Cannabis and Land Use
Commercial real estate in the marijuana industry must be dissected and deciphered through proper legal lens in order to strategically implement it into a business plan.
A Lexis Practice Advisor® Practice Note by Cátia Kossovsky and Garrett Graff, Hoban Law Group.
This practice note discusses (1) the challenges that can arise when marijuana-related businesses (MRBs) rent or purchase commercial real estate, (2) MRBs’ insurance needs, and (3) the ability of residential landlords and common ownership associations to limit state-legalized marijuana consumption within both community common areas and individual houses and apartments. For further guidance see Cannabis Resource Kit.
Industry and Legal Overview
The state-legalized marijuana industry is growing at a remarkable pace. MRBs have commercialized marijuana production and crafted services for each step of the supply chain, from seed to sale. Before the cultivator even plants the first seed through the point that a consumer uses purchased marijuana or its byproduct in the privacy of his or her own home, MRBs, ancillary businesses, and consumers rely on real estate.
Even as more states rush to legalize the medical and/or adult recreational use of marijuana (for those over 18 years of age), marijuana remains a Schedule I drug under the Controlled Substances Act of 1970 (CSA) (meaning that it has a high potential for abuse and no currently acceptable medical use), and its use is illegal under federal law. 21 U.S.C. § 812. Federal law supersedes state law, and therefore, even in states that permit either medical or adult-recreational use of marijuana, the cultivation, manufacturing, distribution, transportation, sale, dispensation, and possession of marijuana remains federally illegal. Fortunately, for MRBs and marijuana consumers, the federal government is prohibited from currently prosecuting medical marijuana cultivation, manufacturing, distribution, transportation, sale, dispensation, and possession that is permitted by state laws. Even so, the possibility that federal law enforcement policy will change course, combined with an industry that is young, in flux, and perceived as inherently risky has created uncertainty all around—for MRBs, ancillary businesses, and consumers of the end product.
Fortunately, as the industry evolves, regulations (both federal and state) are beginning to address the industry’s realities. A recent example is the federal Agriculture Improvement Act of 2018 (2018 Farm Bill) enacted by Congress. 115 P.L. 334. The 2018 Farm Bill provides clarity and answers many questions surrounding hemp and its regulation. Hemp is a variety of cannabis, as is marijuana; however, hemp contains low levels of tetrahydrocannabinol (THC). THC is the main psychoactive ingredient in marijuana and is the primary reason marijuana is included as a Schedule I controlled substance under the CSA. For hemp to be protected under the 2018 Farm Bill, it must contain no more than 0.3% THC. Hemp not produced in accordance with the 2018 Farm Bill and corresponding federal and state regulations, is otherwise treated as marijuana under federal law. Importantly, the 2018 Farm Bill reflects federal acknowledgment that hemp is an agricultural commodity, much like cotton, corn, or tobacco, and reflects this intent by expressly and permanently removing hemp from the definition of marijuana under the CSA and paving the path to sensible federal regulation and commercialization of hemp.
State Regulation of Marijuana As of January 2020, 33 states as well as Washington D.C., Puerto Rico, Guam, the Northern Mariana Islands, and the U.S Virgin Islands have passed laws and regulations for the medical use of marijuana. Eleven of those continental states, as well as Washington D.C. and Guam, have also legalized marijuana for adult-recreational purposes. These programs are appealing to states because they can generate tax revenue that the states can then reinvest in communities. In many cases, state marijuana statutes and regulations are closely tied to real estate laws. The laws and requirements in states and municipalities vary both for state licensing of MRBs and zoning. MRBs should consult with experienced marijuana attorneys as well as local counsel to ensure they are complying with all jurisdictional requirements.
Despite variations in the details and implementation, there are certain common regulatory approaches throughout the states. All states require MRB licensure and different licenses are typically required at each step in the supply chain. For example, licenses are often required to operate:
• Storefronts (commonly referred to as dispensaries)
• Cultivation sites
• Manufacturing and processing locations
• Testing labs –and–
• Hospitality locations (in states where provided for)
Licenses typically expire after a year and require annual renewal. The licensing authority ensures that all applicants issued a license or renewal meet the required regulatory standards and comply with applicable state or local requirements, including zoning and use ordinances.
