We’ve written many occasions about how industrial leases to cannabis tenants are their very own beasts. Generic leases don’t ever the job performed. And, in California, as unhealthy as some landlords wish to rely solely on AIR and CAR kinds, we usually warning landlords to have a personalized lease association when coping with a cannabis tenant. And despite the fact that most of the provisions from the boilerplate will definitely make it into your customized cannabis lease, just about each provision must be reviewed and reformed to cannabis-specific points all with an eye fixed to the state-federal legislation battle. With that in thoughts, listed below are the most important pitfalls for California cannabis leases in 2019:

1.     Native authorization.

So many proposed leases reviewed by our California cannabis attorneys fully miss the truth that earlier than a tenant can safe a state license they need to first safe native authorization from their metropolis or county below the Medicinal and Grownup-Use Hashish Regulation and Security Act (“MAUCRSA”). The California cannabis scene is considered one of excessive native management, and all 482 cities and 58 counties are dealing with MAUCRSA in a different way, so landlords have to get very conversant in what cities and counties are permitting. I nonetheless get calls from landlords in unincorporated LA County that wish to lease to cannabis tenants and the county nonetheless maintains a ban, which suggests there aren’t any lawful cannabis tenants in LA County at this level. And within the Metropolis of L.A. many landlords are unaware of or confused about how Section Three licensing will work with social fairness main the best way. General, landlords additionally want to grasp that not all cities permit each medicinal and adult-use cannabis exercise; it’s fully depending on the town or county and can have an effect on the lease accordingly. In flip, landlords ought to actually require that their tenants search out and safe native approval (and in virtually all jurisdictions, the tenant must present particular landlord authorization to the native authorities) as a part of their lease efficiency obligations. Nevertheless, landlords should first actually get a deal with on what native authorization appears to be like like in their very own yard to make sure that this particular tenant efficiency obligation really is smart below the lease.

2.     State licensing timeline.

With the arrival of the legislature reviving and increasing the lives of provisional licenses, it’s now fairly straightforward to get a state license (though native authorization remains to be required for that). Nevertheless, a provisional license just isn’t an annual license. Many industrial cannabis leases ignore the distinction between provisional and annual licenses and mandate that their tenants simply “safe a state license.” The timing of the state’s issuance between these two license varieties is wildly completely different although and it’ll make a distinction for the lease at subject in that many landlords ponder cancellation of their leases within the occasion state licensure of some form isn’t secured by a set date. For annual licenses, it may very well be greater than a 12 months earlier than a tenant will get one. For provisionals, it may very well be a matter of weeks relying on the company in query. Nonetheless, the annual license is de facto the purpose right here that finally secures the licensee’s full potential to function for a given 12 months. In flip, landlords must be explicit in regards to the distinction between their tenants getting provisional versus annual licenses relative to  the opposite efficiency and operational obligations in the course of the time period of the lease.

3.     Change in native and state legal guidelines and guidelines.

Because the state companies started issuing licenses below MAUCRSA again in January of 2018, the state’s interpretation of its personal guidelines has been unpredictable. Likewise, the cities and the counties (in command of native authorization) have gone forwards and backwards over whether or not they’ll regulate or ban cannabis, and for people who selected to manage, they proceed to reform their native legal guidelines as trade points come up. Any given change in interpretation  by the state relative to company regulation or any pivot by native authorities relative to native cannabis legal guidelines will undoubtedly have an effect on a cannabis tenancy. For instance, in Santa Barbara County, the County supervisors institute a cultivation cover cap in July, which finally signifies that any would-be or present cultivator within the County that was eager about enlargement or submitting new purposes for brand spanking new cultivation websites that weren’t already within the allowing queue can be prohibited from transferring ahead no matter whether or not they have an present lease that enables for such actions. And if, for instance, the California Division of Public Well being (which oversees producers) decides that sure merchandise can be added to its prohibited merchandise record, producers should adjust to such directive or they may face vital points with their licenses. All of this to spotlight the truth that a California cannabis lease should additionally ponder virtually fixed modifications to native and state legal guidelines and guidelines relative to precise cannabis operations.

4.     One licensee per premises. I

t’s been the case for a while now that California landed on the one licensee per premises rule. Nonetheless, landlords nonetheless appear to misread this state legislation mandate on numerous ranges. What the rule means is {that a} single licensee can solely take up one “premises.” Consider the premises because the area during which the industrial cannabis exercise takes place however not essentially all the property on which the premises sits. The simplest real-world instance is a strip mall with a number of suites taken up by a number of tenants. In California, a cultivator may very well be housed in suite one with a producer in suite two and this rule can be happy. Half the issue is that a number of cities and counties don’t actually handle this rule and we subsequently see many leases that wrongfully permit a number of licenses of a single tenant to be housed in a single premises.

5.     Mortgage mortgage violations. 

California doesn’t have the hardest cannabis guidelines when in comparison with different states. Because of this, we don’t have unbelievable entry to the monetary establishments below the 2014 FinCEN tips, so it’s nonetheless fairly tough for cannabis companies to safe even simply financial institution accounts. This implies landlords can be paid in money more often than not (or by a parallel administration firm that’s possible owned by or affiliated with the licensee in order that the owner might be paid with a examine). Both means, as soon as the owner’s financial institution uncovers that it’s leasing its property to a cannabis tenant (as a result of its paid in money one too many occasions or as a result of the financial institution checks up on the collateral), mortgage violations abound. Why? As a result of this (often) boilerplate doc dictates that no waste or criminality happen on the collateral actual property, and a cannabis tenant immediately violates federal legislation and subsequently the mortgage settlement between the owner and its financial institution. This case must be quarterbacked from the outset of the cannabis tenant and landlord relationship because it’s extremely unlikely that the owner will be capable to efficiently push again on the financial institution and can face dropping the property to the financial institution consequently.

6.     Safety, Insurance coverage, and Entry.

California like each different state has explicit facility safety and entry necessities, and it additionally maintains explicit insurance coverage necessities for licensees. On safety, what have to be on the facility is set by the company issuing the license, and sure license varieties have extra vital safety necessities than others (for instance, retailers want actual reside, state-qualified safety guards throughout hours of operations whereas different licensees don’t). Landlords ought to no less than be conversant in their tenant’s safety set up necessities and in addition ask for a duplicate of the corresponding premises diagram to make sure that the tenant is adhering to those very particular guidelines. For entry, not simply anybody can enter a cannabis facility both, together with a landlord (which can lower towards the grain of most landlord pleasant leases that permit free entry with requisite discover). The tenant will principally have to have an ID badge for the owner and “restricted entry areas” require accompaniment by the licensee always. All of it will have to be sorted within the lease to make sure that the tenant isn’t in default. And concerning insurance coverage, solely industrial basic legal responsibility insurance coverage is required for distributor licensees, however all licensees should safe surety bonds. Past that, insurance coverage is to be negotiated between the owner and tenant and it’s nonetheless no picnic in securing largely conventional property and different kinds of insurance coverage as a cannabis tenant (due to federal illegality).

Even in 2019, these lease pitfalls nonetheless exist in California. Nevertheless, as long as landlords (and tenants) take note of the main points of cannabis licensing and the accompanying state and native legal guidelines and rules, an enforceable and strong cannabis industrial lease is fully potential. For extra on how (and why) to reform your present California cannabis lease, see right here.