The Perils of Bad Cannabis Leases

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The Perils of Bad Cannabis Leases

The landlord-renter relationship is probably the most difficult relationship in the cannabis industry. We have seen many business southbound over the years, and while partnership disputes are very common, landlord-tenant disputes are also common, and in some cases even more common than partnership disputes. There are many factors that make cannabis leasing a challenge for both landlords and tenants, which you can read about in my two previous posts below:

  1. Cannabis Leases: Eight Important Tenant Considerations
  2. Cannabis Leases: Six Important Considerations For The Landlord

Cannabis lease disputes are difficult to avoid, even with a solid lease agreement. But they’re all but guaranteed with a bad lease or a lease that doesn’t adequately address the common cannabis pitfalls discussed in the articles above. Unfortunately, it’s very common to see bad cannabis leases and landlords who don’t change them.

As I write, I want to make it clear that references to form agreements don’t necessarily mean that form leasing is bad. There are many commercial leases that work well with cannabis leases, with some tweaks or additions to address some of the cannabis-specific issues.

One of the most common problems we see is landlords refusing to hire a lawyer and creating leases themselves from scratch. We’ve seen everything from leases that are only a few pages long and barely contain the terms needed to get a cannabis lease, to leases that are far too long and burdensome for landlords dealing with cannabis tenants.

Given that most commercial landlords don’t understand the nuances of state and local cannabis laws, many landlord-prepared leases lead to provisions that may not be in line with state / local laws, or at least make it more difficult for tenants to comply with. For example, if a landlord tries to use a percentage of the income as rent or becomes interested in underlying cannabis goods, it can pose a number of legal and regulatory issues that could even hurt the landlord.

We have also seen many situations where landlords refuse to move and negotiate on the terms of their forms, creating serious potential problems for their tenants. In light of the above, this is always a problem. While many commercial landlords believe that property is theirs and that when tenants come to lease it from them they must do so on their terms, cannabis leasing is not the same as any other commercial leasing. Landlords need to be flexible in order to avoid regulatory problems.

Landlords also need to be less tied to cannabis lease forms to avoid the non-regulatory issues that are common in leasing situations. For example, if a landlord’s property is mortgaged and the lender objects to leasing it to a cannabis tenant, it can cause the landlord to default on their mortgage and the lease to fall apart (or worse).

Another good example is the tenant’s change of ownership. This is a very common practice for cannabis companies, and comprehensive leases contain provisions that clearly regulate a landlord’s approval rights and the information the landlord is entitled to from new owners. A five-page lease does not guarantee this and leads to fights between the landlord and tenant.

A full cannabis lease can cost more than a lease a landlord can get from another business. However, given the myriad of problems and disputes that can arise from poorly drafted cannabis leases, the hassle is generally worth it.