We’ve written quite a few occasions about how industrial leases to cannabis tenants are their personal beasts. Generic leases do not ever the job carried out. And, in California, as poor as some landlords want to rely solely on AIR and Vehicle types, we commonly caution landlords to have a customized lease arrangement when dealing with a cannabis tenant. And even even though quite a few of the provisions from the boilerplate will absolutely make it into your custom cannabis lease, fairly a great deal each provision has to be reviewed and reformed to cannabis-certain troubles all with an eye to the state-federal law conflict. With that in thoughts, right here are the largest pitfalls for California cannabis leases in 2019:
1. Local authorization.
So quite a few proposed leases reviewed by our California cannabis attorneys totally miss the truth that just before a tenant can safe a state license they have to very first safe nearby authorization from their city or county beneath the Medicinal and Adult-Use Cannabis Regulation and Security Act (“MAUCRSA”). The California cannabis scene is a single of intense nearby manage, and all 482 cities and 58 counties are handling MAUCRSA differently, so landlords will need to get extremely familiar with what cities and counties are enabling. I nonetheless get calls from landlords in unincorporated LA County that want to lease to cannabis tenants and the county nonetheless maintains a ban, which indicates there are no lawful cannabis tenants in LA County at this point. And in the City of L.A. quite a few landlords are unaware of or confused about how Phase three licensing will perform with social equity major the way. All round, landlords also will need to realize that not all cities enable each medicinal and adult-use cannabis activity it is totally dependent on the city or county and will impact the lease accordingly. In turn, landlords should really absolutely call for that their tenants seek out and safe nearby approval (and in pretty much all jurisdictions, the tenant will have to show certain landlord authorization to the nearby government) as portion of their lease overall performance obligations. On the other hand, landlords have to very first seriously get a manage on what nearby authorization appears like in their personal backyard to assure that this certain tenant overall performance obligation really tends to make sense beneath the lease.
two. State licensing timeline.
With the advent of the legislature reviving and extending the lives of provisional licenses, it is now fairly uncomplicated to get a state license (despite the fact that nearby authorization is nonetheless needed for that). On the other hand, a provisional license is not an annual license. Quite a few industrial cannabis leases ignore the distinction amongst provisional and annual licenses and mandate that their tenants just “secure a state license.” The timing of the state’s issuance amongst these two license forms is wildly distinctive even though and it will make a distinction for the lease at situation in that quite a few landlords contemplate cancellation of their leases in the occasion state licensure of some sort is not secured by a set date. For annual licenses, it could be far more than a year just before a tenant gets a single. For provisionals, it could be a matter of weeks based on the agency in query. Nonetheless, the annual license is seriously the purpose right here that eventually secures the licensee’s complete potential to operate for a offered year. In turn, landlords should really be unique about the distinction amongst their tenants having provisional versus annual licenses relative to the other overall performance and operational obligations for the duration of the term of the lease.
three. Change in nearby and state laws and guidelines.
Due to the fact the state agencies started issuing licenses beneath MAUCRSA back in January of 2018, the state’s interpretation of its personal guidelines has been unpredictable. Likewise, the cities and the counties (in charge of nearby authorization) have gone back and forth more than no matter whether they’ll regulate or ban cannabis, and for these that chose to regulate, they continue to reform their nearby laws as market troubles arise. Any offered transform in interpretation by the state relative to agency regulation or any pivot by nearby government relative to nearby cannabis laws will undoubtedly impact a cannabis tenancy. For instance, in Santa Barbara County, the County supervisors institute a cultivation canopy cap in July, which eventually indicates that any would-be or current cultivator in the County that was pondering about expansion or filing new applications for new cultivation web pages that weren’t currently in the permitting queue will be prohibited from moving forward regardless of no matter whether they have an current lease that permits for such actions. And if, for instance, the California Division of Public Well being (which oversees suppliers) decides that particular items will be added to its prohibited items list, suppliers have to comply with such directive or they could face substantial troubles with their licenses. All of this to highlight the truth that a California cannabis lease have to also contemplate pretty much continual alterations to nearby and state laws and guidelines relative to actual cannabis operations.
four. One licensee per premises. I
t’s been the case for some time now that California landed on the a single licensee per premises rule. Nonetheless, landlords nonetheless look to misinterpret this state law mandate on a quantity of levels. What the rule indicates is that a single licensee can only take up a single “premises.” Assume of the premises as the space in which the industrial cannabis activity requires location but not necessarily the whole home on which the premises sits. The easiest true-globe instance is a strip mall with various suites taken up by various tenants. In California, a cultivator could be housed in suite a single with a manufacturer in suite two and this rule would be happy. Half the trouble is that various cities and counties do not seriously address this rule and we hence see quite a few leases that wrongfully enable various licenses of a single tenant to be housed in a single premises.
five. Mortgage loan violations.
California does not have the toughest cannabis guidelines when compared to other states. As a outcome, we do not have superb access to the monetary institutions beneath the 2014 FinCEN suggestions, so it is nonetheless fairly tough for cannabis corporations to safe even just bank accounts. This indicates landlords will be paid in money most of the time (or by a parallel management business that is most likely owned by or affiliated with the licensee so that the landlord can be paid with a verify). Either way, as soon as the landlord’s bank uncovers that it is leasing its home to a cannabis tenant (since its paid in money a single also quite a few occasions or since the bank checks up on the collateral), mortgage violations abound. Why? Since this (generally) boilerplate document dictates that no waste or illegal activity take location on the collateral true home, and a cannabis tenant straight violates federal law and hence the mortgage agreement amongst the landlord and its bank. This scenario should really be quarterbacked from the outset of the cannabis tenant and landlord connection given that it is hugely unlikely that the landlord will be capable to effectively push back on the bank and will face losing the home to the bank as a outcome.
six. Security, Insurance coverage, and Access.
California like each other state has unique facility safety and access specifications, and it also maintains unique insurance coverage specifications for licensees. On safety, what have to be at the facility is determined by the agency issuing the license, and particular license forms have far more substantial safety specifications than other people (for instance, retailers will need true reside, state-certified safety guards for the duration of hours of operations even though other licensees do not). Landlords should really at least be familiar with their tenant’s safety installation specifications and also ask for a copy of the corresponding premises diagram to assure that the tenant is adhering to these extremely certain guidelines. For access, not just anybody can enter a cannabis facility either, like a landlord (which will reduce against the grain of most landlord friendly leases that enable no cost access with requisite notice). The tenant will fundamentally will need to have an ID badge for the landlord and “limited access areas” call for accompaniment by the licensee at all occasions. All of this will will need to be sorted in the lease to assure that the tenant is not in default. And with regards to insurance coverage, only industrial basic liability insurance coverage is needed for distributor licensees, but all licensees have to safe surety bonds. Beyond that, insurance coverage is to be negotiated amongst the landlord and tenant and it is nonetheless no picnic in securing largely conventional home and other types of insurance coverage as a cannabis tenant (since of federal illegality).
Even in 2019, these lease pitfalls nonetheless exist in California. On the other hand, so lengthy as landlords (and tenants) spend focus to the specifics of cannabis licensing and the accompanying state and nearby laws and regulations, an enforceable and strong cannabis industrial lease is completely probable. For far more on how (and why) to reform your current California cannabis lease, see right here.