Hunton Retail Law Resource

As marijuana sales become increasingly legal in many states across the US, a growing number of commercial property owners will be faced with the decision of whether to lease their space to a marijuana-related business. There are many factors that potential landlords and tenants must keep in mind, not the least of which is federal law.

Under federal law, the use, possession, sale or processing of marijuana is illegal. This is because marijuana is a Schedule 1 substance under the Controlled Substances Act (21 USC § 801 et seq.). More importantly, another federal law, unflatteringly known as the “Crack House Statute” (21 USC § 856), makes it a felony to knowingly open, lease, rent, use or maintain any place for the purpose of manufacturing, distributing or using any “controlled substance.” Thus, even if the potential landlord’s state or locality allows for marijuana-related business activities, this inherent conflict with federal law presents several potential issues.

In addition to statutory issues, there are numerous other factors to take into account. For example, if the property is subject to a mortgage, the loan agreement will almost certainly contain provisions requiring that the borrower, the property and its uses will comply with all applicable laws, rules and regulations. Therefore, upon execution of the lease agreement with a marijuana-related entity, the landlord will likely be in default under the loan agreement.

If the property is not subject to a mortgage, there are several other considerations landlords and tenants should be aware of. For example, the landlord’s bank may not accept deposits of income generated from a marijuana-related business. Zoning regulations may also present problems given the sensitivity that still exists around the use and sale of marijuana. A landlord and tenant must also consider the availability of insurance, because some insurance companies may deny claims if they arise out of an illegal use. Finally, commercial projects are often subject to restrictive covenants contained in other leases or restrictive covenant agreements that prohibit uses within the applicable project that are in violation of laws in general or involve the sale of cannabis products.

The above issues are only some of the issues landlords and tenants must consider before proceeding with entering into a lease agreement related to marijuana use or sale. Because of the conflicts that will inevitably exist between local, state and federal laws, it is important for landlords and tenants to engage counsel familiar with all related laws before proceeding with entering into any lease agreements.