Medical Marijuana Risks for Cultivation Lease Landlords

It may be tempting for a farming operation with fallow acreage to consider leasing to a tenant for above-market rents. However, when the offer is coming from a marijuana grower, the would-be landlord will have a number of additional legal issues to consider.

It bears repeating that marijuana is still illegal as a Schedule I drug under the Federal Controlled Substances Act. Even though Oklahoma is likely to approve marijuana for medicinal use this Summer, the federal government doesn’t recognize such use as valid and prohibits the manufacture, sale, and distribution of marijuana. An owner who leases to a tenant for the purpose of manufacturing, distributing, or storing controlled substances, illegal under federal law, is punishable under the Controlled Substances Act by a fine and up to 20 years in prison.

That might be the end of the story for most landlords. This is especially true now that the Trump Administration’s Justice Department has signaled that it may take a different path with respect to marijuana prosecutions. The U.S. Department of Justice could seek to take real property used in connection with marijuana-related crimes of tenants through civil asset forfeiture. For landlords who determine that the potential revenues are too great to pass up and their risks associated with federal prosecution or civil asset forfeiture are immaterial, there are still other concerns. A landlord may find that a conservative financial institution could refuse to accept deposits of funds related to a marijuana grow operation lease. Also, if the landlord has a loan from a financial institution, the landlord may find itself in breach of that loan without available replacement financing.

Most loan agreements prohibit the borrower from violating the law, and if the loan was entered into more recently, there may be express prohibitions against use of the property with respect to state-licensed marijuana-related businesses. Thus, a financial institution could call a loan due from a landlord renting to a marijuana grow operation. If there is an opportunity for replacement financing, the loan amount may be reduced (if the financial institution excludes rents from the marijuana-growing tenant when calculating the value of the collateral or the revenues of the landlord).

Oregon and Colorado federal bankruptcy courts have come to the conclusion that bankruptcy protections are not available to a landlord leasing to a marijuana business, even if the tenant’s marijuana business is operated in compliance with state law. Federal bankruptcy courts in Oklahoma may come to the same conclusion. Some of this risk can be mitigated with proper planning, but there would always be some portion of the landlord’s business operation that would remain at risk.

Aside from the issues concerning federal law, a landlord could find itself at risk of violating state law if its tenant is not in compliance with state and local regulations.

Unless and until the Controlled Substances Act is changed to permit the state-legalized marijuana activities, landlords should be wary of leasing to marijuana grow operations and should consider the other risks and potential obligations of having such a tenant. At a minimum, before you negotiate a lease, make sure you have a cannabis lawyer help you guard against potential pitfalls down the road. The cannabis industry is unlike any other industry, and there are several factors to consider before you lease.

Share

Comments are closed.

  • Categories

  • Archives