Whether you are a landlord, tenant, or subtenant in the cannabis industry, you need a first-rate cannabis Real Estate lease. The structure of the leasing relationship and the terms of the lease are key components, both for getting funds out of the primary business and mitigating your risks, of which there can be many. If you are involved in more than one venture or have a complex organizational structure, any good attorney or accountant will advise you to put a separate lease in place for each discreet relationship. No, you cannot find the right lease on Google. No, you cannot use the lease your lawyer drafted for a non-marijuana real estate scenario. No, you cannot jot some bullet points down on a piece of paper and call it good. And you should not use a retail cannabis lease as a substitute for a manufacturing space or a cultivation facility. You also should not use a cannabis lease in place of a hemp lease, and vice versa, because those products are treated completely differently.
Every contract in every scenario in every business in every industry needs to be customized to some degree, and marijuana real estate leases are not your typical leases. If the other party wants to negotiate (e.g. change) any portion of the lease arrangement, even if you think it may not have any significant effect on your bottom line, you will want to have a good cannabis real estate lawyer backing you up. Here are some general principles to keep in mind as you decide how to move forward:
Be sure you have a written lease.
Handshake deals and contracts established by text messages or Venmo emojis are not the foundation of a good lease. You want definite terms in all areas of the contract that are important to you and your lawyer who may have to help you enforce the lease (for landlords) or get out of the lease (for tenants). The less you put in writing now, the more you will have to pay later in attorneys’ fees (so your lawyer can prove the terms of your lease), regulatory fines (see #2 below), nuisance settlements (so your former landlord releases you from the lease), or the expenses of re-leasing real estate (because your tenant terminated the lease early upon terms favorable to them). Many states have default laws that fill in contract gaps, and, depending on which side of the contract you sit, you may not want those rules applied to your situation.
Be sure your lease complies with state and local laws.
Real estate is, by its character, tied to local laws. States like to regulate their real estate with their own rules, and those rules can vary wildly, which is why you need a local attorney familiar with both state laws and “the way thing are done around here”. Just ask our California cannabis lawyers how California laws and practices differ from Oregon, Washington, or any other state. The permissions and prohibitions on cannabis, marijuana, and hemp (and their varying stages of cultivation and processing) mean different things to different states. That means if you are going into a new market or even a new town, you need to know what the state laws and regulations are, along with the local zoning ordinances and how they are all enforced. You should assume that what works under one state’s regulatory guidelines will get you into trouble in another state. And because every state is in a different phase of legalizing pot, you need to know the current and proposed laws and regulations so you can roll with the constant changes.
Be sure your lease is tilted in your favor.
Leases are contracts, so they are customizable. If someone wants you to sign their “form lease” because it is their “standard practice”, tell them that your standard practice is to negotiate a balanced arrangement that is good for both sides. Then make sure that your lawyer knows what they are doing so they can tilt as many provisions as possible in your favor. The scenarios can vary drastically: if the other side does not use an attorney, that is generally very good for you; if they use an attorney who does not know real estate, that is also good for you; and if they use an attorney who knows real estate but does not know marijuana real estate, that could result in a relatively balanced lease or a painful and expensive experience because you have to pay your lawyer to teach their lawyer about every part of the contract that is cannabis specific. Landlords generally are the ones who have the upper hand in the lease drafting and negotiations. Ensure your cannabis lawyer prepares a lease with all of the provisions tilted in your favor and then insist with your prospective tenant that it is your form lease and you never vary from it.
Be sure you know your position in the leasing food chain and negotiate accordingly.
The cannabis industry is maturing, and years ago those people and businesses with land or capital to buy land started recognizing the opportunity to lease real estate to marijuana businesses, which has been hailed as a saving grace for landowners with real estate in economically depressed areas like my old stomping grounds in Maine. The first generation of state-legal pot growers, manufacturers, and retailers have been encountering offers to exit the business via both domestic and international M&A activity, and that means leases are extremely important to a potential purchaser and a smart seller. Savvy first generation pot entrepreneurs know that they can make a healthy profit by remaining in the industry via real estate even after the sale of their business, like the legacy landlords who got into the leasing business early. Real estate can be a stable and profitable income stream. Sellers under a master lease who sublease to the new purchaser, unlike the actual landowner, have no risk of underlying asset forfeiture. The former-tenant-turned-sub-landlord’s (aka a sub-lessor) only risk is in the subtenant, and they will make up for that risk by charging the subtenant triple (or more) what they owe to the landowner under the master lease. Landowners with good legal counsel will ensure that the master lease accounts for this clever business maneuver by either prohibiting subleasing or (better yet) requiring any upcharge in the sublease to be passed directly onto the landowner.
In every industry and in every contract, especially the cannabis leasing space, it is crucial you understand what you want out of the relationship and ensure you have a good legal team to help you get there.
In a cannabis business, like most other businesses, “location, location, location” means everything and dictates whether you have the optimal growing, manufacturing, processing, or retail location. Once you find your perfect location, having a great lease and understanding your lease are two crucial parts in solidifying this important business foundation. In this post, I share the starting point for my lease audits so that when you or your attorney audit your lease you will be able to recognize your lease’s strengths and weaknesses. I also provide some practice pointers to help you think more strategically about your marijuana leasing relationships.
