Photo of Vince Sliwoski

A well-rounded attorney with experience in areas such as music and trademark law, Vince heads up Harris Bricken's Portland office and is a leading practitioner in Oregon's ever-evolving cannabis industry.

Oregon Cannabis lawsThe 2017 Oregon legislative session begins two weeks from tomorrow, on Wednesday, February 1. Already, there are many proposed bills, measures and resolutions posted on the legislature’s website, ranging from marquee bills to tackle the state budget shortfall and its gun registry loopholes, to resolutions naming an official state horse (the Kiger Mustang) and a dog (the Border Collie). For our faithful readers, there is also a generous helping of cannabis bills. We count 28 of them.

Back in October, we wrote that issues surrounding public consumption, like cannabis cafés and special event (temporary) licenses, would be up for discussion. As shown below, that has proven to be true. We have also written time and again (and again and again) about the need to merge Oregon’s medical and recreational marijuana programs. That appears to be up for serious consideration as well. Finally, we have written about the state’s burgeoning industrial hemp program, which is also addressed.

Below is a compilation of the 28 introduced cannabis bills, sourced from the Oregon legislature’s website. Each bill is linked to its summary page, and you can click through to the text of any proposal of interest. When reading a bill, it’s important to understand that any text in bold letters would be new, while language in [italics and brackets] would be removed from existing law. It’s also important to note that each proposed bill has a specific enactment date: some are “emergency” laws, effective on passage, while others would take effect at a future date. Finally, some of these bills would sunset after a certain period; others are proffered as evergreen.

As in the 2016 short session, many of the bills listed below will fall by the wayside as the senate and house convene and begin to knock heads. Others will be revised, consolidated or otherwise modified, but it is altogether certain that we will see some changes in Oregon cannabis law this session. Altogether, the index below seems to support the sentiment that Oregon is committed to getting it right with cannabis.

Draft Senate Bills

SB 56. Authorizes Oregon Liquor Control Commission to require cannabis-related licensees, certificate holders and applicants for licenses and certificates to submit information related to persons who hold financial interest in business operating or to be operated under license or certificate.

SB 108. Modifies certain definitions for purposes of regulating cannabis. Imposes tax on retail sale of marijuana seeds. Conforms terms throughout statutes governing regulation of cannabis.

SB 130. Waives fees for obtaining a medical marijuana card for veterans who have total disability rating of at least 50 percent as result of injury or illness incurred or aggravated during active military service, and who received discharge or release under other than dishonorable conditions.

SB 300. Establishes Oregon Cannabis Commission to fulfill duties, functions and powers relating to medical use of marijuana. Directs Oregon Health Authority to transfer duties, functions and powers relating to Oregon Medical Marijuana Act to commission. Makes commission operative January 1, 2018.

SB 302. Removes provisions related to marijuana offenses from Uniform Controlled Substances Act. Moves crimes, penalties, defenses to crimes and procedural provisions in Uniform Controlled Substances Act that apply to marijuana offenses to Control and Regulation of Marijuana Act. Adjusts penalties for certain crimes. Makes corresponding changes to statutes referencing controlled substances to clarify applicability to cannabis and cannabis-derived products.

SB 303. Amends, clarifies and creates consistency in statutes setting forth prohibitions and procedures related to minors possessing, purchasing, attempting to purchase or acquiring alcoholic beverages or marijuana items.

SB 304. For purposes of laws regulating cannabis-related businesses, standardizes language with respect to issuing, renewing, suspending, revoking or refusing to issue or renew licenses.

SB 305. Clarifies law requiring notice to Oregon Liquor Control Commission when person licensed by commission to engage in cannabis business is convicted of violation of state law or local ordinance of which possession, delivery or manufacture of marijuana item is element.

SB 306. Repeals provisions regulating marijuana grow sites, marijuana processing sites and medical marijuana dispensaries on June 30, 2018. Updates and creates provisions providing for licensing of marijuana grow sites, marijuana processing sites and medical marijuana dispensaries by Oregon Liquor Control Commission.

