In 2012, the State of Colorado legalized retail marijuana use by those over the age of 21 through an amendment to the state constitution (Amendment 64). Since its legalization, the state has promulgated many rules and regulations pertaining to the sale of retail marijuana.
What restrictions apply to those who operate retail marijuana businesses, and is there any liability for landlords who lease property to retail marijuana establishments?
This article will address the potential legal issues landlords face when leasing property to retail marijuana establishments and recommend methods to mitigate such problems.
What are Marijuana Establishments?
“Retail Marijuana Establishments” refer to a wide array of businesses associated with the growing, processing, and selling cannabis products. Among such facilities are:
1) Retail Marijuana Stores;
2) Retail Marijuana Products Manufacturing Facilities;
3) Retail Marijuana Cultivation Facilities; and
4) Retail Marijuana Testing Facilities.
Marijuana Hospitality Businesses are businesses that allow the consumption of marijuana products by individuals over the age of 21 within their licensed premises.
Marijuana may only be sold by dispensaries or Retail Marijuana Stores that have obtained a license from the Marijuana Enforcement Division (MED), the Colorado Department of Revenue division tasked with regulating the Medical and Retail Marijuana industries in Colorado.
What Licenses do Marijuana Dispensaries Need?
Each Retail Marijuana Establishment must obtain a Regulated Marijuana Business License from the Marijuana Enforcement Division. A separate Marijuana Hospitality Business License is necessary to allow for the consumption of marijuana products within the business premises. The applicant must demonstrate two years of residency in Colorado when applying for the license. The applicant must also pass criminal and background checks.
The applicant must also show proof of lawful possession of the premises to be licensed for the Retail Marijuana Store. Such evidence can include properly executed deeds of trust, leases, or other written documents acceptable to state and local licensing authorities.
In addition to regulation at the state level, local authorities may also impose licensing requirements on Retail Marijuana businesses. C.R.S.A. § 44-10-301. In addition, local zoning laws may prohibit the use of a landlord's building as a site for a Retail Marijuana Business if the premises are located too close to schools, drug treatment facilities, or other dispensaries. It is best to review the laws and regulations applicable to your specific jurisdiction before entering the cannabis business.
What Happens if a Marijuana Dispensary is not Licensed?
The unlicensed sale of marijuana in Colorado will be subject to criminal penalties. The unlicensed sale of 4 ounces or less of marijuana is a misdemeanor punishable by a minimum of 6 months of prison time and a maximum fine of $5,000. The unlicensed sale of more than 4 ounces will constitute a felony, punishable by prison sentences and fines, which increase according to the amount of marijuana sold.
Warnings have been issued to several businesses in Denver, which have been found to host events where participants consume cannabis products without the proper Marijuana Hospitality Business License. Continued unlicensed operation may result in civil penalties and other enforcement activity by the City.
Can Landlords be Held Liable for Unlicensed Marijuana Dispensaries in Colorado?
Certain other jurisdictions, such as New York City, have moved to enact policies that would penalize landlords for leasing commercial real estate to unlicensed sellers of marijuana or tobacco products. Landlords violating the law would be responsible for fines of up to $10,000 for each infraction. The State of Colorado has yet to enact such a policy, but there may be other potential pitfalls that landlords should be aware of.
Under a standard commercial lease with a Retail Marijuana Establishment, the landlord will likely be considered an "Indirect Financial Interest Holder" under the Colorado Marijuana Rules. Such status does not require significant involvement in the registration process or raise substantial regulatory concerns.
However, suppose the lease agreement contains any provisions that generate an additional benefit to the landlord of 10% or more of the profits of the Retail Marijuana Establishment. In that case, the landlord may be considered a "Beneficial Owner" in the business. Beneficial Owners are required to submit materials during the licensing and renewal process. Such Beneficial Owners may be liable for penalties incurred for the unlicensed sale of marijuana by the Retail Marijuana Establishment with which they are involved.
What are Landlords Responsible for Related to Marijuana Dispensaries?
Landlords will remain liable to any entity from which they secure their financing for a mortgage when purchasing a building. Mortgage terms often include a provision requiring that the borrower, the property, and its use comply with all applicable laws, rules, and regulations.
Even though recreational marijuana use may be legal in the State of Colorado, it is still treated as a Schedule 1 controlled substance at the federal level under the Controlled Substances Act. This may pose issues for landlords leasing property that they still pay the mortgage on. Leasing the property to a Retail Marijuana Establishment may risk the mortgage since it would violate federal law under the Controlled Substances Act.
How Should Landlords Mitigate Risk When Leasing Property to Marijuana Dispensaries?
It is vital to be aware of the risks associated with leasing property to a marijuana dispensary and mitigate such risks in contracting with the Retail Marijuana Establishment.
In certain instances, it may be best to step away from the opportunity to lease property to a Retail Marijuana Establishment if the risk appears to be too high. For instance, in Commerce City, the local regulations require that a Retail Marijuana Business obtain a landlord's signature on an authorization form provided by the City.
The terms of the form require that the property owner assume joint and several liability if “any gas, vapors, odors, smoke, dust, heat or glare or other substances exit the business.” It also releases the City from any liability “for any and all claims and demands or causes of action of any kind whatsoever, present or future, in any way relating to or arising from the conduct of the lessee/licensee's business operation on said property.” ZB Distribs., LLC v. Lee, 2018 Colo. Dist.
How Else Can a Landlord Mitigate its Risk When Leasing to a Retail Marijuana Establishment?
If a landlord wishes to proceed with renting the property to a Retail Marijuana Establishment, they should seek to mitigate their risk by carefully crafting the lease agreement.
First, the leasing of the property should be contingent upon the lessee's ability to obtain the requisite state and local licenses for operation. Since the Retail Marijuana Establishment cannot obtain a license without a valid lease for the premises on which it will operate, the lease must be executed before the license application.
However, since leasing a property to an unlicensed marijuana business would open the landlord up to liability, it is important to include a provision that would only put the lease in effect once the license is obtained and which would terminate the lease upon the tenant's failure to obtain a license. The renewal clause for the lease should also require that the tenant maintains their necessary state and local license. The lease should also allow the landlord to terminate the agreement if the tenant loses their license or otherwise acts unlawfully.
Second, the landlord may wish to include a limitation of liability clause in the lease to specify any damages that an offending party should pay in case of any dispute arising from the lease. This will help limit the amount the landlord will be obligated to pay in case the tenant should face any financial loss due to the lease.
Thirdly, including an indemnification clause will protect the landlord from potential losses resulting from the tenant's actions. The indemnification clause should include language that will indemnify the landlord for civil or criminal penalties resulting from the tenant's unlicensed operation of a Retail Marijuana Business or other unlawful activity.
Flat Rate Leasing
Finally, the lease agreement should include a flat rate for the tenant's property leasing instead of a percentage of the profits earned by the Retail Marijuana Business. If the landlord is considered a Beneficial Owner of the business, they may also be subject to licensing requirements and become susceptible to greater legal risk.
As the legalization of marijuana continues to spread across the country, it can be tempting for landlords to get in on the action by leasing their premises to Retail Marijuana Businesses.
However, given that these state and local regulations are relatively new, there are still many unanswered questions about landlords' liability due to their association with tenants in the cannabis industry. Landlords interested in leasing their property to Retail Marijuana Businesses should consult with an attorney to limit their liability through smart contract drafting. Contact us today for a free consultation.