In 2000, Colorado voters adopted Amendment 20 authorizing the medical use of marijuana for persons suffering from debilitating medical conditions. Amendment 20 provides certain protections from State criminal liability (not U.S. law) for qualifying patients and primary caregivers. Entrepreneurs seek access to commercial space to satisfy the demand for medical marijuana. The commercial real estate market is currently depressed. Landlords who would not consider taking the risk of leasing space to medical marijuana operations in more "normal" times are now doing so. The purpose of this article is not to explain Colorado's Medical Marijuana scheme, but merely to identify the unusual risks a landlord takes in renting space to MMJ operators.
The U.S. Department of Justice, in October of 2009, issued a memorandum (often called the “Holder Memorandum”) stating that while compliance with the State's Medical Marijuana laws does not constitute a defense to the federal prohibitions, the U.S. Attorneys would not focus federal resources on individuals “whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.”
The continued illegality of marijuana under federal law and the fragile protections under Colorado law creates at least two important ramifications for landlords. First, the common provisions in commercial leases prohibiting the use of the leased premises for an illegal activity will be violated by a medical marijuana caregiver. Secondly, the continuing federal illegality subjects landlords to the drug asset seizure risks. Notwithstanding the Holder Memorandum, DEA agents raided and arrested a Colorado caregiver in February of 2010.
Amendment 20 only provided protections for patients and caregivers. There was no protected status for growers (who were not caregivers growing supply for their own patients), transporters, wholesalers or distributors of medical marijuana. Anyone renting vacant land for the cultivation of medical marijuana was almost certainly violating Amendment 20, as was anyone renting a warehouse for the indoor cultivation of medical marijuana. Amendment 20 spawned many small caregiver operations, many of which were located in small strip malls and mixed use development, close to residences.
House Bill 10-1284 intended to create a more practical scheme by licensing "Medical Marijuana Centers," "Medical Marijuana-Infused Products Manufactures" and permit the growing of medical marijuana at an "Optional Premises Cultivation Operation." HB 10-1284 hopes to decrease the number and spread of small caregiver operations and create vertically integrated mega distribution centers.
To be protected under Colorado's system, caregivers, patients, centers, manufactures, grow operations, transporters and their employees must strictly comply with the rules. Many of the rules are counterintuitive for traditional players. Even the most conscientious market participants will find it easy to violate the rules, subjecting themselves to criminal conviction.
Most commercial leases do not contemplate that the permitted use of the leased premises is illegal. The use and default provisions in the lease need to be tailored to permit the landlord to terminate the lease not only because of deviation from explicitly permitted activities, but also because of prosecution for illegal activities, notwithstanding the fact that the permitted use was known to be illegal by the landlord.
The leasing of space to any entrepreneur raises the specter that the tenant's business may fail. While medical marijuana dispensaries may receive steady revenue, the fragile legal scheme for medical marijuana dispensaries may offset the benefits of a financially strong tenant. Local zoning restrictions and moratoria enhance the legal fragility of caregivers. Landlords should be mindful of these risks as they consider making investments in things such as free rent and tenant finish. The normal provisions in a lease which call for post-lease termination liability for a tenant have little meaning for an ex-tenant who is in prison.
Most commercial leases do not contemplate that the permitted use of the leased premises is illegal. The use and default provisions in the lease need to be tailored to permit the landlord to terminate the lease not only because of deviation from explicitly permitted activities, but also because of prosecution for illegal activities, notwithstanding the fact that the permitted use was known to be illegal by the landlord.
Under federal law, real property which is used in violation of federal drug laws is subject to civil forfeiture. Consider a landlord who has leased one storefront, as part of an eight unit strip mall, to a caregiver. Because of the enhanced risks associated with the tenant's use of the premises, the landlord charges a rent higher than the ice cream shop next door. In spite of the Holder Memorandum, the feds arrest and convict the tenant for violating federal drug laws. (This could happen for a variety of reasons, including the tenant violating Colorado law, a change in federal drug enforcement policy, or whatever reasons drove the feds to bust the Highlands Ranch caregiver.) The feds also attempt to seize the whole strip mall from the landlord.
There are many examples where the feds have limited their seizures to the tenant's leasehold interest in the property, and not tried to take the landlord's fee title. There is a notion in civil forfeiture laws that "innocent owners" are not subject to seizure. However, is a landlord who collects extra rent due to the illegal use an innocent owner? Isn't the landlord knowingly benefiting from the fruits of the illegal activity? In one case, the feds brought forfeiture proceedings against fee title to a five-story building containing eight apartments and two leased stores even though the stores were the only source of the illegal drug activity, and even though the stores were operated by tenants. There is ample precedent that the feds are not limited to the space in which the illegal activity occurred, but can instead pursue the whole legal parcel.
Commercial landlords who knowingly lease to caregivers take huge risks. Lease terms that are designed to mitigate these risks, or compensate landlords for these risks, might enhance the risk of civil forfeiture. Landlords contemplating leasing to caregivers should work with their lawyers to properly calibrate and manage these risks.
Jonathan A. Goodman is a shareholder in Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm. His practice areas include Real Estate, Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance. He can be reached at contact Jonathan Goodman.
Disclaimer -- Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.