SB 307. Provides for regulation by Oregon Liquor Control Commission of consumption and sale of marijuana items at temporary events, including licensure of premises on which temporary events are held. Provides for regulation by commission of consumption of marijuana items at cannabis lounges, including licensure of premises where cannabis lounges are located. Prohibits licensing temporary events or cannabis lounges in cities or counties that have not adopted ordinances allowing for the consumption of marijuana items at temporary events or cannabis lounges. Excepts from prohibitions on public use, including restrictions set forth in Oregon Indoor Clean Air Act, consumption of marijuana items in designated areas of premises for which temporary event or cannabis lounge license has been issued. Applies current law regulating licensed marijuana producers, processors, wholesalers and retailers to new types of licensees. Makes certain exceptions.

SB 308. Establishes Task Force on Social Consumption of Cannabis.

SB 319. Authorizes local governments to allow medical marijuana dispensaries and marijuana retailers licensed by Oregon Liquor Control Commission to be located within certain distance [500 feet] of schools.

SB 342. Clarifies total number of mature marijuana plants and immature marijuana plants and total amount of usable marijuana, medical cannabinoid products, cannabinoid concentrates and cannabinoid extracts that patients and caregivers registered under Oregon Medical Marijuana Act may possess.

SB 570. Creates crime of intentionally administering marijuana item to body of person who is under 18 years of age. Punishes by maximum of 20 years’ imprisonment, $375,000 fine, or both. Creates crime of knowingly administering marijuana item to body of person who is under 18 years of age. Punishes by maximum of 1 year’s imprisonment, $6,250 fine, or both.

Draft House Bills

HB 2151. Allows property tax exemption for food processing machinery and equipment newly acquired by persons engaged in business of producing cannabinoid edibles, alcoholic beverages and alcoholic liquors.

HB 2197. Directs Oregon Liquor Control Commission to enter into agreement with nongovernmental entity that conducts or funds research on cannabis and cannabis-derived products. Specifies terms of agreement. Requires public dissemination of data, information, analysis and findings procured pursuant to research.

HB 2198. Changes name of Oregon Liquor Control Commission to Oregon Liquor and Cannabis Commission. Changes composition of Oregon Liquor and Cannabis Commission by adding commissioners from cannabis retail industry. Specifies that Oregon Health Authority may not register marijuana grow sites, marijuana processing sites and medical marijuana dispensaries. Creates within authority, for purposes of administering Oregon Medical Marijuana Act, Medical Use of Cannabis Board. Becomes operative June 30, 2018. Repeals provisions regulating marijuana grow sites, marijuana processing sites and medical marijuana dispensaries on June 30, 2018. Updates and creates provisions providing for licensing of marijuana grow sites, marijuana processing sites and medical marijuana dispensaries by Oregon Liquor Control Commission. Makes other technical changes to laws regulating cannabis. Creates alternate registry system administered by State Department of Agriculture for growers that produce marijuana for registry identification cardholders. Directs Oregon Liquor and Cannabis Commission to coordinate with department for purpose of regulating marijuana producers.

HB 2199. Eliminates provision indicating that cannabis-related business licenses may be for term other than one year. Qualifies provision providing that cannabis-related business license expires upon death of licensee.

HB 2200. Changes name of Oregon Liquor Control Commission to Oregon Liquor and Cannabis Commission. Changes composition of Oregon Liquor and Cannabis Commission by adding commissioners from cannabis retail industry. Directs commission to coordinate with State Department of Agriculture for purpose of regulating marijuana producers. Makes other technical changes to laws regulating cannabis. Specifies that Oregon Health Authority may not register marijuana grow sites, marijuana processing sites and medical marijuana dispensaries. Repeals provisions regulating marijuana grow sites, marijuana processing sites and medical marijuana dispensaries on June 30, 2018. Updates and creates provisions providing for licensing of marijuana grow sites, marijuana processing sites and medical marijuana dispensaries by Oregon Liquor and Cannabis Commission.

HB 2201. Corrects and conforms definitions for “cannabinoid concentrate” and “cannabinoid extract” in laws regulating cannabis.

HB 2202. Modifies statute under which lien may be imposed against building or premises used to illegally produce, process, sell or use marijuana items.

HB 2203. Changes distribution of moneys collected by Department of Revenue as tax imposed on retail sale of marijuana items.

HB 2204. Changes statutory limitation on local government’s authority to impose local tax or fee on retail sale of marijuana items. Specifies that if electors of city or county approve ordinance imposing tax or fee, governing body of city or county may amend ordinance, without referring amendment to electors, to adjust rate of tax or fee.

