The Dude (and Cannabis Leasing) Abides

My favorite movie trio may be Jeff “the Dude” Lebowski (Jeff Bridges), Walter Sobchak (John Goodman) and Donny Kerabatsos (Steve Buscemi) from the Coen Brothers cult film “The Big Lebowski.”

Set in California, the movie has kidnapping, ransom money (and no money), a porno king, a nasty rich guy (the Big Lebowski), a runaway wife and, of course, bowling.

I am not enough of a fan to have been to the Big Lebowski annual convention and am not a member of the Church of the Latter-Day Dude, but I never tire of this classic.

Walter may be the wackiest supporting character in all of Hollywood and the white Russian sipping, cannabis loving Dude certainly epitomizes the stereotypical vision of the stoner.

But it turns out that vision may not be completely accurate.

Both the Wall Street Journal and the New York Times have written about how many fitness fiends use marijuana.

These new age dudes use cannabis to recover after a workout or claim that using it before a workout can make the exercise more enjoyable. Some Harold and Kumars even claim it improves performance.

What are they smoking?

Maybe they are onto something since even the World Doping Agency disallows cannabis use for the Olympics since “cannabis can cause muscle relaxation and reduce pain during post-workout recovery. It can also decrease anxiety and tension, resulting in better sport performance under pressure.”

Of course, many doctors and scientists say such exercise related use can be dangerous and quite a few workout weeders admit that things can get a little hairy if you get confused while lifting heavy weights or using workout machinery.

Any of you who have actually read one of our leases no doubt believes that we must be employing our inner Dude and indulging in some banned substances in order to create such unintelligible nonsense.

But in our defense, I defy you to read through a landlord’s first draft of a lease and tell me that hallucinogens are not part of the equation!

Subordination provisions? Operating Expenses? ROFO rights?

I suspect somebody has been partaking in something a lot stronger than a little ganja!

All of this may become relevant other than when surfing late night television for classic movies as many states, New York now included, have legalized recreational marijuana use.

Right now, cannabis leases are an odd niche retail market with many risks. While some states have legalized marijuana use, it is still illegal and considered a controlled substance under federal law and it is a felony to lease, rent or use real estate for the purpose of cultivating or distributing a controlled substance.

Banks that are federally insured and conventional mortgage lenders preclude landlords from working with cannabis businesses.

There are also unfavorable tax consequences that restrict the deduction of certain business expenses.

A host of legal and regulatory challenges lie in the weed(s) and make it more likely that landlords will require higher rents and personal guaranties.

Notwithstanding all that, the cannabis business may be ready to explode and with it will come a need for storefronts, warehouses and cultivation sites.

COVID has not slowed things down as, with a nod to the Dude, many states have deemed medicinal and recreational dispensaries “essential businesses.”

If cannabis is made legal on a federal level, that would be a complete game changer.

Think of how changes in some alcohol related laws in the 1980’s led to a flood of local breweries.

As the Dude might say, if you are not into the whole brevity thing, here are eleven ideas to keep in mind regarding leasing for a cannabis business.

  • License and space. Most states have a limited number of marijuana sales licenses and some states require that you control a site before you can apply for a license. This means that during the uncertain process to obtain a license, you will need to control a site through a lease or option to lease. Another way to handle this concern is to create a contingency in the lease based on obtaining the license.
  • Focus on zoning. Some municipalities place strict limits on the placement of dispensaries (e.g., not within a particular distance from schools or parks).
  • Lenders. Since many commercial buildings are subject to financing, the landlord’s lender may have a say in the type of business in occupancy and may object to a cannabis lease. Most conventional mortgage financing requires that the borrower and its tenants use the property in accordance with federal law. In addition, federally insured banks will not cash rent checks from cannabis businesses so alternative banking arrangements will be required (e.g., other local banks, credit unions, cash payments, etc.)
  • Early termination. Notwithstanding illegality at the federal level, the federal government has for the most part let cannabis businesses grow and thrive and the current administration has not indicated any intention to change things, but cannabis entrepreneurs are wary of the possibility of federal interference.
    • You should try to include a right of early termination to cover the possibility of changes in the law that prevent you from operating. Note that in most instances this will require some early termination payment.
    • Since many cannabis licenses are tied to particular properties, you also want to limit your landlord’s ability to terminate your lease, certainly for a “violation of law” since you start off violating the law on day one, but also be sure that you have plenty of notice and cure rights in the event of a breach.
  • Operating expenses. Cultivation and warehouse facilities may require a heavy use of water and other utilities. If there are no direct meters, then such services should be paid through your landlord but without any mark-up.
  • Compliance with law. Most leases require that the tenant comply with all federal, state and local laws regarding use of the property. This covenant should exclude compliance with federal law and instead require compliance with all state and local requirements regarding the cultivation, distribution and sale of cannabis. And since contract law provides that illegal contracts are void and unenforceable, your landlord should stipulate that federal illegality is waived and not a valid defense to claims under the lease (although it is not clear if this would be enforceable).
  • Secure areas. In many states, the cannabis license requires secure access, i.e., limited to third parties. This includes the landlord and will require more stringent access limitations than in an ordinary commercial lease.
  • Insurance and indemnification. Since traditional insurers may balk at covering cannabis businesses, you may not be able to meet customary insurance requirements such as obtaining property insurance for your inventory or using an insurer of a particular Bests rating. You will need specialized insurance policies and will have to modify your lease accordingly. Your landlord may also want more extensive indemnification provisions; another risk to address with your attorney.
  • Percentage rent. The common retail lease use of percentage rent (paying some or all of your rent based on a percentage of sales) may not work since regulators may view this as a share of “ownership” in the business and this may violate your license.
  • Landlord authorization. Considering all of the legal issues raised with cannabis leasing, your landlord should specifically acknowledge in your lease that it authorizes your cannabis related use.
  • Dispute resolution. You will want to avoid ending up in federal court since the court may refuse to uphold your lease on the basis that it violates federal law. One solution may be to require arbitration (expedited or otherwise) for many stated disputes.

Walter Sobchak is the Dude’s best friend and he takes his bowling very seriously, even pulling a gun from his bowling bag and telling someone who refused to acknowledge that his foot improperly went over the line “my friend, you are entering a world of pain.” Walter only places his religion over bowling, refusing to play in a tournament on a Saturday exclaiming “I don’t roll on Shabbos.” Address the issues above and your cannabis lease could be rolling along fine. Shut up Donny!