Things to Think About for Commercial Cannabis Leases in Oregon

Commercial property owners and tenants often ask their lawyers for a "form lease." But no form will fit every situation, and this is particularly true when the tenant is a cannabis business.

Because cannabis remains illegal under federal law, landlords and tenants should think about a few key issues when negotiating or drafting a commercial cannabis lease.

Paying the rent

Fear of federal prosecution means most banks will not serve cannabis customers. So, cannabis businesses are forced to pay their bills using cash or money orders. And even money orders are risky, given that the most common source is the U.S. Postal Service. Look at any "form" commercial lease, however, and it probably requires payment of rent by either check or automatic funds transfer. Neither of these options is available to many cannabis tenants, so a good cannabis lease will provide the tenant alternative methods for paying the rent.

Landlord access

Most commercial leases give the landlord a right to access the leased premises, to make repairs or confirm ongoing compliance with the lease. But Oregon law requires the licensee of a cannabis business to insure that no unauthorized person has access to cannabis inventory. Thus, the lease should require that an agent of the tenant accompany the landlord when accessing any place where cannabis is kept.

Similarly, many form commercial leases provide that if the tenant fails to remove its property from the leased premises after the lease terminates, the landlord may do so. But a landlord that handles cannabis products without a license can get sideways with both state and federal authorities.

The better practice is for the lease to obligate the tenant to dispose of its cannabis in accordance with state rules. If the tenant does not, the landlord can use the creditor liquidation procedures of the Oregon Liquor Control Commission to handle any cannabis left behind.

Compliance with federal law

Almost every commercial lease has boilerplate language requiring the tenant to comply with the law. But cannabis tenants can't comply with federal drug laws, so a well-written lease will carve out any obligation to comply with federal cannabis laws such as the Controlled Substances Act.

But don't wield the knife too broadly – there are many federal laws unrelated to cannabis that should still apply, such as those governing hazardous substances.

Compliance with state law

Oregon and other states that have regulated cannabis have extensive laws and rules governing cannabis businesses. If the tenant complies with state law, current federal cannabis enforcement policy is to look the other way (as first articulated in the Cole Memo) that Jeff Sessions rescinded, but which Oregon's U.S. Attorney Billy Williams has essentially adopted. But if the tenant operates outside state law or federal enforcement policy changes, the feds may come knocking. And if they do, the feds aren't likely to try very hard to distinguish between the property of the landlord and the tenant when seizing property tainted by cannabis activity.

Thus, a good lease will specifically require the tenant to comply with state-specific rules and laws governing cannabis businesses and to refrain from any conduct that would trigger federal enforcement. If the tenant does not, or if federal policy changes, the most common remedy is to allow either party to terminate the lease early without penalty and obligate the tenant to vacate the premises.

Waiver of the "illegal purpose" defense

In any lease, both parties need certainty that it can enforce the lease in court and obtain a proper remedy if the other party breaches the lease. With a non-cannabis lease this is a no-brainer, but Oregon law prohibits courts from enforcing a contract entered into for an "illegal purpose," so a party in default of a cannabis lease might try rely on federal law to assert the illegal purpose defense to avoid lease enforcement.

To mitigate this risk, a cannabis lease should contain an advance waiver of the "illegal purpose" defense by both landlord and tenant. A cannabis lease also should provide that any lawsuit under the lease must proceed in state courts, which should be more respectful of state regulation of cannabis.

Cannabis businesses will exist in a cloud of legal uncertainty for some time to come. Addressing these issues in any lease will help both landlords and tenants be better prepared for any changes.