With the passage of California Adult-Use, an ever-increasing percentage of California’s warehouses and commercial retail spaces is occupied by cannabis cultivation, processing, packaging, distribution, and retail dispensary storefronts.
Behind each property stands a landlord, many of whom failed to fully comprehend the unique risk of renting to a cannabis business. This article addresses what landlords can do to protect themselves from the civil and criminal liabilities that arise when their renter engages in unlicensed and/or otherwise non-compliant cannabis operations on the premises.
Cease and Desist
In late 2019, the Bureau of Cannabis Control (BCC), in an effort to combat the state’s illegal cannabis market, sent hundreds of letters notifying California landlords that the Bureau had information their property was being used for illegal cannabis activity and warning landlords that they may personally be subject to criminal and civil penalties for allowing illegal cannabis activity to occur on their property.
These letters claimed among other things, that renting to an unlicensed cannabis businesses was a violation of California Health and Safety Code section 11366.5, subdivision (a) and Business and Professions Code section 26031.5.
Landlord Liability
The threats facing landlords set forth in the BCC cease and desist letters should not be disregarded as baseless bluster. California Health and Safety Code section 11366.5 provide that any person who knowing rents any space for unlawfully manufacturing, storing, or distributing any controlled substance faces up to one year in jail and Business and Professions Code section 26031.5 empowers the BCC to levy up to $30,000 in fines per day and the costs of investigation and enforcement (including attorney fees) against unlicensed persons who through act or omission violates California cannabis laws and/or regulations.
Most frustratingly, many landlords have little or no way of knowing whether the cannabis business leasing their building is in compliance or has the propert type of license given its operations.
Given the inherent difficulty of determining whether your renter is in compliance with state cannabis law and given the seriousness of the fines and penalties that arise from a failure to comply, the importance of protecting oneself the failures of one’s tenants is paramount. Thankfully, it is also quite straightforward and easy to implement common sense protections that can pay dividends should you find yourself receiving a cease and desist letter or as the subject of an enforcement action.
How Landlords Can Protect Themselves
The key to protection yourself from the liability of non-compliant tenants starts with a well-crafted lease that both anticipates and protects against the types of damage that might arise non-compliance. It is best practices to include substantial use restrictions, an early termination option, and provisions that ensure the landlord is indemnified for all costs that might arise as a result of an enforcement action. Other creative solutions include increasing the amount of the security deposit and lifting restriction on how the security deposit is used. The security deposit can then be used by the landlord to cover the cost of an enforcement action. Another solution would be to include a clause requiring the tenant to post bond, within a certain number of days of having been informed of the potential or actual enforcement action, in the amount of the estimated cost of the enforcement action. Regardless of the manner by which you protect yourself the key is to have the mechanism in place before the trouble starts.
BrightWork Law
If you are considering entering into a lease agreement with a cannabis business in the state of California, contact Brightwork Law. We have experience crafting commercial cannabis leases and can craft a custom lease agreement that both meets your goals and protects you from the unique risks that arise from renting to a cannabis business.
If you are already renting to a cannabis business and have received a cease and desist letter, are the subject of an enforcement action, or you simply suspect that your tenant is engaged in unlicensed or other non-compliant cannabis activity, Brightwork Law can assist you in navigating the complex law of cannabis to ensure to most beneficial outcome for you and your business.