HB 2205. Directs State Department of Agriculture to solicit proposals from third party vendors to create for producers of cannabis efficiency standards for energy and water consumption and certification protocols for meeting those standards.

HB 2371. Specifies that, for purposes of statutes regulating seeds, agricultural hemp seed is flower seed. Directs Director of College of Agriculture and dean of College of Agricultural Sciences of Oregon State University to establish program for labeling and certification of agricultural hemp seed.

HB 2372. Establishes Oregon Industrial Hemp Commission.

HB 2556. Restricts sale and delivery of marijuana paraphernalia. Creates violation for unlawful sale or delivery of marijuana paraphernalia. Punishes by maximum of $2,000 fine.

If you made it this far, well done. We will continue to offer updates as events unfold this February and March. In the meantime, please let us know if you have comments on any of the specific bills listed above, or on the Oregon legislature’s approach to cannabis this session.

 

 

Cannabis lawOn Tuesday, we wrote that Jeff Sessions’ confirmation hearing had begun, for the post of U.S. Attorney General. In that piece, we expressed our hope that one of the committee members would “drill down from civil rights to marijuana legalization, and specifically, to enforcement of the Federal Controlled Substances Act.” The hearing concluded yesterday and no one did exactly that. No one turned the screws.

Still, Sessions fielded questions from a few different Senators related to marijuana and the Controlled Substances Act (CSA). Below is a close reading on Sessions’ pot-related testimony, beginning with the opening question, when Senator Patrick Leahy (D-VT) asked if Sessions would use federal resources to prosecute sick people using marijuana in accordance with state law. Sessions responded: “I won’t commit to never enforcing federal law, Senator Leahy, but absolutely it is a problem of resources for the federal government….”

This comment is interesting in a few respects. First, and unfortunately, Sessions keeps all options on the table as to CSA enforcement. As we have mentioned, that could mean suing states to block implementation of state marijuana programs, or, more narrowly, wielding the CSA’s asset forfeiture provisions against specific cannabis businesses and related parties. That probably sounds ominous, but two years ago, current Attorney General Loretta Lynch said this (in response to a question by Sessions himself, at her own confirmation hearing): “I can tell you that not only do I not support the legalization of marijuana, it is not the position of the Department of Justice currently to support the legalization. Nor would it be the position should I become confirmed as attorney general.”

We all know that states have largely proceeded with impunity on cannabis during Lynch’s tenure, even though the country had far less state-sanctioned pot activity than it does today. Sessions’ reservation about “never enforc[ing] federal law” seems benign by comparison. Regarding the second part of Sessions’ quote, and the “problem of resources for the federal government,” he concedes a key point: even if it were the Trump administration’s number one goal to eradicate state level marijuana, there are likely too many people involved and too much money to revert to the past.

In the hearing on Tuesday, Sessions continued by discussing the Cole memo and the factors considered by the current administration regarding prosecution of state-level marijuana programs:

The Department of Justice under Lynch and Holder set forth some policies that they thought were appropriate to define what cases should be prosecuted in states that have legalized, at least in some fashion marijuana, some parts of marijuana…. But, fundamentally the criticism I think was legitimate is that [the policies] may not have been followed. Using good judgment about how to handle these cases will be a responsibility of mine. I know it won’t be an easy decision, but I will try to do my duty in a fair and just way.

Again, Sessions leaves open the possibility of enforcing federal cannabis prohibition. His talk of “using good judgment about how to handle these cases” is a euphemism for using prosecutorial discretion, something he misleadingly claimed he didn’t have in a subsequent response to Sen. Mike Lee (R-UT):

One obvious concern is the United States Congress has made the possession [of marijuana] in every state and distribution an illegal act. If that’s something that’s not desired any longer, Congress should pass a law to change the rule. It is not so much the attorney general’s job to decide what laws to enforce. We should do our job as effectively as we’re able.

Here Sessions appears to have forgotten his earlier reference to prosecutorial discretion. His disingenuous argument that “my hands would be tied” by Congress, compelling enforcement action, should not be taken seriously – especially because Congress has sheltered state level medical programs for the past few years, and is likely to do so again. Sessions’ point, however, that Congress should pass a law if it permanently wants to prohibit federal enforcement actions, is probably a fair one, and only reinforces the need for us to secure federal legalization of cannabis.

