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We’ve written many instances about how industrial leases to cannabis tenants are their very own beasts. Generic leases don’t ever the job achieved. And, in California, as dangerous as some landlords need to rely solely on AIR and CAR varieties, we typically warning landlords to have a custom-made lease association when coping with a cannabis tenant. And despite the fact that lots 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 a watch to the state-federal legislation battle. With that in thoughts, listed below are the largest pitfalls for California cannabis leases in 2019:

1.     Native authorization.

So many proposed leases reviewed by our California cannabis attorneys utterly 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 one in every of excessive native management, and all 482 cities and 58 counties are dealing with MAUCRSA in a different way, so landlords must get very accustomed to what cities and counties are permitting. I nonetheless get calls from landlords in unincorporated LA County that need to lease to cannabis tenants and the county nonetheless maintains a ban, which implies there are not 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 way in which. Total, landlords additionally want to grasp that not all cities enable each medicinal and adult-use cannabis exercise; it’s utterly depending on the town or county and can have an effect on the lease accordingly. In flip, landlords ought to definitely require that their tenants hunt down 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 like in their very own yard to make sure that this particular tenant efficiency obligation really is sensible below the lease.

2.     State licensing timeline.

With the arrival of the legislature reviving and lengthening the lives of provisional licenses, it’s now fairly simple to get a state license (though native authorization continues to be required for that). Nevertheless, a provisional license 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 sorts is wildly totally different although and it’ll make a distinction for the lease at concern 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 might be greater than a yr earlier than a tenant will get one. For provisionals, it might be a matter of weeks relying on the company in query. Nonetheless, the annual license is de facto the objective right here that finally secures the licensee’s full potential to function for a given yr. In flip, landlords must be explicit concerning 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.

For the reason that 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 backwards and forwards over whether or not they’ll regulate or ban cannabis, and for those who selected to control, they proceed to reform their native legal guidelines as business 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 interested by enlargement or submitting new purposes for brand new cultivation websites that weren’t already within the allowing queue will probably 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 will probably be added to its prohibited merchandise record, producers should adjust to such directive or they may face important 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 quite a lot of ranges. What the rule means is {that a} single licensee can solely take up one “premises.” Consider the premises because the house by 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 might be housed in suite one with a producer in suite two and this rule could be glad. Half the issue is that a number of cities and counties don’t actually handle this rule and we due to this fact see many leases that wrongfully enable 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. In consequence, we don’t have improbable entry to the monetary establishments below the 2014 FinCEN pointers, so it’s nonetheless fairly tough for cannabis companies to safe even simply financial institution accounts. This implies landlords will probably 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 may be paid with a verify). Both approach, 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 instances 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 instantly violates federal legislation and due to this fact the mortgage settlement between the owner and its financial institution. This example 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 shedding the property to the financial institution in consequence.

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 should be on the facility is decided by the company issuing the license, and sure license sorts have extra important safety necessities than others (for instance, retailers want actual stay, state-qualified safety guards throughout hours of operations whereas different licensees don’t). Landlords ought to not less than be accustomed to 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 in opposition to the grain of most landlord pleasant leases that enable free entry with requisite discover). The tenant will principally must have an ID badge for the owner and “restricted entry areas” require accompaniment by the licensee always. All of this may should be sorted within the lease to make sure that the tenant isn’t in default. And relating to insurance coverage, solely industrial normal 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 small print of cannabis licensing and the accompanying state and native legal guidelines and rules, an enforceable and stable cannabis industrial lease is solely attainable. For extra on how (and why) to reform your present California cannabis lease, see right here.