This article addresses what landlords can do to protect themselves from the civil and criminal liabilities that arise when a cannabis business lessee engages in unlicensed and/or otherwise non-compliant cannabis operations on the premises of a San Jose commercial property.
Landlord Liability Under California Law
Enforcement of California cannabis law at a state level is conducted by the BCC.
California Health and Safety Code section 11366.5 provide that any person who knowing rents any space for the unlawful manufacture, storing or distribution of any controlled substance faces up to one year in jail.
Business and Professions Code section 26031.5 empowers the BCC to levy up to $30,000 of fines per day and the costs of investigation and enforcement (including attorney fees), against any unlicensed persons who through act or omission violates California cannabis laws and/or regulations.
Landlord Liability Under San Jose Law
The only legal cannabis operations in San Jose are the registered cannabis businesses licensed by the city of San Jose. All other cannabis enterprises are prohibited. This means, if your tenant is not one of the registered cannabis businesses, it is illegal for them to open a cannabis store, grow cannabis for sale, manufacture extract, deliver, distribute, or transport cannabis for sale in the City of San Jose.
The Division of Cannabis Regulation, with the assistance of the San Jose Chief of Police, has the responsibility to monitor the operations of registered medical and non-medical cannabis businesses in the City of San Jose. This robust regulatory program consists of continuous site-inspections of registered cannabis businesses, conducting background investigations on all employees, investigating violations of the San Jose Municipal Code and conducting analysis of criminal activity in the areas surrounding cannabis businesses.
In accordance with San Jose Municipal Code Section 6.88.820 each and every violation of the code constitutes a separate violation and shall be subject to all remedies and enforcement measures authorized by this Code. Additionally, as a nuisance per se, any violation of this Chapter shall be subject to injunctive relief, the Cannabis Business’s registration being deemed null and void, disgorgement and payment to the City of any and all monies unlawfully obtained, costs of abatement, costs of investigation, attorney fees, and any other relief or remedy available at law or equity. The City may also pursue any and all remedies and actions available and applicable under state and local laws for any violations committed by the Cannabis Business and persons related to, or associated with, the Cannabis Business.
While the code does not specifically address what if any criminal and/or civil liability a landlord incurs by leasing commercial space to an unlicensed and/or non-compliant cannabis business, a broad reading of the enforcement provision could result in the landlord being found to be “a person related to, or associated with it the cannabis business” and therefore subject to fines and penalties under the code.
How Landlords Can Protect Themselves
Frustratingly, landlords have little or no way of knowing whether the cannabis business they’re leasing to is being operated in compliance with San Jose Municipal Code and the attendant Rules and Regulations.
Given the inherent difficulty of determining whether compliance is being maintained, and the possibility of civil and criminal costs liability for a failure to comply, the importance for landlords to protect themselves against unlicensed and/or non-compliant operations is paramount.
The key to protecting yourself from the liability of a non-compliant lessee starts with a well-crafted lease that anticipates and protects against the types of damage that might arise from non-compliance. It is best practices for a lease to a cannabis business 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 for managing the risk and costs of enforcement actions include increasing the amount of the security deposit and lifting restriction on how the security deposit is used. The security deposit would therefore act as a buffer, to be used by the landlord to cover the cost of any enforcement action, should it occur. Another solution would be to include a clause in the lease requiring the tenant to post bond, within a certain number of days of having been informed of the potential or actual enforcement action, in an amount determined to sufficient to cover the estimated cost of any enforcement action. Regardless of the manner by which you protect yourself, the key to success is to have the mechanism in place in the lease, well before trouble starts.
BrightWork Law
If you are considering entering into a lease agreement with a cannabis business in the city of San Jose, California, contact Brightwork Law. We have experience crafting commercial cannabis leases and can quickly and inexpensively craft a custom lease agreement that both meets your goals and protects you from the unique risks posed by renting to a cannabis business.
If you are already renting to a cannabis business and you have received a cease and desist letter, or are the subject of an enforcement action, or you simply suspect that your tenant is engaged in unlicensed or other non-compliant cannabis activity, contact Brightwork. We can assist you in navigating the complex field of cannabis law to determine your best course of action, ensuring you get the most beneficial outcome possible for you or your business.