I am a transactional attorney, which means I thrive on putting together and executing a great business deal for my clients that is tilted as much as possible to their advantage. I live and die by my data points, and I often use Excel so that I can crunch the data and identify trends. The more data I have about my client or the opposing party, the better deal I can put together. In a recent transaction I reviewed about 15 leases for a client as part of the due diligence in an acquisition, and for each lease I filled out the following chart, which we call a lease abstract. This chart can also be useful in negotiating a lease at an entirely new location or with a new landlord or tenant.
|Property Address: (fill in Lease section to reference here and in all parentheses below)|
|Premises: ( )||Your leased premises may only be a portion of a larger property (like a strip mall) and may include other portions of the property (like dedicated restrooms or storage areas).|
|Property Use: ( )||Even if your lease or proposed lease does not specifically exclude your contemplated use, you should ensure that the location is zoned and the lease explicitly permits your planned activities.|
|Landlord: ( )||Make sure the landlord’s full legal name, entity type, and state of formation is used and not some unregistered dba or incorrect name.|
|Tenant/Subtenant: ( )||If you are the landlord, make sure the tenant’s full legal name, entity type, and state of formation is used and not some unregistered dba or incorrect name.|
|Lease Term: ( )||This is the length of time for the lease’s initial term.|
|Lease Commencement Date: ( )||This is the date the lease “starts.” Often a lease will be negotiated in advance and have a commencement date in the future after certain preparations (the buildout) are made by landlord or tenant.|
|Lease Expiration Date: ( )||This is the date the initial term ends.|
|Base Rent: ( )||Some leases include base rent only; some include percentage rent based on some financial metric; and others incorporate base rent plus percentage rent.|
|Rent Due Date: ( )||This can be the 1st, 10th, 15th, or whatever date makes the most sense based on when the landlord’s mortgage payment is due.|
|Late Payment Penalty: ( )||If you are the landlord, you want the late payment penalty to apply without any notice from the landlord to tenant that the rent payment is past due. If you are the tenant, you want a long payment window without any late payment penalty.|
|Rent Increase: ( )||Most rent increases occur on a set schedule, either in straight dollar increases or a percentage increase, often pegged to one of the consumer price indices (CPI).|
|Gross Lease Amount: ( )||This lets both landlord and tenant (or their CFOs) to see at a glance the value or cost of the lease over the life of the lease.|
|Security Deposit: ( )||This becomes important at the lease termination or upon sale of the underlying real estate when the lease is still in force.|
|Utilities: ( )||Determine which utilities are tenant’s responsibility and which are landlord’s, as well as who will actually remit payments.|
|Taxes: ( )||Determine which taxes are tenant’s responsibility and which are landlord’s, as well as who will actually remit payments.|
|Tenant’s Responsibilities: ( )||These could include maintenance, cleaning, garbage removal, snow removal, and structural and nonstructural repairs to the leased premises.|
|Landlord’s Responsibilities: ( )||These could include maintenance, cleaning, garbage removal, snow removal, and structural and nonstructural repairs to the leased premises.|
|Parking: ( )||Reference whether tenant has any dedicated parking, which can be extremely important for retail locations.|
|Tenant Improvements: ( )||Include whether the tenant is permitted to make improvements and which improvements will be considered (a) fixtures that become part of the leased premises or (b) non-fixtures that the tenant can (or must) remove at the end of the lease term.|
|Lease Extension Provisions: ( )||Indicate whether the lease can be extended only by mutual agreement of the landlord and the tenant or whether the tenant can unilaterally extend the lease.|
|Lease Extension Notice Date: ( )||Even if the lease can be unilaterally extended by the tenant, often lease extension notice is required three, six, or 12 months prior to the end of the lease.|
|Tenant’s Holdover: ( )||Some leases treat the tenant’s holdover at the end of the lease term as an automatic lease renewal; others expressly exclude the tenant’s holdover and apply a 2x or 3x rent multiplier to discourage the tenant from holding over.|
|Termination Provisions: ( )||Include who can terminate the lease and how the lease must be terminated, especially the termination notice date and method of giving notice.|
|Termination Notice Date: ( )||This date is as crucial as the renewal notice date.|
|Assignability: ( )||Often leases can be freely assigned by the landlord and sometimes by the tenant. Other times the landlord requires notice of the tenant’s assignment, including subleasing.|
|Guarantor(s): ( )||Most landlords require the owners of tenants that are new companies to personally guarantee the lease.|
|Landlord’s Contact: ( )||If the landlord uses a managing company or other third party, or if the landlord is an entity, you will want to know who to contact and have reliable contact information, including a cell phone number for emergencies.|
|Landlord’s Notice Address: ( )||This notice address becomes extremely important to the tenant if the landlord does not timely perform its lease obligations, such as snow removal or other maintenance or repairs.|
|Landlord’s Payment Address: ( )||Often the location of where to pay rent differs from the landlord’s primary business address.|
|Additional Information / Issues: ( )||Include anything here that may be relevant to negotiations or to responsibilities under the lease that do not fit in any category above.|