Oct 2016

Landlords and Cannabis Clients: How to Handle Commercial Leases with Green Tenants

On October 27, 1970, President Richard Nixon signed the Controlled Substances Act into law.  The act restricted access to various drugs through rankings based on the drug’s potential for abuse, accepted medical use and dependence potential. The worst offenders were assigned to Schedule 1 – high potential for abuse, no currently accepted medical use, and no accepted safe use under medical supervision.

Marijuana was and remains a Schedule 1 drug.

The Rise of “Legal” Cannabis

Over 25 years later, California passed the Compassionate Use Act to allow the use of medical marijuana. Twenty-four other states and the District of Columbia have since legalized marijuana for medical or recreational use. Despite state level legalization, it remains illegal at a federal level for landlords to knowingly lease or manage space for manufacturing or distributing marijuana. Landlords violating the Controlled Substances Act face criminal penalties including a 20-year imprisonment, a fine of $2 million and forfeiture of the landlord’s real estate.

On October 19, 2009, Deputy Attorney General David W. Ogden of the United States Department of Justice released a memorandum addressing federal prosecution in states permitting medical marijuana (the “Ogden Memo”). The Ogden Memo encouraged selective marijuana prosecution under the Controlled Substances Act, stating:

“[t]he prosecution of significant traffickers of illegal drugs, including marijuana, and the disruption of illegal drug manufacturing and trafficking networks continues to be a core priority in the Department’s efforts against narcotics and dangerous drugs, and the Department’s investigative and prosecutorial resources should be directed towards these objectives. As a general matter, pursuit of these priorities should not focus federal resources in your States on individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.”

The Ogden Memo reassured landlords that although marijuana remained illegal at the federal level, the Department of Justice was unlikely to prosecute those complying with state medical marijuana laws. The Ogden Memo did not, however, legalize marijuana nor represent an official policy of the Department of Justice – it merely encouraged selective enforcement. The Department of Justice remained empowered to prosecute landlords leasing space to marijuana dispensaries, as shown in Marin Alliance for Med. Marijuana v. Holder.

In Marin Alliance, landlords were leasing space to marijuana dispensaries operating in compliance with state marijuana law.  The U.S. Attorney’s Office demanded the landlords take steps to discontinue their tenants’ sale of marijuana, threatening criminal prosecution, fines, imprisonment and forfeiture of the landlord’s real estate. The landlords sought to enjoin the U.S. Attorney’s Office from prosecuting based on several theories of law, citing the Ogden Memo.The Marin Alliance court found for the U.S. Attorney’s Office and reaffirmed that marijuana remained illegal at the federal level despite state law to the contrary and that the Ogden Memo did not legalize marijuana, was not a statement of official policy, and was mere guidance for the Department of Justice.

Even though the Department of Justice can still prosecute landlords leasing to state sanctioned marijuana dispensaries, landlords remain eager to access the now estimated $7.1 billion United States “legal” marijuana market. The conflicting relationship between state and federal law, state regulations, and unusual working conditions of green tenants make obtaining a lawyer all that more critical when creating commercial marijuana leases. Lawyers may be reluctant to take on these cases, however, due to ethical concerns.

A Lawyer’s Quandary

Rule 1.2(d) of the Model Rules of Professional Conduct states:

“[a] lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law.”

Is it a breach of ethics if a lawyer advises or assists a landlord in knowingly leasing space to a marijuana dispensary operating illegally under federal law but legally under state law?  Different ethics committees have concluded differently. The New Jersey Advisory Committee on Professional Ethics narrowly concluded that lawyers may represent clients whose businesses involve growing marijuana pursuant to the New Jersey Compassionate Use Medical Marijuana Act, stating that public policy encourages lawyers to provide legal services to businesses navigating complex regulatory framework.

The Professional Ethics Committee of the Connecticut Bar Association, however, found that although Connecticut may permit medical marijuana use, such behavior remains a federal crime and the rules of professional conduct do not distinguish between which crimes are enforced. As such, the Professional Ethics Committee concluded lawyers may only advise clients of the requirements of the Connecticut Palliative Use of Marijuana Act and are prohibited from conduct violating federal law, which includes representing marijuana clients before state licensing committees.

Many states have addressed the lawyer’s dilemma through amending existing state rules of professional conduct. In Colorado, the state supreme court amended the Colorado Rules of Professional Conduct to explicitly allow lawyers to counsel clients on state marijuana laws as well as assist clients in conduct the lawyer reasonably believes is permitted under the state and local marijuana laws.

Conflicting ethical guidelines, opinions and laws prohibit a simple answer for whether lawyers can help landlords lease to green commercial tenants. Lawyers must conduct a case-by-case analysis, review their state rules of professional conduct, and search for relevant ethics opinions. Assuming the lawyer may assist the landlord, a green commercial lease should address several important considerations.

Protecting the Landlord

The Department of Justice can still prosecute the landlord under the Controlled Substances Act for leasing to state sanctioned marijuana dispensaries, even though the Department has mostly refrained from prosecuting landlords and tenants complying with state marijuana laws.

As such, the green lease must include generous landlord termination provisions. The scope of permissible use should be narrowly drawn with no cure period for defaults to ensure strict compliance with applicable state marijuana laws. This helps avoid federal scrutiny and provides easy termination for noncompliance. The ideal green lease also provides non-curable defaults for federal intervention, changes in federal enforcement policy, forfeiture threats, and federal enforcement actions. This gives the landlord a better negotiating position with the Department of Justice should the need arise.

Current federal marijuana law makes strict compliance with all applicable federal law impossible for green tenants. The lease should address this by including provisions requiring strict compliance with all state law and relevant federal law to the fullest extent possible. Special indemnification provisions should also be included for landlord’s loses relating to the tenant’s business including a taking of the landlord’s property, criminal prosecution, and damage as a result of break-ins, robberies, and burglaries. Marijuana dispensaries are largely cash businesses, which can attract unscrupulous attention. Finally, the lease should provide no tenant allowance, require that the tenant install all tenant improvements, and require that the tenant remove any improvements at the tenant’s sole expense upon landlord’s request at the lease’s expiration. This helps distance the landlord from the green tenant’s business activities.

Despite the risks, commercial marijuana leases can be a lucrative endeavor. Landlords and attorneys must ensure they are sufficiently protected, however, before adventuring into the new, green economy.