analysis during the buyer’s due diligence phase should include not just the usual searches for recorded and non-recorded easements, but it also should also account for the implications on these property rights that a cannabis use might present, which would not necessarily present with a routine property due diligence.
  2.      CC&Rs. Though covenants, conditions, and restrictions are normally associated with residential property (think homeowner associations), they are also common in the commercial real estate industry. CC&Rs typically are binding on future purchasers. Restrictions that might not normally be thorny or even applicable to typical business uses can present unique problems when it comes to cannabis. Common examples of this are restrictions on odor and waste emissions, use/manufacture/trafficking of “illegal drugs,” and the pervasive “compliance with all laws” mandate. Because cannabis is still illegal under federal law (notwithstanding its legal status in California and other states), a beneficiary of a “compliance with all laws” restriction could seek to enforce the CC&Rs against a cannabis operator. Consequently, due diligence for cannabis land purchases should include both a thorough review of CC&Rs and creative thinking on how those restrictions could potentially be interpreted against a cannabis use.
  3.      Zoning and local cannabis ordinances. A buyer looking for land for commercial cannabis operations has usually narrowed the search to jurisdictions with some form of commercial cannabis ordinance (See our California Cannabis Countdown series, which tracks updates in cannabis legalization by locality). Though many California cities and counties have passed legislation to accommodate new zoning requirements for cannabis uses, the burden is on the buyer to confirm that the parcel it seeks to buy will be suitable for its intended use, and, ideally, that it will stay that way. This means conducting due diligence on the local cannabis ordinance and on other related zoning laws and local land use restrictions. This also often means working with the locality to put in place a development agreement (sometimes required by the local ordinance anyway) to make sure the zoning laws won’t change.
  4.      Geographical vicinity and state regulatory requirements. In addition to local zoning requirements, cannabis operators must consider state laws when deciding where to locate. California’s Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA) requires cannabis businesses maintain at least a 600-foot distance from schools and other youth gathering places. Local cannabis ordinances commonly include geographical buffer requirements that mirror current state requirements, but they can (and they sometimes are) be stricter than MAUCRSA’s. This means that your search for land suitable for your cannabis operation should include an analysis of local and state geographical buffers and any other local restrictions.
  5.      Neighbors. The importance of maintaining good neighbor relations cannot be overstated in the commercial cannabis industry. You should assume any neighboring landowner who opposes your business operation would have no trouble finding a legal basis to challenge it. They can (and often do) seek to enforce land use restrictions or lobby to change local zoning laws to the detriment of cannabis businesses. Or they might just bring an old-fashioned nuisance lawsuit against you, claiming the smell from your property or the number of people who visit it are damaging them. Your due diligence should, therefore, include gauging the potential risks coming from your future neighbors, particularly if the land you are considering is close to residential zoning or urban areas, where NIMBYism is likely to be more acute.

Due diligence on a real estate purchase is always important, but the unique characteristics and legal status of cannabis make it even more important for commercial cannabis businesses.


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California Commercial Cannabis: Beware the Residential Farm Purchase


California cannabis farmsWith California’s cannabis real estate market red hot right now, many cannabis businesses are looking at buying rural farms with family farmhouses as sites for their marijuana business. This though can be a risky approach. Businesses hoping to become legitimate licensed operators under California’s Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA) should consider the following before signing on the dotted line on this sort of real estate deal:

