We’ve written lots of instances about how industrial leases to cannabis tenants are their personal beasts. Generic leases do not ever the job completed. And, in California, as negative as some landlords want to rely solely on AIR and Automobile types, we commonly caution landlords to have a customized lease arrangement when dealing with a cannabis tenant. And even even though lots of of the provisions from the boilerplate will definitely make it into your custom cannabis lease, quite a great deal each provision has to be reviewed and reformed to cannabis-particular concerns all with an eye to the state-federal law conflict. With that in thoughts, right here are the most significant pitfalls for California cannabis leases in 2019:
1. Local authorization.
So lots of proposed leases reviewed by our California cannabis attorneys absolutely miss the truth that ahead of a tenant can safe a state license they should initially safe neighborhood authorization from their city or county beneath the Medicinal and Adult-Use Cannabis Regulation and Security Act (“MAUCRSA”). The California cannabis scene is one particular of intense neighborhood handle, and all 482 cities and 58 counties are handling MAUCRSA differently, so landlords want 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. lots of landlords are unaware of or confused about how Phase three licensing will perform with social equity major the way. General, landlords also want to have an understanding of that not all cities enable each medicinal and adult-use cannabis activity it is absolutely dependent on the city or county and will have an effect on the lease accordingly. In turn, landlords should really definitely demand that their tenants seek out and safe neighborhood approval (and in virtually all jurisdictions, the tenant will have to show particular landlord authorization to the neighborhood government) as component of their lease functionality obligations. Nevertheless, landlords should initially truly get a deal with on what neighborhood authorization appears like in their personal backyard to assure that this particular tenant functionality 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 quite simple to get a state license (even though neighborhood authorization is nonetheless essential for that). Nevertheless, a provisional license is not an annual license. Numerous industrial cannabis leases ignore the distinction among provisional and annual licenses and mandate that their tenants just “secure a state license.” The timing of the state’s issuance among these two license kinds is wildly distinctive even though and it will make a distinction for the lease at situation in that lots of 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 a lot more than a year ahead of a tenant gets one particular. For provisionals, it could be a matter of weeks based on the agency in query. Nonetheless, the annual license is truly the purpose right here that eventually secures the licensee’s complete capacity to operate for a provided year. In turn, landlords should really be certain about the distinction among their tenants having provisional versus annual licenses relative to the other functionality and operational obligations for the duration of the term of the lease.
three. Change in neighborhood and state laws and guidelines.
Considering the fact that 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 neighborhood authorization) have gone back and forth more than irrespective of whether they’ll regulate or ban cannabis, and for these that chose to regulate, they continue to reform their neighborhood laws as sector concerns arise. Any provided modify in interpretation by the state relative to agency regulation or any pivot by neighborhood government relative to neighborhood cannabis laws will undoubtedly have an effect on 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 sites that weren’t currently in the permitting queue will be prohibited from moving forward regardless of irrespective of whether they have an current lease that makes it possible for for such actions. And if, for instance, the California Division of Public Wellness (which oversees companies) decides that particular goods will be added to its prohibited goods list, companies should comply with such directive or they could face considerable concerns with their licenses. All of this to highlight the truth that a California cannabis lease should also contemplate virtually continuous modifications to neighborhood 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 one particular licensee per premises rule. Nonetheless, landlords nonetheless appear to misinterpret this state law mandate on a quantity of levels. What the rule indicates is that a single licensee can only take up one particular “premises.” Consider of the premises as the space in which the industrial cannabis activity requires spot but not necessarily the complete house on which the premises sits. The easiest true-globe instance is a strip mall with several suites taken up by several tenants. In California, a cultivator could be housed in suite one particular with a manufacturer in suite two and this rule would be happy. Half the difficulty is that several cities and counties do not truly address this rule and we for that reason see lots of leases that wrongfully enable several 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 economic institutions beneath the 2014 FinCEN suggestions, so it is nonetheless quite tough for cannabis enterprises to safe even just bank accounts. This indicates landlords will be paid in money most of the time (or by a parallel management firm that is probably 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 house to a cannabis tenant (simply because its paid in money one particular as well lots of instances or simply because the bank checks up on the collateral), mortgage violations abound. Why? Mainly because this (generally) boilerplate document dictates that no waste or illegal activity take spot on the collateral true house, and a cannabis tenant straight violates federal law and for that reason the mortgage agreement among the landlord and its bank. This circumstance should really be quarterbacked from the outset of the cannabis tenant and landlord connection considering the fact that it is hugely unlikely that the landlord will be in a position to effectively push back on the bank and will face losing the house to the bank as a outcome.
six. Security, Insurance coverage, and Access.
California like each other state has certain facility safety and access needs, and it also maintains certain insurance coverage needs for licensees. On safety, what should be at the facility is determined by the agency issuing the license, and particular license kinds have a lot more considerable safety needs than other people (for instance, retailers want 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 needs and also ask for a copy of the corresponding premises diagram to assure that the tenant is adhering to these extremely particular guidelines. For access, not just any individual can enter a cannabis facility either, like a landlord (which will reduce against the grain of most landlord friendly leases that enable cost-free access with requisite notice). The tenant will fundamentally want to have an ID badge for the landlord and “limited access areas” demand accompaniment by the licensee at all instances. All of this will want to be sorted in the lease to assure that the tenant is not in default. And concerning insurance coverage, only industrial common liability insurance coverage is essential for distributor licensees, but all licensees should safe surety bonds. Beyond that, insurance coverage is to be negotiated among the landlord and tenant and it is nonetheless no picnic in securing mainly standard house and other types of insurance coverage as a cannabis tenant (simply because of federal illegality).
Even in 2019, these lease pitfalls nonetheless exist in California. Nevertheless, so lengthy as landlords (and tenants) spend focus to the information of cannabis licensing and the accompanying state and neighborhood laws and regulations, an enforceable and strong cannabis industrial lease is completely probable. For a lot more on how (and why) to reform your current California cannabis lease, see right here.