In this final installment, I review more provisions of the commerce park/industrial style lease that will require thought and usually revision when a landlord negotiates its form lease with the medical marijuana enterprise (“MME”).
Common Areas, Signage and Rules and Regulations: Tenants sometimes forget that the common areas are for the benefit of all the tenants, and remain at all times under a landlord’s control. Every landlord has to prohibit the smoking of Cannabis in the parking area. That’s not just a matter of traffic safety; it’s also a matter of setting the proper tone for the character of the overall project. If employees of the MMB are using the products, they should not be smoking in obvious areas (in front of a main entrance to a building), nor enabling smoke to enter into the ventilation system of the building. In this regard, the landlord should have the right to review the images saved on any video cameras trained in the parking areas (prescribed by the regulations) in the event there are complaints by other lessees of the project about the “wrong appearance” of operations in the project. Customers of the MMB must not be inhaling or ingesting in the parking lot or the drives; that should be prohibited under project rules and the lease text, irrespective of whether the parties believe the issue is addressed in state laws or regulations. If one of the parties believes this is never going to be an issue, look at the news stories published in the community Eagle Rock (LA) newspaper, where local residents contacted the Justice Department in frustration over the smoking-up occurring on the curbs next to dispensaries prior to patients’ starting and maneuvering their autos in urban traffic. The lease should also address turning out any illuminated signs for the MME outside operating hours. There’s no legitimate reason to invite non-customers of the business to its location outside business hours. On the subject of signage, some MME tenants may want to have funky, “high society” – oriented signage. A landlord must exercise some discretion in approving such signage for reasons of project character and compliance with CC&Rs. The lease further should address hours of operation of the dispensary. While a cultivation site may need to have staffing 24 hours daily, a dispensary open all night is a natural target for mischief, and all night hours of opening should be prohibited, if for no other reason than to put co-tenants at ease.
Rent and Landlord Audit Rights: Word has it that some MME tenants are trying to entice reluctant landlords to make a deal, with offers of percentage rent or business equity positions. Lovely thoughts, these are. The problem is that should privity of contract (the lease) not be sufficient alone to establish grounds for forfeiture of the landlord’s assets, a position of sharing in the gain with the MME will put the landlord fully in a government’s gun-sights, making the case that the landlord’s assets are derived from a criminal enterprise. Taking a piece of the revenues does not support the argument of an innocent landlord, so landlords need to be certain that there is no revenue in the nature of percentage rent in the lease. The landlord should, however, insert an audit of income right. This is more than reviewing the sales tax return paperwork; it should extend to reviewing, on premises, the full gamut of receipts of sales and other records the MME must maintain for compliance with laws now and in the future. If the MME isn’t complying with tax and other reporting requirements, it would be nice for the landlord to know this in advance of the government’s knowledge. Odd are that the landlord’s lender would like to know that its customer is exercising some vigilance, too.
Utilities and Other Operating Expenses: Since indoor grow sites use excessive water when contrasted with most industrial processes, and use a great deal of electricity for heat lamps, there are going to be uneven consumption patterns in a multitenant building housing a MME, or in a multi-building project with only one utility meter, where that occurs. Any excessive consumption should be for the sole account of the MME. Likewise, if extraordinary expenses of the project’s operation are the result of the MME tenancy, any such surcharge against operating expenses should be this tenant’s burden, like the cost of evening security guards, extra janitorial service or air conditioning maintenance.
Insurance and Indemnity Covenants: The landlord must consider how the tenancy of a MMB impact its casualty and liability insurance coverage, and after addressing all questions to your agent, including whether the premium cost will increase as a result of implementing MMB uses, will be ready to draft careful provisions in the lease on this issue. Some insurance companies will not insure a grower MMB, although most apparently will insure for liability, etc. for a dispensary. If a MMB will make the landlord’s insurance cost more, then the extra premium shouldn’t be spread across the other tenants in a multitenant project as a common area charge – that increased cost should be all for the MMB operator’s account, as the landlord will provide in the lease form. As mentioned earlier, any “surcharge” for any item that pertains to MME operation should be the sole obligation of the MME.
A standard lease clause provides for a hold harmless and indemnity covenant from the tenant for matters occurring within the premises; but in the instance of a MME that’s not sufficient protection of the landlord. Despite cameras in the parking lot and on the building, there is bound to be an effort somewhere, sometime, to get at the tenant’s “stash.” The tenant ought to indemnify his landlord against the damage done to the building and other tenants’ premises caused by knuckleheads who decide to invade the project despite the obvious security measures in place to score some product.
Assignment and Subletting Clauses: If the MME is selling its business, there likely will be, in any jurisdiction, some background investigation of the successor’s principals. Whether or not this is true, the lender will want the borrower landlord to conduct its own due diligence. The landlord will want full access to documentation on the financial and operating histories of all principals affiliated with the proposed subtenant or assignee, and anything less than full disclosure of these matters and any prior criminal record (including non-violent criminal convictions and arrests) should be identified in the lease as a legitimate basis for the landlord to decline to approve the transfer (that is, failure of disclosure should be grounds for refusal as “commercially reasonable” conduct by the landlord). The lease should require production of all organizational agreements of the successor prospect (articles of organization, operating agreement, buy-sell agreement) and disclosure of all professional licensures that each principal has held from the inception of their adulthoods.
Surrender/End Of Term Clauses: In Arizona and probably other states, cultivation facilities (grow sites) have to be enclosed, as described in Arizona in A.C.R. R9-17-101. Metal gates, bars or what have you (creating a barrier around the cultivation area) are not the optimally “reusable” tenant alterations; thus, landlords should negotiate in their forms that all “undesirable” alterations must be removed at the sole expense of the tenant at the end of the lease term, and all damage incurred in their removal must be repaired by the tenant, too. Generally, dismantling the MMB’s operation at the lease term’s end must be entirely the burden of that tenant, because the landlord isn’t licensed to handle remaining plants or parts of plants, the soils, any chemicals used in the growing (which could conceivably be hazardous materials in their own right) or any other agriculturally related activity. Whether or not the residue of Cannabis has any economic value, no security deposit should be returned to the tenant until all the evidence of the cultivation operation in even the slightest quantities is thoroughly removed. Also, remember that HIPAA regulations may be implicated by the presence of patient records, charts or prescriptions inside the premises. Landlords should not be in a rush to destroy what appear to be patients’ documents if a too-swiftly vacating tenant leaves them within the premises upon the lease’s end.
So, that’s the thought process on dealing with MME’s except for a final thought. No matter where you’re located, if your state has authorized medical marijuana sales, you have to review the stated policies of the U.S. Attorney’s Office for that federal district on the enforcement intentions of that office under the Controlled Substances Act, and how landlords will be treated in any enforcement effort. The two USAOs for Washington made a very strong statement of their joint (no pun intended, but you can love it) intentions in a letter from Jenny A. Durkan and Michael C. Ormsby dated April 14, 2011, addressed to Washington Governor Christine Gregoire, which is posted on the Seattle Times site: Dennis Burke, the U.S. Attorney for the District of Arizona, issued an advisory letter on May 2, 2011 on his office’s policies governing enforcement, which may be on the USAO website for Arizona by now. It’s one more way to try to calculate your risks in leasing to MMEs. Good luck, whatever you decide.