  1. Government approval contingencies. One of the most important differences between a residential and a commercial Purchase and Sale Agreement is that well-crafted commercial agreements (especially in the cannabis industry) usually contain business-specific contingencies, including a contingency for local and state government approval that the buyer will be able to confirm that it can legally use the property for its intended use. Residential real estate Purchase and Sale Agreements (even those with an agricultural addendum) rarely include these specific contingencies, leaving the buyer to investigate and bear the risk. Because local law is king under MAUCRSA, you need a contingency in your real estate Purchase and Sale Agreement that will allow you to stop the deal if your local government is not going to let you conduct cannabis business on the property.
  2. Zoning. If a seller is using a residential Purchase and Sale Agreement because a house is included with the land purchase, chances are good that the property being bought is zoned residential. This sort of zoning increases the likelihood commercial uses will be disallowed altogether or restricted by local ordinance — many of which will roll out in the months and years to come as MAUCRSA licensing tees up. Even rural properties that look suitable for farming must be closely scrutinized for land use restrictions of all kinds, including zoning. A buyer cannot simply rely on the appearance of the property or on general knowledge about a past use.
  3. Nuisance. California’s Right-to-Farm laws generally work against neighbors seeking to bring nuisance claims against farming uses abutting a residential development. But those laws do not (at least as of yet) make cannabis an explicit agricultural product that landowners have a right to farm. Add that to probably the most common complaint about cannabis — odor — and you can see why that family farm could end up creating a NIMBY problem that would not be there with your typical cornfield. See California Cannabis NIMBYs and Land Use Disputes.
  4. Civil asset forfeiture. Even state-legal cannabis businesses are at risk of federal civil asset forfeiture actions and that sort of action could be even harsher for cannabis operators living in a house on their cannabis farm — the federal government could take their house as well as their land.
  5. Conservation Easements. California’s Williamson Act allows localities to enter contracts with landowners that restrict the use of their property to only agricultural purposes and not build any improvements on the land in return for local tax breaks. Some California localities (even those with medical cannabis licensing ordinances) will often decline to waive prohibitions on federal illegality in agricultural conservation easements to allow cannabis operations on those parcels because federal funding is directly tied to these conservation programs, and it is much easier for the federal government to turn off a locality’s funding spigot than to pursue a civil asset forfeiture against individuals and their land. This means you should carefully examine all land use restrictions on any parcel you are considering buying.
  6. Water rights. California’s water rights laws are complex and contentious (see, e.g., Chinatown). A California landowner’s right to use a nearby water source can flow from a number of different legal sources, such as riparian rights (land is adjacent to water source), appropriative rights (first in time, first in right), prescriptive rights (akin to adverse possession), overlaying groundwater rights, adjudicated rights, contractual rights, statutory rights, etc., etc., etc. What’s more, these various rights frequently compete with each other in priority for finite water sources, particularly during droughts. A potential buyer of a residential farm will need to look closely not only at the existing water rights associated with the property, but also at the potential for those rights to be augmented, especially if the intended use is cannabis cultivation, which is water-intensive. Commercial properties, especially those with past manufacturing or large scale agricultural uses, usually have greater established water rights than a small family farm. Furthermore, though the California Department of Food and Agriculture has not yet issued its final cannabis cultivation rules (those will come in November), MAUCRSA will require government approval of any water diversion for cultivation purposes (and water board approval by certain fast-approaching dates for some water sources), which is something that can be included in a government approval contingency but that would not typically be included in a residential Purchase and Sale Agreement, so amend accordingly.

The above list highlights just some of the key land use issues you should consider before you do any residential land deal involving cannabis.

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Business Hashish Land Improvement: Improvement Agreements as Beneficial Software


Cannabis Development Agreements
Improvement agreements must be in your actual property software package.

We’ve seen this film earlier than: a metropolis will get enthusiastic about business hashish alternatives and passes an ordinance permitting indoor medical hashish cultivation. After the regulation goes into impact, neighbors complain about odors or aesthetic points or simply as a result of they don’t need something to do with hashish of their neighborhood. Eventually, the suitable neighbor complains to the appropriate metropolis council member and hashish suffers a serious setback with a restrictive ordinance or perhaps a moratorium. The town declares the “offending” hashish enterprise use to be nonconforming and points a discover and order to abate. The hashish enterprise finds itself a whole lot of thousand dollars in debt on its development/build-out venture with no path ahead for with the ability to function and a allow it might’t take elsewhere as a result of it runs with the land.

How then ought to a would-be hashish tenant or purchaser keep away from this danger, or at the least mitigate towards it, earlier than leaping into an enormous funding for enhancing the land? A improvement settlement is one answer.

A improvement settlement is actually a contract between a property proprietor/developer and a municipality that specifies how a given parcel will probably be improved and used for a sure finite time period, and specifying how the planning and zoning legal guidelines for that parcel will change or not change throughout that point. Municipalities profit from improvement agreements as a result of by decreasing danger they encourage improvement and improve property tax revenues. The property proprietor/developer advantages by having a lot larger certainty relating to the makes use of to which the property could also be put.

The added certainty of secure zoning makes builders and their buyers and lenders extra prepared to take a position their time, effort, and monetary assets into enhancing the land. And not using a improvement settlement, builders sometimes should danger paying architects, engineers, and contractors earlier than they will get hold of a constructing allow from the municipality. Builders and municipalities typically find yourself litigating over vested rights and the allowing course of. Underneath California’s vested rights doctrine, solely after builders get hold of the constructing allow can they make sure their parcel will stay unaffected by future zoning regulation modifications — and even this isn’t all the time a complete certainty, as California courts have discovered exceptions that permit zoning modifications, relying on the circumstances.