In all, the hearing could have been better, could have been worse. Sessions was far less retrograde in his statements toward marijuana than he has been in the past. He played his cards closely, as nominees are wont to do, and — like it or not — he is going to be confirmed. This means cannabis operators will simply have to wait and see, which has been the name of the game for a while now.

 

 

 

Cannabis lawyerThe confirmation hearing for Alabama Sen. Jeff Sessions, Trump’s nominee to serve as the U.S. Attorney General, begins this morning at 9:30 a.m. ET. You can view the live feed here. Sessions is opposed by civil rights groups and championed by law enforcement, which, together, signal poorly for marijuana. On the specific issue of federal marijuana prohibition, we wrote on his nomination day that the Senator has been hostile to marijuana for a long time.

If each member of the Senate Judiciary Committee votes with his or her party, Sessions will pass by a vote of 11 to 9. That seems likely, as there have been no reported signs that any Republicans will defect, either in the committee or on the Senate floor. Still, Democrats have the opportunity to ask some tough questions on a variety of topics. It is our sincere hope that somebody takes the opportunity to drill down from civil rights to marijuana legalization, and specifically, to enforcement of the Federal Controlled Substances Act (CSA).

As it stands, a hostile, Sessions-led Department of Justice (DOJ) could attempt to kneecap marijuana policy reform nationwide. Its options would include everything from suing states to block implementation of marijuana programs, to leveraging the CSA’s asset forfeiture provisions against pot businesses and related parties. These actions would likely be massively unpopular, but they would be well within the power of a hostile administration – even one that ostensibly supports limited government and states’ rights.

Fortunately, there is a bipartisan majority in each chamber of Congress that appears interested in seeing states, and not federal law enforcement, lead on the issue of cannabis legalization. If Congress continues to prohibit the DOJ from chasing state medical marijuana actors, it may be hard for Sessions to keep the jails as full as he would like. There is also a possibility that as much as Sessions dislikes pot, he may have other priorities, at least to start.

As of today, there is probably more uncertainty than at any point in the past few years with respect to enforcement of federal prohibition. Anyone interested in federal marijuana policy would be well served to tune into today’s hearings, and to closely monitor the hearings of other Trump nominees like Georgia Rep. Tom Price, who has been nominated to serve as Secretary for Health and Human Services (and also has a very poor record on pot). Mr. Price is set for hearing next week.

Stay tuned.

Cannabis mortgages and bank loansMy law firm represents a large number of cannabis operators in Oregon, Washington and California. Some of these operators own the land they trade on; others simply lease. Whenever we are lucky enough to meet the client before the onset of cannabis activity, our first question is often whether the target property is mortgaged, or if it is owned free and clear. If the property is mortgaged, we ask “by whom?” If the answer is “a bank,” we tend to say, “let’s talk about that for a minute.”

Your standard institutional mortgage contains language allowing the mortgagee/lender to call the loan if the property is being used to conduct “illegal activity.” Lenders won’t budge on that provision: it relates back to federal lending guidelines, and attempting to pare back that language is impossible. If a borrower acquires a bank loan with the secret intention of operating or leasing to a cannabis business, that borrower is running a risk of foreclosure, to say nothing of allegations of fraud.

When a bank discovers that cannabis is being grown, processed, held or sold on its mortgaged property, it has the option, under contract, to call the loan. This means the bank can declare the entire mortgage balance due and owing on the spot. In practice, if a loan is in good standing it won’t always get called; but if a bank learns that cannabis is being traded on the property, a real possibility exists that the mortgage will get called. And refinancing with the lender will be all but impossible.

Although banks typically do not troll their commercial loans looking for pot merchants, many loans require borrowers to inform lenders about tenants and new leases on the property. When a bank decides to call a loan due to cannabis activity, the bank may give the mortgagor a limited window of time to cure the defect (stop the cannabis activities), or to find alternative lending. Given the realities of business investment and operations, the strictures of leases and the high cost of private lending, this can cause tremendous headaches.

There is no work-around for the “illegal activities” issue in institutional lending, but that hasn’t stopped some folks from trying. Among other creative ideas, we recently saw one owner give a second, unrecorded mortgage to a cannabis operator as “insurance” against the first loan getting called. Not only would this approach fail to prevent the first mortgage from getting called, it would typically allow the first mortgagee to declare the balance of its loan payable immediately, as “due on sale.” Such an action could wipe out the junior, unrecorded mortgage interest in any subsequent foreclosure.

