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Commercial Landlords Must Assess Risk Before Leasing to Marijuana Providers

Many states have passed laws legalizing medical and/or recreational marijuana use. As a result, manufacturers of marijuana will need a place to conduct their business, and commercial landlords, many of whom were suffering with high vacancy rates, are more than eager to fill the need. The opportunity, however, is fraught with risk that any careful landlord must weigh against the potential benefits.  Discussed below are three areas of risk for commercial landlords to consider before leasing property to a manufacturer or dispenser of medical marijuana products: forfeiture, insurance coverage, and loan and contract defaults.

New Jersey became the 14th state to allow medical marijuana when the state legislature passed the New Jersey Compassionate Use Medical Marijuana Act (“MMA”) on January 11, 2010, which Governor Jon Corzine signed a week later. Under the MMA, medical marijuana must be ordered by a registered physician from one of the Alternate Treatment Centers (“ATCs”) approved by the New Jersey Department of Health. Patients are not allowed to grow their own marijuana plants. This past July, the Department of Health issued a Request for Approval for up to six additional ATCs in the state – two in each of the northern, central, and southern regions. ATCs are authorized to grow and provide registered qualifying patients with usable marijuana and related paraphernalia in accordance with the MMA.

In addition, the New Jersey Legislature is considering legalizing the use of marijuana for recreational purposes.

Nevertheless, the manufacture and sale of marijuana are illegal under the Controlled Substances Act (“CSA”). The drug is a Schedule I narcotic – the most dangerous of all categories of narcotics under federal law. Thus, it is illegal to manage or control any place, permanently or temporarily, for the purpose of manufacturing, distributing, storing or using marijuana. 21 U.S.C. § 856. Not only to the owner of such a business, but also the landlord may be subject to prosecution under this statute as a principal, a co-conspirator, or an aider and abettor. The criminal penalties are steep.

Forfeiture: Adding to the concern and uncertainty, in January 2018, Attorney General Jeff Sessions rescinded the “Cole Memo” issued by the Obama Administration, which many in the industry viewed as a “safe harbor” of sorts against prosecution. Mr. Sessions has left it to each U.S. Attorney (of whom there are 93 across the country) to enforce federal marijuana laws according to their own prosecutorial discretion. Now, the only thing standing between providers of medical marijuana and a crackdown on that industry by the Department of Justice is the so-called Rohrabacher-Blumenauer Amendment, which is essentially a budget rule in Congress that forbids federal law enforcement from interfering with states where medical marijuana is legal. The amendment applies to medical cannabis, but not recreational cannabis and does not change the designation of cannabis as a Schedule I controlled substance under the CSA. The Amendment has been included in several spending bills and was scheduled to expire on September 30, 2018.

Thus, uncertainty and risk abound in the industry. Even if the government does not pursue criminal charges against a landlord or owner, the powerful tool of civil forfeiture is still available to federal prosecutors where prosecution is not otherwise prohibited. Under those circumstances, the government can seize vehicles, land, profits, and other assets related to the involvement in illegal activity.

The only real defense to a forfeiture action is a lack of knowledge or consent on the part of the owner. Thus, owners who do not wish to risk exposure under the law should expressly prohibit such conduct in their leases and undertake regular audits of their properties to assure that they are not being used to support the marijuana industry in any way.

Insurance: Another risk facing landlords is the loss of liability and casualty coverage for an incident related to the sale or manufacture of marijuana. The manufacture of marijuana i) requires increased power sources for lighting thus increasing the risk of fire; ii) is conducive to the creation of mold because of humidity created during the growing process; iii) can generate nuisance claims because of smells generated by the manufacturing process; and iv) risks explosions from cannabis oil distribution systems. Carriers have successfully denied insureds coverage for violating criminal statutes or for engaging in conduct violative of public policy. Additionally, nearly every commercial general liability policy contains a pollution exclusion clause that would exclude coverage for liability ensuing resulting from the discharge or dispersal of pollutants. Whether marijuana odor constitutes a pollutant that would fit within a pollution exclusion clause has yet to be determined. Suffice it to say that the loss resulting from any one or combination of these casualty events could be catastrophic, particularly if no coverage is in place to cover the loss. Thus, in assessing risks, an owner or landlord should undertake a thorough review of existing insurance coverages to understand how its policy exclusions might apply to a casualty loss related to a tenant’s sale or manufacture of marijuana.

Loan and Contract Defaults: Finally, by leasing space to an entity that manufactures and/or sells medical or recreational marijuana, a landlord risks defaulting on its other agreements, such as loans, service agreements, restrictive covenants, or bank and credit agreements. These agreements typically require the parties to comply with state and federal law. Because marijuana is illegal under federal law, landlords who allow their property to be used to sell or manufacture marijuana would be in default of their obligations to comply with applicable law. Under those circumstances, a lender could invoke the default clause and accelerate the loan. Banks are being advised to include in their documents covenants against marijuana operations; or, alternatively, a provision that the guaranty will spring into place if the property is lost because of a forfeiture arising out of a marijuana violation. In other contract situations, the non-breaching party could terminate the agreement and/or sue for damages in case of a breach arising from the marijuana-related activity, notwithstanding its legality under New Jersey law.

While the legalization of marijuana gathers steam at the state level, owners and landlords must keep in mind that marijuana is still illegal at the federal level. Accordingly, it is incumbent upon any landlord who wishes to lease property to a marijuana-related business to first assess the many associated risks. Failure to do so could have disastrous consequences.

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