At last, there will be the moment of reckoning where the terms of the lease with a medical marijuana enterprise (“MME”) must be drafted and negotiated. So, what provisions will the landlord require its attorneys insert into the lease? Here’s a laundry list, arranged loosely by topic:
Term, Renewals and Early Landlord Termination Rights: The term of the lease may be influenced by the lender who is dealing with its institutional anxiety (see part Three of this series), but whatever term is selected, there must be early landlord termination rights, for the following reasons. A Department of Justice prosecution of the MMB operation under the Controlled Substances Act must be grounds for termination of the lease at the election of the landlord. There is enough risk of prosecution of the landlord under federal or state forfeiture statutes to merit an early “out” clause for the benefit of the landlord. A second basis for early termination must be the rendering of a judgment by a civil court finding the operation to be a nuisance (public or private) or a violation of the quiet enjoyment clause of a co-tenant’s lease. The landlord has to be certain that it will not get whipsawed by being obligated to close down the use and exposure to the MME that has lost its place of operation. The tenant may negotiate for an agreement that the landlord won’t “roll over” if sued but will vigorously defend the claim; the landlord’s response should be an agreement to defend as vigorously as the costs-of-suit-reimbursing tenant’s budget permits. As in other commercial leases, any tenant renewal options should be tied to the fact of no default being in existence at the time the option is to be exercised. I’d include in that concept that a tenant “default” would include a pending investigation by law enforcement authorities of the MME operation. A tenant may want an early termination right if the MME is subject to new regulations with which the tenant cannot afford to comply, or if the regulations make the MME’s principals ineligible for licensure. The landlord may want to entertain such discussions, but should be paid an early termination fee by the tenant and should consult with its lender before agreeing to such a provision.
Use Clause and Landlord’s Right to Inspect: The use clause needs to be narrowly drawn, describing the types of Cannabis products to be sold, and whether growing will or will not be a use. Whatever the use is, the clause must include a statement about the tenant’s obligation (at its sole expense) of compliance with all federal, state and local laws. Don’t forget that this should include compliance with the ADA (federal and state) laws and regulations for access to the premises by persons with disabilities, including chronic pain and motion limitations (which might, in the future, require a higher parking lot ratio of disabled persons parking stalls). This also should include the requirements for the tenant’s appropriate disposal of waste products of cultivation, preparation and packaging/repackaging by the MMB of products being dispensed. No landlord needs to discover 24-hour dumpster-diving going on in the common areas of its project. All byproducts of cultivation, drying and curing should be disposed of in airtight and opaque containers so as not to attract attention by human senses and invite unwanted visitors into the common areas.
Landlords must secure the right to inspect the premises during normal business hours. It’s advisable once in a while to check for items implicating hygiene, fire hazards and indoor air circulation and quality, and to put the tenant on notice if any such items appear to be neglected. Why? The tenant who is out of compliance with regulations likely will be shut down; and the MMB that is shut down won’t generate any rent. If the operation isn’t operating to some reasonable standard of professionalism in the industry, the landlord ought at least to be prepared for exercising its remedies without delay.
Environmental Compliance Covenants: All of such covenants have to be absolute in terms of the expense of compliance, including with respect to disposal of hazardous substance containers. Second, it’s entirely reasonable to require the prospective tenant to schedule (in the lease exhibits) all the fertilizers and herbicide/pesticide products it intends to maintain on the premises, and to update the schedule on a regular (say, every six month) basis. If a landlord would require that of a paint store, dry cleaner or print shop, why act differently in this case? The landlord should require the product brand names (not just the manufacturer’s name) to be provided on the schedule to be delivered periodically to the landlord. Brands from the same manufacturer have different potencies and “side-effects.”
Tenant Improvements and Premises Security: Until all the pertinent jurisdictions’ regulations and rules sort themselves out, beware representing or warranting anything about the suitability of the premises and the project for an MMB other than stating that the base (underlying) zoning is suitable. Also, the lease should make clear that (i) the tenant has to pay all costs of permits, licenses and other approvals without landlord reimbursement for tenant improvements that are unique to the operation of the MME (and that may include some types of ADA requirements), and (ii) only the tenant will do the heavy-lifting to comply (in Arizona) with A.C.R. R9-17-304 (which requires certain physical barriers to premises’ access), although the landlord must agree to cooperate to a reasonable degree with the elements of the application upon the request of the tenant. Finally, as these regulations evolve, there may be additional requirements that the MME cannot claim to be “grandfathered” from complying with. In those instances, the cost of refitting the premises to comply will need to be the tenant’s obligation. Indeed, the landlord should consider a provision allowing it to elect (in its reasonable discretion) to require more security than mandated by laws and regulations should the need arise; a security guard in the parking lot of a busy dispensary is one illustration of a specialized need.
In the next post, I finish a tour of the commerce park/industrial standard-style lease to suggest other items to be negotiated and documented with the MME and the owner’s other tenants and lender in mind.