Given its unpredictability and its big potential, California’s business hashish business is a chief candidate for improvement agreements, but they’re nonetheless not often used for hashish enterprise land improvement. I see this as on account of a mixture of issues, starting from native authorities reluctance to tie land inside metropolis limits to makes use of the federal authorities nonetheless deems illegal, to hashish legal professionals (particularly those that solely lately switched from representing hashish felony defendants) merely not figuring out about improvement agreements. See How To Select Your Hashish Enterprise Lawyer.

Regardless of the cause, much less certainty in already unsure occasions is dangerous for all events concerned.

Cities need to appeal to accountable, skilled builders to enhance land and public infrastructure and improve property values and tax revenues. Builders and their associates search certainty that the enhancements they pay so as to add to their land could also be legally utilized. Cities that cross ordinances to permit hashish enterprise actions, in addition to would-be purchasers and builders, must be contemplating improvement agreements as a part of their business hashish improvement plans.

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California Business Hashish Leases: Will Courts Implement Them?


California cannabis commercial leaseA contract isn’t value a lot with out your with the ability to implement it, and the identical goes for business leases. We’ve written about distinctive issues in hashish contracts because of the state-vs-federal illegality drawback (see right here, right here, right here) and of how courts have navigated that inconsistency within the context of contract enforcement. However in terms of business hashish leases in California, landlords and hashish corporations alike need to understand how probably it’s a courtroom will implement their lease. The brief reply: it’s a lot likelier now than 5 years in the past.

The primary problem with California business hashish leases, as with all hashish contracts, goes again to the issue of federal illegality. As a result of hashish continues to be federally prohibited beneath the Federal Managed Substances Act, it’s federally unlawful to domesticate, manufacture, or promote hashish for any function. This implies hashish contracts set off the doctrine of illegality in contract regulation, which holds that contracts with no lawful object are void and unenforceable as towards public coverage. Although enforcement of contracts is usually ruled by state regulation, state regulation consists of federal regulation beneath the U.S. Structure’s Supremacy Clause.

Courts have struggled with tips on how to reconcile the totally different legal guidelines, however a constant theme emerges in California courtroom selections: business hashish lease agreements will usually be enforced as long as the dispute earlier than the courtroom is only contractual and as long as the owner and tenant are in an arms-length transaction for cost of lease. One notorious instance of that is the Harborside case, the place a U.S. District Courtroom declined to void a business lease for a hashish dispensary on grounds of illegality, the place the dispensary was in compliance with California regulation.

One other newer instance is Mann v. Gullickson, a November 2016 Northern District of California choice involving a dispute between a creditor plaintiff who bought shares in two hashish companies to the defendant in change for a promissory notice. When the creditor sued for nonpayment beneath the promissory observe, the defendant argued federal illegality rendered the contract (the promissory word) unenforceable. Although the courtroom acknowledged it might void a contract if it required a celebration to violate the CSA by, for instance, requiring it to domesticate or promote hashish, for a number of causes, the courtroom declined to take action on this case.

First, the truth that the courtroom might order cost on the observe with out requiring any cannabis-related actions meant that implementing the contract wouldn’t essentially additional an unlawful objective. Second, even when an unlawful function have been to be furthered, the courtroom discovered it might be inequitable for the defendant to be unjustly enriched by not having to pay on the promissory word. Third, the courtroom famous that many states, together with California, had lately modified their legal guidelines to encourage state-legal hashish enterprise actions, thereby undercutting the defendant’s public coverage argument. Fourth, and most apparently, the courtroom referred to as out the noticed impact of adjusting state legal guidelines on federal enforcement: “The federal authorities’s concern over the CSA’s medical marijuana prohibition has waned in recent times, and the underlying coverage purporting to help this prohibition has been undermined.” The courtroom additionally famous that beneath the McIntosh case, the Rohrabacher-Farr modification prohibits CSA enforcement towards medical marijuana within the Ninth Circuit (the federal appellate circuit that encompasses California).

The lesson to be drawn from these instances for California business hashish leases is that hashish leases must be written to maintain the landlord-tenant relationship as an arms-length transaction. This implies no profit-sharing preparations, no funds in hashish product, and no fairness shares altering palms; simply cost of lease. Finally, the easiest way to keep away from enforcement issues on your California business hashish lease could also be to incorporate a well-drafted arbitration clause that specifies selection of California state regulation, amongst different issues, as that may to a big extent side-step the difficulty of courtroom enforcement, at the very least till you’ll want to get your arbitration award enforced by a courtroom.

