Real Estate Leases in the Hemp and Cannabis World
The last several years have seen hemp and cannabis journey from their traditional treatment as substances controlled at the state and federal levels, on penalty of criminal prosecution, to a more legally and socially accepted part of the domestic market.
Hemp has been effectively decriminalized at the federal level (through the passage of the 2018 Farm Bill), and cannabis generally has been legalized, regulated, or decriminalized in a growing number of state regimes, from medical-only programs to full recreational platforms. Hemp and cannabis market participants are unique players in many spaces, but their position in the landlord-tenant space is the focus of this article. Both tenants and landlords would be well-served to take note of the important issues in play in this universe and to partner with legal counsel versed in these issues when preparing commercial leases.
Commercial Leases Generally
Around the country, and especially in North Carolina, residential landlord-tenant relationships are heavily regulated by statute. Residential leases, generally speaking, are allowed to govern certain aspects of the landlord-tenant relationship, but only within the confines of the applicable statutes. That is often the same situation with commercial leases, although to a much, much smaller degree. Parties to a commercial lease are considered by Courts to be sophisticated business players with the ability and know-how to negotiate the terms of their deal, and the Courts will generally defer to and enforce the terms of the commercial lease. There are some limited exceptions depending on the applicable law, but those exceptions are far rarer than in the residential lease context. This places a significant burden on the parties negotiating a commercial lease, namely that they better get it right the first time. In the hemp and cannabis space, "getting it right" means considering the unique and special issues that those market participants face.
Regulatory Compliance and Licensure
The ability to participate in the hemp and cannabis market is heavily regulated and is largely, if not entirely, dependent on proper licensure with either the state or federal authorities, or both. Landlords who seek to rent to hemp or cannabis businesses should:
identify the applicable regulations and licensing body, whether state or federal, or both,
understand the parameters and limits of the regulations and also of the license in question, and, perhaps most importantly,
appreciate and plan for the consequences should the tenant run afoul of the regulations or should the license lapse or be suspended.
Include provisions that allow the landlord to monitor the status of this regulatory compliance, and also the standing of the license, and which obligate the tenant to keep compliant and the license in good standing are critical. Also, it is critical for landlords in states that have legalized or decriminalized cannabis to appreciate the conflict between state and federal law and to plan as they can for the possibility of that conflict impacting prospective tenants.
Fostering Neighborly Love
Hemp and cannabis tenants do not have an inherently negative impact on their fellow tenants, and it would be unfair to cast them all in that light. It is, however, important to appreciate that there are aspects of the hemp and cannabis business that can be perceived as having a negative impact. For example, odors from agricultural and processing operations in this space can be strong and can cause concerns among affected neighbors. Noise and traffic, being more traditional impacts, should also be considered. Often, like many other things considered to be inherently negative, these things can be sufficiently addressed with proactive communication, and also in the lease with the tenant and in the leases with the other tenants, as well.
Land Use and Zoning
Many jurisdictions around the country have implemented land use and zoning regulations in their county and municipal ordinances, although that largely has not yet been the case (with hemp businesses) in North Carolina. Landlords and tenants should both be familiar with any applicable restrictions and be careful not to violate them. These parties should also consider the nature and character of the hemp or cannabis business, as agricultural operations may be exempt from certain land use and zoning regulations.
It is not sufficient or advisable to rely on boilerplate, form commercial leases for hemp and cannabis businesses, whether you are the tenant or the landlord. Issues in this space are unlike any other and require careful consideration and treatment and partnering with legal counsel versed in these issues on the front end of the relationship. That approach may not prevent all disputes or issues, but it will mitigate them in a meaningful way.