For any marijuana business not fortunate enough to own its land outright, there are few documents more important than the lease. Not only is the lease the only transactional document reviewed by the Oregon Liquor Control Commission (OLCC) prior to licensure, but it sets fundamental operating parameters than can determine the success –and even life cycle — of the business. Problematic lease arrangements can sink a ship fast.
In Oregon, there are four main varieties of leasehold: the residential lease, the commercial lease, the ground lease and the agricultural lease. We steer most of our pot industry clients toward commercial and agricultural leases, depending on the circumstance. That said, we have had people walk in with just about everything.
Below is a brief summary on each type of lease, what to look for, and when to use them.
Do not use a residential lease for a commercial cannabis operation under any circumstances. Even if you think you can revise the lease form to suit your purposes, do not be tempted; and if your landlord insists on this form of lease, say no. We are currently aware of two pieces of landlord-tenant litigation in which the parties used a residential lease for a commercial cannabis grow: those leases were upside down on everything, including the eviction process. One goes to trial next week after thirteen months of litigation.
The only time a residential lease should involve cannabis is in the residential landlord-tenant context, discussing the right of an Oregon tenant to grow up to four plants for home use (not OLCC; not re-sale) in accordance with state law.
We have written on commercial leasing a fair bit on this blog, and we have adapted a handful of excellent lease forms for various buildings and circumstances. Generally speaking, commercial leases are broken into three categories: office, industrial and retail. The latter two are used extensively by cannabis businesses.
Prior to entering into a commercial lease, the parties will commonly run some due diligence on each other. From the landlord’s perspective, that usually means looking at a business’ operating history (if any) and financials; from the tenant perspective it’s more about local zoning laws and the space. This last piece is especially important: the lease almost always disclaims any liability for premises defects with “AS IS” language.
Prior to signing a lease, the parties will often start with a letter of intent (LOI) that nails down the high-level terms: e.g. duration, rights of renewal, rental amount, occupancy commencement, rent commencement, landlord and tenant improvements, taxes, insurance, common area maintenance, etc. Once the parties agree on these deal points, the next step is to get busy drafting. Here are some cannabis-centric things to watch for at that point.
Ground leases are long-term leases (think, 20 years or more) where the parties intend for the tenant to construct a building and other improvements (think, a row of cannabis greenhouses) which ultimately become the property of the landlord. These are almost always “net rent” leases, where the tenant pays all taxes associated with the property, including taxes, insurance premiums, utilities and maintenance.
Recently, we’ve seen an uptick in multi-acre property owners choosing ground leases. In some cases, a master ground lease with a series of subleases for different OLCC licensees is used to create a complex of sorts, assuming compliance with local zoning law and the availability of water rights.
Agricultural leases are a specialized subset of commercial and ground leases, and they are used commonly in rural cannabis grows. These agreements tend to be laced with various provisions not present in other commercial leases, like irrigation, water rights, sharing of farming costs, maintenance of equipment, etc. These leases may also be tailored specifically to the nature of the land. This means that in addition to describing the property at issue, the lease will describe buildings, structures, fixtures and other appurtenances included in (or excluded from) the leasehold.
It is important to note that although commercial and agricultural leases are related in many ways, use of a commercial lease on certain types of rural property, like Exclusive Farm Use (“EFU”) land could theoretically have disastrous effects. In Oregon, “commercial activity” is banned on EFU land. More than one attorney has speculated that use of a commercial lease on EFU land could lead to that parcel’s tax benefits being removed.
Sometimes, an agricultural lease is the only way to go.