That will help you higher perceive what’s going on with California hashish and what MAUCRSA means on your hashish enterprise, three of our California attorneys can be internet hosting a free webinar on Tuesday August eight, 2017, from 12 pm to 1 pm PT. Hilary Bricken from our Los Angeles workplace will average two of our San Francisco-based attorneys (Alison Malsbury and Habib Bentelab) in a dialogue on the most important modifications between the MCRSA and MAUCRSA, together with on vertical integration and possession of a number of licenses, revised distributorship requirements, and what California hashish license candidates can anticipate extra usually from California’s Bureau of Hashish Management as rule-making continues by way of the rest of the yr. They will even tackle questions from the viewers each throughout and on the finish of the webinar.

To register for this free webinar, please click on right here. We sit up for your becoming a member of us.

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California Hashish Leases – 5 Keys to Doing Them Proper


California cannabis leaseBusiness leases for hashish companies are distinctive and require particular issues for danger administration through the tenancy. Business hashish leases in California are susceptible to the next pitfalls inherent in a landlord doing enterprise with a hashish tenant, and these dangers must be thought-about when deciding find out how to construction your landlord-tenant relationship:

  1. Accepting possession within the hashish tenant firm. Shopping for and promoting shares in privately held hashish corporations can set off state and federal securities legal guidelines and create regulatory issues underneath California’s hashish licensing program. A landlord’s acceptance of an possession share from a tenant in lieu of or along with lease can jeopardize the hashish tenant’s California state hashish license standing. California’s proposed hashish guidelines outline an “proprietor” as an individual with 20% or extra possession within the licensed hashish firm, a CEO or board member with 5% or extra possession in an entity with 20% or extra possession within the licensed entity, or any person who workouts “path, management, or administration” of the licensed enterprise. All such “house owners” are topic to thorough background checks as a part of the corporate’s means to accumulate and keep its hashish enterprise license. A change in possession or management places the tenant’s license vulnerable to being revoked, harming each landlord and tenant.
  2. Receiving hashish product as lease cost. Although cash-poor hashish tenants might have hassle discovering financing, they often have loads of worthwhile hashish product. However for a similar causes landlords ought to keep away from accepting possession of their hashish tenants enterprise entities, they need to additionally keep away from accepting hashish product as nicely. Not solely does a tenant offering its landlord with hashish jeopardize the tenant’s license (and thus the owner’s supply of lease income), it additionally exposes the owner to legal responsibility for working as an unlicensed hashish service provider. California’s proposed hashish guidelines strictly management who can and can’t deal with or settle for hashish product as a part of a licensed operation, and circumventing these strictures exposes each landlord and tenant to legal responsibility.
  3. Revenue/income sharing. Business leases for garden-variety enterprise tenants typically embrace phrases requiring the hashish tenant pay a sure proportion of its income or income to its landlord along with or as a part of lease. Although this type of association might be advantageous in different conditions, it raises issues for hashish tenancies since receipt of income or income particularly tied to hashish gross sales can expose the owner to legal responsibility for unlicensed hashish exercise as a de facto proprietor. 
  4. Liens for build-outs. Indoor agricultural grows require distinctive environmental management techniques and this in flip typically means hashish tenants should interact in costly build-outs. Landlords might need to search lease provisions making certain all alterations be approved in writing beforehand, that the owner acquires no possession or profit from any alterations, and that each one alterations have to be eliminated when the tenancy ends until the owner elects in any other case, along with serving notices of non-responsibility the place applicable. Primarily, landlords will need to keep away from permitting build-outs which may end in liens filed towards their actual property. Then again, the owner might need to be concerned within the build-out to outfit the power to its personal preferences. In different phrases, landlords ought to search to keep away from unintended entanglements whereas structuring their leases to mirror their intent.
  5. Entry and safety. Although landlords sometimes need business hashish leases to permit them entry at any time with affordable discover for issues like upkeep, inspections, and showings, the state of affairs is totally different for hashish enterprise tenants. California’s proposed hashish guidelines underneath the Medical and Grownup Use Hashish Regulation and Security Act (MAUCRSA) require hashish tenants to arrange and keep a rigorous safety protocol that solely permits product to be dealt with by approved people, and that solely permits approved people to entry the premises. Unfettered entry by a landlord will doubtless increase issues with California’s hashish regulators, and with good cause. A part of the rationale for complying with strict state-mandated safety necessities is to additional federal enforcement objectives, akin to stopping diversion of product to minors or to states the place hashish has not been legalized. By failing to sufficiently regulate entry within the lease, the owner can unintentionally entangle itself with the operations of the licensed hashish entity and thereby place its tenant’s hashish license in jeopardy.

