By James Forbes
In no business is the “devil is in the details” more appropriate than in marijuana business, and in no business can things go crossways quicker than in a slip-up in the details of a landlord/tenant relationship.
The marijuana industry is proving to be profitable for landlords, with businesses willing to pay premium rents. Conversely, it is also complex and has many details from a risk management standpoint.
Following the last election, more than half of the states now approve the sale of marijuana, either for medical or recreational purposes. That’s a promising trend for this fast-growing industry, but looming in the shadows is the federal government, which has yet to legalize marijuana.
While the feds have opted for a relaxed stance on enforcing marijuana laws in states where it is legal, that doesn’t mean there isn’t risk to manage. And this is just one of the many details property owners must consider when taking on a marijuana business as a tenant.
The lease and insurance are two critical areas where you need to understand all of the details.
First, let’s tackle the lease. Each state has specific laws pertaining to dispensaries, cultivation sites, caregiver facilities and manufacturing hubs. An experienced attorney in the cannabis industry is the centerpiece in helping landlords and tenants meet those regulations before signing an executable lease. For example, a dispensary that only has a permit to sell medical marijuana should not be growing marijuana, nor should it be selling to recreational customers, and vice versa. It should go without saying, but don’t take for granted the process of acquiring permits and licenses.
A critical area for this industry is the form of payment. Many standard lease agreements permit payment by check or money order, however these methods are not available to marijuana businesses. Your agreement should ensure that cash is an acceptable form of payment.
The state-federal disagreement on marijuana has a direct impact on lease agreements, since marijuana is still a Schedule I narcotic at the federal level. The lease should include language that ensures both parties follow as many federal, state and local laws so exposure to prosecution is minimized.
The devil we’ve been talking about can be especially devious when it comes to zoning and building laws. Marijuana businesses have unique requirements and it is easy to miss a detail and find you are shut down after work on the property has been completed. Now, not only is the tenant scrambling, but the landlord is out a tenant.
When it comes to insuring property and operations for a marijuana business, here’s advice you likely won’t expect to hear: don’t trust your agent. That doesn’t mean agents aren’t honest people, but most agents know absolutely nothing about the marijuana business. In fact, most agents rely on the insurance carriers to know the details. You might call that the fox guarding the hen house.
While there are many progressive insurance companies in the cannabis industry, it’s safe to say that most are extremely conservative in how much risk they will take in this rapidly-developing industry, and rightly so. Here’s an example: most landlords have a lessor’s risk policy in place, and most tenants name their landlords as additional insureds on their policies. The problem: many insurance professionals and clients overlook exclusions and endorsements in their policy language that often alter the coverage, or provide no coverage at all.
To avoid denied claims, landlords and tenants should seek coverage that includes marijuana and marijuana products in policy language. Even more important, any person currently operating in the marijuana field should seek professional consultation to ensure that they don’t have marijuana “excluded” in policy language.
Here’s a great example: The landlord and tenant meet all permitting, licensing, zoning and building requirements, but then all hell breaks loose: a fire. Both parties believe the losses are covered by insurance, only to find out their multi-million dollar claims are denied because the insurance policy specifically excludes any “business or activity engaged in a federally criminal act” or contains language that “this policy specifically excludes any marijuana products.”
While the details of leases and insurance policies will put the best of us to sleep, be diligent and persistent to make sure both sides of the landlord/tenant relationship keep the devil out of their business.