Finding a cannabis property is not always easy, but it’s important to understand how the property is financed (or otherwise encumbered) before you sign a lease or begin operations. If you intend to purchase a cannabis property and cannot pay cash, seller financing is a popular option we have written about elsewhere. Otherwise, it’s hard money or trying to fool the bank. Neither of those is a good business plan.

Oregon Cannabis lawsThis week marks the end of the early start program for medical marijuana dispensaries licensed by the Oregon Health Authority (OHA). As of Sunday, January 1, OHA licensed dispensaries will only be allowed to sell marijuana to adults who hold a valid medical marijuana card. These dispensaries will no longer be allowed to sell marijuana at retail to non-medical cardholders, as most had been doing since October 1, 2015. Going forward, only Oregon Liquor Control Commission (OLCC) licensed dispensaries can sell pot at retail to non-medical cardholders. And that is where the money is.

For the past few months, our Oregon cannabis lawyers have prodded, poked and cajoled many of our clients to submit their OLCC paperwork to ensure a timely and successful transition into the adult use market. In our experience, OLCC has prioritized retail applicants, and for anyone without local hang-ups the transition has been fairly smooth. Still, the OLCC reports that just 104 of 494 retail applicants have been licensed to date. (The numbers for processors are even worse, with just 23 of 208 applicants approved.)

If you are an OLCC licensed retailer, you will be sitting pretty on January 1, assuming you can find product to sell while everyone else scrambles toward licensure. The situation is less than ideal for consumers, who will no longer have access to many outlets, and also less than ideal for the State of Oregon, which could see a hiccup in sales tax revenues. We have written that the rollout of state level cannabis programs is an uneven course, and hard deadlines tend to showcase that observation.

Note that although the January 1 deadline may seem to decouple Oregon’s medical and adult use marijuana programs, the reality is more nuanced. OLCC licensed entities are allowed to opt in to medical marijuana activity, and almost all of them do – whether through production, processing or retailing. In the retail context, this means that OLCC licensees will be allowed to sell marijuana to medical marijuana cardholders along with anyone else (but tax-free), subject to tracking and reporting requirements. A year from now, we expect very few OHA dispensaries will be standing.

The Oregon early sales program was a good idea, and we believe it achieved its goal of diminishing black market sales. It is our hope that the testing bottleneck and a lack of licensed OLCC operators will not reverse that trend. In any case, starting January 1, Oregon dispensaries without an OLCC license will face a $500 fine, per violation, for selling to retail customers. All of this should make for an interesting start to 2017.

 

Oregon CannabisLast week saw a triad of notable marijuana law and policy developments in Oregon, and our Portland office has been busy fielding questions from clients on a few of these changes. Rather than devote a full blog post to any one item, we have decided to present a round-up of last week’s key developments around the state. Enjoy.

New Pot Testing Rules

On Wednesday, December 14, the Oregon Health Authority released yet another set of temporary testing rules with the intention of “relieving some of the testing burden on producers and processors.” These rules improve on the temporary rules issued on December 2, which were designed to do the very same thing. We wrote that the December 2 rules were still pretty tough, so we were glad to see some progress.

The new rules took effect on Thursday, December 15, and still apply to both medical and retail marijuana items. Batch and sample size requirements are now friendlier to licensees, and the reporting deadlines for labs have been kicked out to January 31, 2017. For an overview of these developments and more, the OHA published a summary bulletin here. If you are an Oregon cannabis producer, processor or lab, we recommend you acquaint yourself yet again with the revised testing regime.

Portland Pot Delivery?

We have never had nice things to say about the City of Portland’s marijuana regulatory program, and our clients’ experiences with its Office of Neighborhood Involvement have been uniformly dismal. When a detailed report surfaced last week indicating that the program is driving people out of business, we were not surprised. That said, if you want to run a delivery service in Portland next year, you probably can!

Marijuana delivery is allowed under state rules with a retail license, although Portland had forbidden it. Last week, the City unanimously approved amendments to its existing regulations to allow for delivery under a “marijuana retail courier” license. Portland has also extended the hours of permissible operation for marijuana business, and now seeks to license microbusiness entrepreneurs (unfortunately). We expect these amendments to be formally adopted by the City Council this week, and hope the City shows some much needed improvement.

