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Maryland’s Medical Marijuana Tenants Pose Substantial Risks for Landlords

Today, 25 states plus the District of Columbia have adopted laws legalizing some form of medical and/or recreational marijuana use. As a result of laws recently adopted by the Maryland General Assembly, Maryland's Medical Cannabis Commission will award 15 grower licenses, 94 dispensary licenses, and an unlimited number of processor licenses. The licensing application process has set off a modern-day land rush, with the Commission receiving well over 1,000 applications for the available licenses. Because the of the limited number of licenses to be granted, there will undoubtedly be a number of disappointed applicants. However, for those who are awarded licenses, a new industry awaits.

Although the prospect of this new industry is compelling, a major hurdle remains – under federal law, marijuana is illegal except in extremely limited research applications.  Under the Controlled Substances Act (CSA) marijuana is a Schedule 1 "controlled substance," and persons who manufacture, distribute, import or possess controlled substances in violation of the CSA are subject to severe civil and criminal penalties. For example, the mere possession of marijuana can lead to one year imprisonment and a minimum fine of $1,000. The penalties go up from there. A person who cultivates or distributes marijuana or who possesses it with intent to distribute, risks imprisonment for a term of from five years to life. Importantly, any real or personal property associated with the offense is subject to civil and criminal forfeiture.

With a significant number of growing, processing and dispensary facilities anticipated in Maryland, the landlord-tenant relationship will inevitably be drawn into sharper focus. Although marijuana growing, processing, possession and distribution are now legal under Maryland law in limited circumstances, substantial risks remain for landlords under federal law.  Although the Department of Justice through a series of pronouncements has indicated it will essentially turn a blind eye to enforcement of the federal marijuana laws in the context of state legalization of marijuana use, the threat remains that a landlord leasing space to a state sponsored or licensed marijuana business can be prosecuted as an aider and abetter, and even as a co-conspirator.

By participating in the application process, licensees under the Maryland statutory structure will have weighed the risks against the potentially substantial rewards in this new business. However, landlords of these ventures may not be as aware of the downsides inherent in leasing to Maryland’s new marijuana businesses. Maryland landlords who are willing, nonetheless, to accept the risks under federal law and proceed with leasing transactions need to keep in mind several practical impediments that arise as a consequence of such transactions.

For example, if the landlord's building is currently financed, the deed of trust or mortgage instrument which encumbers the landlord’s property will in virtually every case contain a standard covenant that the landlord will not violate any laws. Accordingly, the mere lease of the landlord’s property to those involved in the marijuana trade risks a default of that covenant. Moreover, even if there is no current mortgage or deed of trust lien on the property, a landlord may find its prospects of financing its building substantially diminished where some or all of the leases supporting the loan are from a criminal enterprise under federal law.

When a landlord desires to sell the property in which a marijuana tenant is located, the landlord may find the scope of the market of potential buyers severely constrained. It is likely no institutional buyers will accept the risk. This leaves a smaller market of individuals or real estate entrepreneurs, but even these potential buyers will have difficulty finding financing. Thus, a landlord with a marijuana tenant may find itself with an asset that can neither be financed nor sold.

There are other practical issues. Since marijuana businesses are prevented from opening and maintaining regular bank accounts because of federal regulations, the landlord must be willing to accept cash payments for rent. Accepting these cash payments alone will subject the landlord to the potential of civil forfeiture, and make the landlord subject to federal Department of Treasury reporting requirements for amounts received in excess of $10,000.

As if these issues weren't enough, a landlord leasing to a marijuana business may face serious hurdles in enforcing its lease. Assume that a landlord successfully prosecutes a judgment for repossession. If the premises is filled with stock (e.g. marijuana being cultivated, processed or stored), what is the landlord to do with it since the landlord itself is not licensed?

Last, it is clear under recent bankruptcy court holdings that medical marijuana businesses cannot avail themselves of bankruptcy protection. The same reasoning has been applied in at least one reported bankruptcy case involving a landlord who sought bankruptcy protection where the landlord had a marijuana business as a tenant.

For those landlords whose risk tolerance is high enough to proceed in the face of all of the above, the standard commercial/retail/industrial lease forms will need substantial modification. The new medical marijuana laws signal the growth and development of a dynamic and potentially lucrative industry in Maryland, with significant opportunities for Maryland landlords. This notwithstanding, prudent landlords need to fully understand the risks inherent in leasing to Maryland medical marijuana businesses, and take steps in their leasing documents to adequately anticipate and address these risks.

Matthew Kimball is Chair of the Commercial Real Estate Department of Niles, Barton & Wilmer, LLP. His practice includes real estate, real estate finance, leasing, property management and real estate-related environmental law.

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