Leasing to Marijuana Operations Could Cause your Property to go up in Smoke
Elizabeth A. Carroll i
With the recent legalization of medical marijuana in 19 states and the District of
Columbia and recreational marijuana in Colorado and Washington State, commercial
landlords interested in leasing vacant retail and warehouse space to medical marijuana
dispensaries and growing operations of marijuana are facing complicated issues related
to the interplay of state and federal law. There are risks to commercial landlords
associated with leasing to tenants that produce, distribute or sell marijuana, even in
states where such production, distribution and sale is legal under state law.
According to the United States Justice Department, production, distribution and sale of
marijuana is still a federal crime under the Controlled Substance Act (“CSA”), because
marijuana is a Class I drug (i.e. drugs with no currently accepted medical use and a
high potential for abuse). The United States Deputy Attorney General, however, has
issued guidance memoranda to all United States Attorneys, one on August 29, 2013
and one on February 14, 2014, stating that federal enforcement of what is otherwise the
legal production, distribution and sale of marijuana at the state level is a low priority.
There are some aspects of marijuana enforcement that are still priorities which are
listed in each of the guidance memoranda and include preventing distribution to minors,
preventing revenue from marijuana sales to going to criminal enterprises and preventing
diversion of marijuana from states where it is legal under state law to other states where
it is not legal. These guidelines are just that; they neither have the force of law nor
modify existing federal laws.
There is also an as yet undecided issue of whether the various state laws legalizing
marijuana are invalid because they are in conflict with federal laws prohibiting
marijuana. Preemption, which occurs when federal law applies to conduct also the
subject of state law, is established by the Supremacy Clause of the United States
Constitution and provides that in the event of a conflict between the federal law and
state law governing the same conduct, federal law applies. Marijuana advocates have
argued that the federal CSA does not preempt the state marijuana legalization laws so
long as the states are regulating the production, distribution and sale of marijuana in a
manner that does not obstruct federal objectives. At least one federal court has noted
in dicta that state laws are not preempted stating that “Federal preemption is not an
issue because no part of the Colorado law must give way in order for federal authorities
to fully enforce the CSA.” (In re Rent-Rite Super Kegs West Ltd, 484 B.R. 799 (Bankr.
D. Colo. 2012))
Even if state laws are not preempted by federal law, the federal law is still in effect and
enforceable. In addition to penalties under the CSA that commercial landlords may be
subject to by leasing their property to tenants using such property in violation of the
CSA, commercial landlords also risk civil forfeiture. Under the Civil Asset Forfeiture
Reform Act of 2000, the federal government can seize real property used in connection
with activities that violate the CSA and are punishable by more than one year’s
imprisonment. Civil forfeiture does not require any judicial proceeding nor does it
require anyone to be charged with a crime. In the Rent-Rite case cited above, the
United States Bankruptcy Court for the District of Colorado, in determining whether to
dismiss a voluntary bankruptcy, found that a commercial landlord leasing warehouse
space to tenants who the landlord knew were engaged in the business of growing
marijuana in violation of the CSA was jeopardizing its warehouse property by
subjecting it to civil forfeiture. Further, commercial landlords may be in violation of
existing loan documents or ineligible for future loans on their property if they permit use
of their property in violation of the CSA. Recently, we have seen lenders add violation
of the CSA or Civil Asset Forfeiture Reform Act of 2000 as recourse carve outs in
guaranties. Another consideration is whether marijuana operations violate use
restrictions in other leases, declarations or other recorded covenants that affect the
property.
Commercial landlords should be aware that the production, distribution and sale of
marijuana remains illegal under federal law and may result in civil forfeiture of their
property and other penalties when determining whether to lease space to tenants
engaging in the production, distribution and sale of marijuana, even in states where
marijuana has been legalized.
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Elizabeth Carroll is an associate in the Real Estate Practice Group in the Washington, DC office of
Seyfarth Shaw LLP. She focuses her practice in all aspects of commercial real estate transactions.