Banks Get a Boost

Given the state of federal law, banking is a seemingly intractable issue in the cannabis industry. The Oregon legislature, however, has done everything it can to encourage local banks and credit unions to service cannabis merchants. Last week, a new public poll showed 87% of Oregonians would approve of their bank working in cannabis, a significantly higher approval number than for big box stores (75%), oil (59%) or tobacco companies (52%). This poll should alleviate any remaining “optics” worries Oregon banks might have about working with local cannabis operators. And with Oregon sales tax receipts well ahead of projections as of November 30, we can only hope that Washington D.C. will begin to yield to public opinion on this crucial issue as well.

Cannabis lawyerWe have run quite a few real estate deals in Oregon, Washington and California cannabis. No two deals are the same, and as we previously have written, buying and selling land for pot ventures is a trip. An obvious reason for this is the lack of banking services, but another big reason is lack of certain title company services, like escrow. If you are hoping to enlist a title company as escrow in your cannabis property sale, we say to you, “good luck.”

Typically, title companies handle all of the paperwork to close a standard real estate transaction. It is probably easiest to think of these services in three distinct parts: (1) receiving, holding and sending money and key documents (escrow); (2) providing a spot for the parties to iron out details toward the end of a deal (including deeds and other formal documents (closing)); and (3) issuing title insurance. By providing this suite of services, a title company can serve as a “one stop shop” for closing most real estate deals.

Pot deals, of course, are different.

In our experience, title companies generally will close a cannabis deal, and they will even provide title insurance in most cases. However, they generally will not facilitate the exchange of funds. This seems strange initially, but it relates back to banks, and the fact that many banks refuse to service businesses even indirectly involved with cannabis. That includes title companies. Thus, title companies often have formal policies against serving as escrow in cannabis deals, especially where the land already is being used for a pot-related purpose.

Fortunately, it is possible to close a real estate sale without a title company performing escrow services. In those transactions, the buyer and seller will usually engage an attorney to serve as escrow, and the attorney will take instructions on how and when to distribute funds. Though attorneys tend to be more expensive than title companies for this purpose, they are safer than fringe operators offering escrow services, and an attorney worth her salt should be able to run the exchange efficiently.

With respect to title insurance, title companies generally will issue these policies on the rationale that the insurance product relates to land ownership, rather than to the activities taking place thereon. Of course, most title insurance policies in marijuana-related transactions will expressly exclude coverage for governmental actions, including civil and criminal forfeiture under the federal Controlled Substance Act. Before purchasing title insurance, we strongly recommend that the buyer disclose their intended use of the land. Otherwise, the title company has an argument not to pay on claims.

In the coming months, we expect to handle more and more real estate deals for pot businesses and also sellers. The California land grab will heat up in that state’s pot friendly counties, and our Oregon office has seen another spike in land deals from November’s local election results. Our Washington cannabis lawyers are also seeing an increase in land sales, mostly attributable to growers who got in early, but now wish to sell.

Ultimately, the laws around the purchase and sale of commercial real estate tied to cannabis are complicated, and vary state by state. An experienced cannabis attorney with commercial real estate chops will be able to facilitate the purchase or sale of real estate for pot commerce, from title examination through recording the deeds. The attorney will know how to work with the parties’ chosen title company to push the deal through, and how to navigate the unusual aspects of these transactions, like escrow.

 

Oregon cannabis testing lawsLast week, at the request of Governor Kate Brown and in collaboration with the Oregon Liquor Control Commission (OLCC), the Oregon Health Authority (OHA) issued yet another set of temporary rules for Oregon marijuana. The rules, which apply to both the medical and recreational programs, do three notable things:

  • relax certain potency testing requirements for processors;
  • remove the prohibition on certain solvents (butanol, propanol and ethanol); and
  • allow producers (growers) to test multiple strains of flower in a single batch.

The rules took effect immediately, and remain valid through May 30, 2017. For a comprehensive summary, go here.

Oregon has the toughest pot testing requirements in the country, and that hasn’t changed. By way of comparison, a recent study found that most California weed would fail under Oregon’s rigorous testing standards. These new, temporary rules still contain robust concentration limits and a sweeping ban on pesticides. Although many pot merchants were hoping for more, they will have to adapt; the state has held the line.

We recently touched on the perfect storm created by the tough testing rules and laboratory bottleneck, and we wrote that the rollout of a state cannabis program is an uneven course. We have also commended the state at various points for collaborating with industry stakeholders and making adjustments on the fly. We admire the commitment to public health in Oregon, but only time will tell if these rules have given pot businesses room enough to breathe.

Going forward, we predict strong revenue opportunities for processors who can get their product through, particularly after January 1, when only OLCC licensees will be able to sell into the recreational market. Today, the testing strictures and a shortage of licensed processors in general have caused shelves to thin out in certain dispensaries around the state. Some retailers stockpiled processed products prior to the October 1 testing deadline, but that inventory is fleeting.

We expect the legislature to take a close look at the testing rules when it meets again in February, especially if these administrative tweaks do not fully right the ship. By February, a greater number of OLCC licensees will have entered the system, which in turn will give a fuller picture as to how these rules are working. For now, if you ingest any state-sanctioned cannabis in Oregon, it is going to be clean.

lease-agreementIn states with legal cannabis programs, most licensed cannabis businesses fall into three broad categories: producers, processors and retailers. Some states offer more exotic classes of licensure for activities like testing, research and even wholesaling marijuana, but a substantial majority of pot entrepreneurs are trading in the basics. Whether you are on the landlord or tenant side of the transaction, though, marijuana leases are anything but basic.

Unlike with standard commercial leases, pot landlords and tenants must account for the status of federal prohibition, the strictures of state-level programs, and the peculiarities of local zoning laws. These considerations are separate and distinct from baseline commercial lease considerations, which can themselves be complex and run into the dozens of pages. Without getting too far into the weeds, here are ten items to consider specifically in your marijuana lease.

1. Profit Sharing. We have seen many, many pot leases drafted by parties where a landlord agrees to take a cut of business profits over and above base rent. This type of transaction is typically frowned upon by regulators, who may view anything beyond ordinary, arms-length payments as de facto license ownership, subject to disclosure and vetting. Both parties should check local rules before entering into any sort of profit sharing arrangement, even if it is a small percentage of rent overall.

2. CSA Indemnity. Savvy landlords will often push for an indemnity requirement from tenants on general liability issues. The experienced marijuana landlord will also require indemnity on the specific issue of civil forfeiture under the federal Controlled Substances Act. This stipulation requires a marijuana tenant to defend a landlord and absolve the landlord of wrongdoing if the federal government takes enforcement action against the landlord for renting to the pot business.

3. Licensing Cooperation. Most marijuana licenses are tied to locations. A marijuana tenant will want to ensure that its landlord is obligated to assist if new administrative rules impose unforeseen requirements on them during the lease term. If a tenant is forced to move, the chances it will be able to drag its license from one place to the next are low. And if the property contains any peripheral attributes relevant to cannabis licensure, like a state-approved water right, the tenant will also want to ensure that the landlord is obligated to maintain that feature.

4. Access. States have strict rules about who may enter onto a marijuana licensee’s premises, and when. The right of the landlord to enter onto a premises should be clearly outlined, and it should dovetail with the provisions contained in any relevant statute or administrative rule regarding entry by anyone other than the licensee.

5. Occupancy and Commencement Dates. A typical cannabis lease will provide that a tenant will abide by all state and local laws, which includes a requirement not to begin any marijuana related activity on the premises prior to licensure. Sometimes, this creates a chicken and egg problem for a tenant, who needs a lease to get licensed, and also needs a license to operate under its lease. The parties should plot out a realistic timeline for licensure, and discuss whether rent will be abated or reduced prior to licensure.

6. Outs. Both parties will want a series of cannabis-specific “outs,” or escape clauses, drafted into the lease. These outs may accrue in situations ranging from federal law enforcement action, to local cannabis license denial. The landlord may also want outs for a tenant’s noncompliance with state or local cannabis laws.

7. Environmental Concerns. This is a big one in production and processor leases. Landlords and tenants will want to address fertilizers, herbicides and pesticides used and stored at the premises, along with the disposal of cannabis products and byproducts. States have both general environmental laws and cannabis specific laws that govern these issues and a properly drafted cannabis lease will take them into account.