Backside Line: California business hashish tenancies profit from being stored as arms-length transactions in order to guard towards problematic entanglements, each meant and unintended and any proposed tenancy must be analyzed with this aim in thoughts.

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California Business Hashish Leases: Arbitration Versus Litigation


California cannabis leaseWe’ve written beforehand on arbitration and why it so typically is sensible for hashish enterprise contracts, primarily due to enforceability points stemming from hashish being unlawful beneath federal regulation. However within the realm of economic actual property leasing, hashish makes use of can current different distinctive challenges that require considerate options to disputes, and, extra importantly, considerate planning to organize for potential disputes down the street.

Under are a number of the points our California hashish legal professionals sometimes think about when anticipating methods to draft dispute decision clauses for business hashish leases.

  1. Enforceability of the lease and the arbitration award. Federal illegality of hashish impacts all hashish enterprise transactions. Although the Federal Division of Justice has issued hashish enforcement tips within the Cole Memo (and each cannabis-touching lease settlement ought to embrace language mandating compliance with these tips), this does not assure towards federal civil asset forfeiture or different federal enforcement actions. One other consequence of federal illegality is that hashish corporations should think about what recourse they may have in implementing their contracts and account for federal district courts being unwilling to implement any such contract. Because of this alone, it’s going to almost virtually all the time be higher so that you can have your disputes resolved in a California state courtroom that might be much more more likely to apply and implement California state hashish legal guidelines. California state courts can even apply federal regulation, however as a result of there’s typically a danger of your case being eliminated to federal courtroom you must all the time think about placing an arbitration clause in your hashish business leases, specifying the arbitral physique, limiting how the lease and the arbitration award may be enforced (confining it to state courts, maybe) and limiting potential appeals.
  2. Selection of regulation. We’ve written about how California business hashish landlords (and tenants) ought to think about beefing up their lease’s indemnity provisions, permitting for early termination within the occasion of enforcement actions, disallowing federal illegality as a grounds for invalidating the lease, and usually requiring strict compliance with California state regulation for the precise proposed hashish use. For comparable causes, arbitration clauses can embrace a mandate that the arbitral physique apply state regulation and the California Arbitration Act, and never, for instance, the Federal Arbitration Act, which permits an award to be vacated the place the arbitrator “manifestly disregards the regulation.” It isn’t troublesome to think about a state of affairs the place a federal courtroom vacates an arbitral award for an arbitrators having failed to use the Managed Substances Act or void the hashish lease ab initio. California arbitration clauses ought to, at minimal, particularly define 1) the tactic for selecting the arbitrator, 2)  the legal guidelines the arbitrator should apply in resolving the dispute, and three) the usual of assessment any reviewing courtroom should apply. For a lot of California actual property transactions, the arbitration clause also needs to embrace particular statutory discover language.
  3. Carve-outs for Illegal Detainer, Nonpayment, and different Early Termination Causes. Although arbitration could be a extremely useful gizmo, landlords will even need to keep their capability to hunt cures for nonpayment of lease and illegal detainer (eviction) with out having to undergo the arbitration course of. Equally, if a tenant faces a state or federal enforcement motion, the owner (and even the tenant for that matter) will doubtless need to keep its capacity to terminate the lease shortly and with out arbitration. The events to a California business hashish lease ought to all the time contemplate carving out exceptions to arbitration to maintain choices open and to encourage well timed efficiency of the lease.
  4. Arbitrator’s business experience. California arbitrators are typically retired California state courtroom judges and the modifications of this kind of arbitrator having deep information concerning the hashish business or hashish legal guidelines will not be good. However spelling out the arbitrator choice course of in your business lease settlement (and even naming the precise arbitrator or arbitrators) can assist you to make sure your arbitrator has enough hashish business information to know any eventual dispute.
  5. Think about making mediation step one. Arbitrations might be costly and their outcomes unsure. So as an alternative of drafting a business lease settlement that requires you to leap proper into that course of each time a dispute arises, think about making personal mediation a compulsory first step earlier than a requirement for arbitration might be made.

Although each business lease dispute is exclusive (much more so for hashish business leases), there are widespread themes and one is that non-public dispute decision tends to work greatest for disputes between hashish companies.