Top Five Suggested Revisions to California Form Leases for Cannabis Tenants

26 Apr Top Five Suggested Revisions to California Form Leases for Cannabis Tenants

I cringe every time a form lease comes across my desk for a California cannabis tenant. While C.A.R. and A.I.R. lease forms certainly have their advantages (brokers and veteran landlords are comfortable with them, and they can be cheap and efficient if the transaction is simple), because of the complexity involved in leasing to cannabis industry tenants, they do not work for cannabis tenancies. Redlining form leases is messy, and the addenda I’ve seen tend to create conflicts and ambiguity, making the problems with form usage even worse.

Cannabis is a heavily-regulated industry. The standard language in most lease forms not only fails to account for the nuanced requirements in state and local laws and regulations, but in some cases the forms actually conflict with what the law requires.

Because the C.A.R. and A.I.R. lease forms are prepared by real estate broker associations, their primary purpose is to protect the interests of the brokers (ensuring commissions and limiting broker liability).

Any issue not addressed in the lease will be governed by state law. State law tends to be very protective of tenants in residential leases, but provides little protection to commercial tenants.

My best advice is to avoid use of forms altogether when entering into a lease for cannabis activity. But if the landlord insists on using a lease form, here are my top five suggested revisions and issues to be aware of:

1. Notice and Cure Provisions – Tenants Need More Than Three Days

The C.A.R. commercial lease form does not include notice and cure provisions addressing how long a tenant has to cure a violation of the lease before the landlord can move forward with eviction. Accordingly, state law governs the notice and cure process, which is bad for tenants, especially in the cannabis industry. Code of Civil Procedure section 1161 provides that when a tenant violates a lease covenant and the violation is curable, the landlord may serve a 3-day notice to perform or quit.

Three days is generally not enough time to resolve any issue involving a cannabis business. It usually takes at least that long to get even a canned response from a government agency regarding a generic license or permitting question. Actually resolving an issue involving a government agency takes much longer. We have seen cannabis tenants receive three-day notices to quit for various alleged lease defaults, including violating a use clause (where cannabis was not specifically enumerated as a permitted use), storing or using hazardous materials (which becomes a very complex issue when dealing with manufacturing operations), lack of state or local licenses, and operating as a nuisance, among others.

If a landlord insists on using a form lease that lacks a notice and cure period, tenant should negotiate a revision to the form for cure periods of at least 10–30 days for non-monetary defaults, because most types of default cannot be cured within such a short period of time.

2. Express Allowance of Cannabis Activity and Exclusion of Controlled Substances Act

As mentioned above, we have seen many leases that fail to expressly name cannabis as a permitted use (never a good idea for cannabis tenants). While the lease should expressly include commercial cannabis activity as a permitted use, the applicability of federal law, specifically the Controlled Substances Act, should be expressly disclaimed. While it would be difficult for a landlord to evict on grounds that a tenant is violating federal law where commercial cannabis activity is expressly allowed as a permitted use, if cannabis activity is not specified in the lease, then the tenant should at least eliminate the requirement that tenant comply with federal laws.

The C.A.R. form, for example, requires that tenant not “use the Premises for any unlawful purposes, including, but not limited to, using, manufacturing, selling, storing, or transporting illicit drugs or other contraband, or violate any law or ordinance, or committing a waste or nuisance on or about the Premises.” Tenants should strike this provision from the lease, or at a minimum, exclude cannabis and cannabis products from “illicit drugs,” and make clear that “any law” excludes the federal Controlled Substances Act.

3. Inspection and Access Rights – Make Subject to MAUCRSA

Both the A.I.R. and C.A.R. forms provide access rights to the landlord for repairs, inspections, and showing the property to prospective tenants and purchasers, among other reasons. Neither form provides tenants the right to exclude landlord from restricted areas or to limit access only to authorized people in compliance with MAUCRSA. If a landlord or the landlord’s agents enter into the limited access areas in a licensed cannabis premises in violation of MAUCRSA, the state holds the licensed tenant responsible for such violation. Accordingly, tenants should amend the form to make landlord’s access rights subject to the restrictions and requirements in MAUCRSA governing access to licensed premises.

4. Landlord Authorization Required

While every lease is subject to the covenant of good faith and fair dealing, that covenant only gets a tenant so far. In reality, many landlords enjoy collecting premium rents from cannabis tenants but when tenants ask them to provide authorization to a local or state agency in order to enable the tenant to obtain a license, many landlords get cold feet and refuse to provide the authorization needed.

We have seen many cannabis license applicants pay months of premium rent just to hold a spot in a local application process, only to have the landlord back out at the last minute (this happens far more frequently when the relationship is governed only by an LOI and not a full lease). In order to avoid any ambiguity and to ensure that the cannabis tenant will be able to submit all necessary documentation to obtain a local and state license, the lease should expressly require the landlord to provide the property owner authorization as required under state and local laws.

5. Hazardous Materials or Substances – Exclude Cannabis, Cannabis Products, and Substances Used in Production 

Both the C.A.R. and A.I.R. forms prohibit use and storage of hazardous materials. The C.A.R. form does not define “hazardous materials,” while the A.I.R. form provides a broad definition of “hazardous substances” (anything potentially injurious to the public health, safety or welfare, the environment or the premises). Both forms allow usage if the material or substance is necessary in the normal course of the permitted use in the lease. To avoid any confusion and to protect against potential liability, in addition to making commercial cannabis activity an expressly permitted use, tenant should revise the lease to state that cannabis and cannabis products are not hazardous materials or substances, and disclose any potentially hazardous substances tenant intends to use (this is especially true for manufacturers).

This is not an exhaustive list of all issues that should be addressed in a form lease. Ideally, form leases should not be used for cannabis tenancies, but if the landlord insists, cannabis tenants to make sure they make the changes necessary to enable them to run their business.

For more on California cannabis leasing, check out the following: