Why do commercial landlords still hesitate to rent to marijuana businesses? In addition to the remote possibility of a landlord getting arrested and prosecuted by the U.S. Department of Justice (DOJ) for violating the Federal Controlled Substances Act, landlords face the very real threat of losing their property via a civil asset forfeiture. The federal government can and does sometimes seize property used for cultivating, manufacturing, or selling marijuana. In recent years, the Federal Government has netted at least one billion dollars from seizing personal and real property used for to manufacture or distribute Federally illegal drugs, including marijuana in states where marijuana is legal. Whether you are a commercial landlord or a marijuana business tenant, you need to know what you can do to help fend off Federal intervention, including asset forfeiture.
First though, a brief overview of how asset forfeiture works. Forfeiture can be either civil or criminal. Forfeiture of real property used to violate the Federal Controlled Substances Act is governed by 21 U.S.C §§ 881 and 18 U.S.C §§ 983 and 985. Pursuant to 18 U.S.C §881(a)(7):
“[t]he following shall be subject to forfeiture to the United States and no property right shall exist in them … [a]ll real property, including any right, title, and interest (including any leasehold interest) in the whole of any lot or tract of land and any appurtenances or improvements, which is used, or intended to be used, in any manner or part, to commit, or to facilitate the commission of, a violation of this subchapter punishable by more than one year’s imprisonment.”
Since cultivating, manufacturing, and distributing marijuana are Federal crimes, real property used to facilitate the commission of those crimes is subject to asset forfeiture.
In civil asset forfeiture cases involving real property, the government actually sues the property itself and the property owner is treated as a third party claimant. Civil forfeitures of real property are initiated as judicial forfeitures, meaning a court with competent jurisdiction must oversee the seizure. The burden of proof is on the government to show by a preponderance of the evidence that the property is subject to forfeiture. Civil asset forfeiture of real property does not require that the government prove that the landowner is guilty of any crime; it is enough if the government shows that there is a “substantial connection” between the property and the crime alleged. By contrast, criminal forfeiture is against a person only after a conviction (beyond a reasonable doubt) for an underlying criminal offense.
Nonetheless, 18 U.S.C §983(d) creates what is known as the “innocent owner defense” to asset forfeiture of real property. “An innocent owner’s interest in property shall not be forfeited under any civil forfeiture statute. The claimant shall have the burden of proving that the claimant is an innocent owner by a preponderance of the evidence.” The term “innocent owner” means an owner who (i) did not know of the conduct giving rise to forfeiture; or (ii) upon learning of the conduct giving rise to the forfeiture, did all that reasonably could be expected under the circumstances to terminate such use of the property (emphasis added).”
In many states where marijuana has been legalized (either for recreational or medical use) the innocent owner defense is usually not available because the marijuana-legal state mandates that the lease explicitly allow for the cultivation, manufacture, or retail sale of marijuana. And, in most if not all, marijuana-friendly States, having a lease that allows for marijuana activity is a requirement to receive an operational license from the state. So then what can landlords and tenants do to prevent asset forfeiture or Federal intervention altogether?
First, as we noted in our post, Marijuana Commercial Leaseholds: Any Resemblance to Regular Leaseholds is Purely Coincidental real property leases that involve a marijuana business should include “escape clauses” listing Federal intervention, changes of Federal enforcement policy, forfeiture threats, and/or Federal enforcement (be it a raid by the DEA or filing of criminal charges by the DOJ) as defaults that constitute lease violations or cancellations.
Leases typically contain a permitted use provision to govern the activities that can take place on the leased property. The permitted use provision for a marijuana business should accurately identify the activities allowed on the property. For example, if a tenant is a marijuana retailer, the permitted use provision should reflect this by explicitly permitting “the retail sale of marijuana.” If the permitted use is unclear, tenants run the risk of breaching the lease by conducting an activity not permitted on the property, which itself could invite Federal scrutiny.
It is also prudent for a marijuana commercial leasehold to set out a strict code of conduct relating to the use of the property. The typical Commercial Broker’s Association lease provides that any illegal activity on the property constitutes a default so just pulling one of these “off the shelf” is not the way to go. One reliable way to handle the illegality issue is to write a lease that explicitly forbids only those actions that violate state (not Federal) law.
Moreover, it is important to include in a marijuana lease provisions relating to hours of operation, the tenant’s treatment of its surrounding commercial neighbors, loitering, odors, the use of hazardous substances at the property, the number of people permitted on the property, and constant compliance with any and all state and local regulatory rules and with the recent Cole Memo from the DOJ.
The bottom line: Federal marijuana prohibition and the fluidity of state law marijuana regulatory schemes mean that standard commercial lease agreements are not sufficient to sustain and protect the landlord/tenant relationship involving a cannabis business. You instead need lease that accounts for the realities of running a marijuana business. Or prepare to face the consequences.