8. Lease Term. Commercial leases often extend five or ten years at minimum, and a tenant may have one or more options to renew its lease beyond the initial term. In cannabis, parties tend to agree to shorter lease terms with fewer renewal options, because of the uncertainty inherent in cannabis laws and markets. Each party should weigh its desire for contract stability against the risk of market disruption, before committing to a term.

9. Dispute Resolution. The default rule in commercial leasing is that disputes are settled in court. Landlords are accustomed to expedited court proceedings designed to deal with FED (“forcible entry and wrongful detainer”) and courts are well versed in the summary eviction process. With cannabis, however, there are compelling arguments to be made for arbitration when it comes to contracts, including leases.

10. Federal Illegality. As with any cannabis contract, a well drafted cannabis lease should stipulate that federal illegality is not a valid defense to any claim arising from the lease, and that the parties waive the right to present any such defense related to the status of cannabis under federal law. Otherwise, a court could throw out the lease entirely, causing some serious headaches.

The above list is not exhaustive, and every marijuana lease will be different, depending on the parties, activity, state and location. Above all, it is important to note that marijuana leases, like other marijuana contracts, are unusual agreements that require expert attention.

imagesOn Friday, Reason magazine published a well-researched article titled “Oregon Charts an Uneven Course Toward Legal Marijuana Sales.” Anyone who cares about the Oregon cannabis market would do well to read it. The article breakout offers that “overregulation of the industry keeps cannabis business owners in limbo.” This thesis is somewhat predictable, as Reason has a libertarian bent as the self-proclaimed circular “of free minds and free markets.” Still, the article makes its points in a fair-minded manner and it echoes our longstanding observation that although Oregon is as good as it gets for a pot market, it is paradoxically overregulated.

The Reason article features a few different cannabis entrepreneurs, including the owner of a state-shuttered cannabis café, to drive home the point that cannabis in Oregon is not yet “normalized” from a rule-making standpoint (whatever that could mean, given federal prohibition). Reason critiques many changes the Oregon legislature made in implementing Measure 91, the initiative that legalized recreational marijuana in the state. The article casts blame on Oregon for imposing “incredibly onerous” cannabis testing guidelines, which it argues have caused a supply chain bottleneck.

Though we agree that the Oregon state rules on testing are tough, we see a few things going on here. First, it has been apparent for months that too few laboratories had applied to test marijuana in Oregon, regardless of the testing strictures. There simply seem to be fewer people out there with the wherewithal to test cannabis than to grow it. Second, Oregon had a pretty bad scare with tainted cannabis products as recently as last year. In reaction, the state adopted strong public health and safety regulations. (On this point, it is worth noting that though the federal government expects states to regulate their cannabis programs comprehensively, it offers virtually no guidance on these issues.) Finally, it is clear that Oregon has tried to thread the needle between maintaining high standards and moving the program forward, mostly through temporary rulemaking. Reasonable minds can disagree on the success of each administrative tactic.

As cannabis lawyers who deal with the state almost daily on cannabis issues, we echo observations in the Reason article that Oregon wants its pot programs to work, that its hiccups are mostly growing pains, and that the Oregon Liquor Control Commission (OLCC) in particular has done yeoman’s work with an eye toward long-term success for cannabis in the state. As for the Oregon Health Authority, that agency seems to be on its way out, and we have suggested the state would do well to relieve it of its duty in the next legislative session. With respect to cannabis program entrepreneurs, we continuously remind our clients that they need to pull their weight, too. That includes getting OLCC applications in as soon as possible, so as not to be left out in the cold come 2017.

The cannabis testing bottleneck in Oregon has already begun to clear, and it is possible that Oregon, like Colorado, will allow for public marijuana consumption as soon as the next legislative session. In the meantime, we may see other market challenges, like a possible shortage of licensed OLCC processors, or something entirely unforeseeable. Absent any affirmative federal interference, however, the state and its entrepreneurs will continue to work together as we move through these issues.

One lesson to take from all of this is that implementation of a state cannabis program is never a smooth ride. States tend to operate in a reactionary manner with respect to marijuana, beginning on Day 1, when their legislatures are tasked with implementing programs by their forward-thinking residents. That process has been bumpy in Washington, Colorado and Oregon, and it will be no different in California and each of the brand new cannabis states. The course is “uneven,” but it’s the only course we’ve got.