In the complex interplay between a landlord and tenant for a lease of an industrial building, the parties to the transaction engage in a lengthy but familiar set of negotiations. Most real estate legal practitioners experienced in leasing are familiar with the typical feints and thrusts made by the other party in an effort to secure the most advantageous lease agreement. For the most part, the negotiation between the parties is largely independent of the tenant’s intended use of the property.
However, this overly simplified conclusion is turned on its head when leasing to a tenant that intends to engage in the legal production, manufacture or retail sale of marijuana. There are several unique concerns under Washington law that modern leases involving marijuana tenants must address.
Risk of Forfeiture
Unlike other leases, a landlord who enters into a lease with a marijuana tenant faces a perilous risk — namely, the potential forfeiture of the landlord’s real property. Like most states, Washington law provides the right for state authorities to seize real property used with the owners’ knowledge in violation of the state’s laws concerning controlled substances.
To minimize the risk of potential forfeiture, a landlord in Washington should, in addition to relying on written promises from the tenant to comply with all applicable laws, require the tenant to provide proof of compliance with marijuana laws. At a minimum, this would include copies of all requisite licenses and renewals. Further, a landlord should maintain those records to establish that the tenant complied with state law and that the landlord did not knowingly allow an operation that violated marijuana regulations. By doing this, a landlord will substantially reduce the risk of state authorities seizing property under state forfeiture laws.
Portland Oregon – White Stag sign, Dec. 2010. Photo by Steve Morgan.
Access to the Premises
Generally, a tenant cannot prevent a landlord from entering the leased premises. Most leases give landlords a right of entry to inspect and repair the building, and the parties typically negotiate the type of early notice required before such access is made. However, the landlord’s right to enter the building may be limited by state marijuana regulations that are intended to trace the marijuana product from inception to sale and to prevent the product from being diverted outside the legal marketplace.
Washington Administrative Code 314-55-083 requires marijuana tenants to issue badges to all non-employee visitors (not including retail store customers) and maintain a log of visitors. The regulation does not provide an exception for a landlord that needs to access the building to address an emergency situation. Accordingly, while landlords should insist upon their right to enter the building as necessary, including without prior notice to address an emergency, they should also agree to comply with all state requirements concerning access so tenants do not lose their license.
Disposal of Marijuana Waste
In most buildings, one of the parties will contract with the local solid waste company to haul away the tenant’s waste. Unless the tenant engages in processes involving chemicals, the standard solid waste hauler will be adequate for the removal of garbage. However, the disposal of waste from marijuana processing requires special consideration. Processing marijuana requires solvents, which may be hazardous substances that require special handling under federal and state laws. Marijuana plant waste is not a dangerous substance (unless treated with solvents), but does require special handling before it can be disposed. Under WAC 314-55-097, tenants need to render the plant waste “unusable,” which means grinding and mixing the plant waste with other materials so that the resulting mixture is at least 50% non-marijuana waste by volume. Compostable mixed waste will be disposed as compost feedstock or some other organic waste method, and non-compostable mixed waste may be disposed in a landfill or another disposal method, such as an incinerator. The landlord will need to ensure that the lease requires the tenant to comply with the applicable law concerning the disposal of marijuana waste, including securing the services of an appropriate solid waste hauler.
Conclusion
This article provides a small sampling of the unique issues in a lease agreement with a marijuana tenant. Although Washington law serves as the basis of this article, other states have adopted similar regulations for cannabis operations. The concerns discussed will also be present in leases in other states, such as Colorado, Oregon and California. Each state’s regulations will need to be considered for specific tailoring of the lease agreement to conform with that state’s laws.
Landlords and tenants should seek the advice of local legal counsel familiar with the applicable state marijuana regulations to avoid any unexpected pitfalls and to identify unusual requirements not present in other lease transactions.
Jack Pawlicki is a member in the Seattle office of Williams Kastner. His practice concentrates on commercial real estate transactions, particularly leasing, purchase and sales, financings, development and land use for various office, retail, industrial, mixed use and raw land projects. He specializes in complex retail, office, medical, industrial and ground leases in Oregon and Washington state. Williams Kastner publications should not be construed as legal advice. The communication does not create an attorney-client relationship with Williams Kastner or any of the firm’s attorneys.
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