State and local regulators have implemented zoning, use, and distance restriction requirements to reflect certain priorities either to cluster or deter clustering of certain types of MRBs and marijuana-related activities. These zoning regulations vary by jurisdiction but tend to require that MRBs be located beyond a fixed distance from other MRBs (particularly applicable to storefronts) as well as from locations such as schools, daycares, and houses of worship. Although zoning requirements have valid intentions, some have limited MRBs’ commercial real estate options. Washington state, for example, requires all cultivators, processors, and retailers to be at least 1,000 feet from elementary and secondary schools, playgrounds, recreation centers, childcare centers, libraries, and, uniquely, any arcade that does not restrict entry to individuals 21 years and older. Wash. Rev. Code Ann. § 69.50.331(8). Similarly, the city of Portland, Oregon has implemented a 1,000-foot minimum distance between dispensaries and certain other facilities such as schools (akin to Washington’s distance restriction). Some cities, including Cambridge, Massachusetts, have implemented further distances, 1,800 feet to be exact. City of Cambridge Ordinance 11.803.1.
At times, zoning requirements leave MRBs with limited or no real estate options in a particular area. Fortunately, however, some jurisdictions are more welcoming to MRBs and even offer them zoning waivers. In many jurisdictions, MRBs can apply for a zoning waiver to reduce the buffer zone, often premised on the notion that the issuing authority finds that the MRB will not cause a substantial adverse impact. For example, the City of Cambridge, Massachusetts, requires that MRBs be beyond 300 feet of a public or private school, children’s playground, or public youth recreation facility, but also allows the planning board to issue special permits reducing this distance. City of Cambridge Ordinance 11.803.3 (a) and (b). MRBs and their counsel should consult local and state ordinances to determine the applicable zoning requirements.
General Considerations for MRBs Seeking Commercial Real Estate
Although MRBs are subject to an additional layer of complex regulations, in many ways, an MRB’s search for commercial real estate is similar to that undertaken by a traditional business. As with all businesses, MRBs should weigh factors such as cash flow, tax implications, available financing, and the local real estate market to determine if the MRB is better off renting or purchasing property. MRBs should tailor their real estate searches to locations that will provide the MRB with adequate space for operations and renovations, as well as satisfy applicable structural requirements, security requirements, and the need for easy customer access. Regardless of whether the MRB purchases or rents real estate, both situations present benefits as well as potential obstacles and considerations that MRBs should be aware of.
Commercial Leasing Considerations
If an MRB decides to rent, it can focus its search on properties and landlords that are marijuana-friendly or even cater to the industry. Marijuana-friendly landlords may be able to provide MRBs with guidance and can often craft leases that comply with state requirements. In fact, some MRBs may be lucky enough to locate a commercial property that was previously leased to and modified by an MRB. This not only provides the necessary space in a location that is zoned as MRB-friendly, but can reduce the amount of money the MRB will need to spend on the initial build-out and installation of fixtures that are needed for MRB activities, such as built-in vaults, security systems and layouts and floor plans that restrict access to certain areas.
To begin with, an MRB must understand the real estate time line necessary to become operational. The time line needed to secure a commercial lease may be contingent on the state’s licensing requirements. Some states, such as Colorado, require MRB applicants to secure possession of property—through either lease or deed—prior to applying for a license. In Colorado, the marijuana license attaches to the real estate, despite being owned by the MRB. This makes it essential for the MRB to secure a location prior to applying for the license. Unfortunately, this requirement makes it difficult for start-up MRBs that do not have deep pockets to get their businesses off the ground because the ramp-up time to become operational can be six months longer, depending on the type of premises and the regulatory requirements needed for operational approval. These MRBs generally cannot afford to pay rent for an empty commercial space without income coming in.
In response, MRB attorneys have crafted innovative solutions to ensure that MRB clients do not need to deplete their funds. However, the success of these possible solutions often relies heavily on the landlord’s willingness to accept such arrangements. One possible solution is to propose that the MRB tenant pay discounted rent until its license is issued. Upon issuance of the license, the rent increases to an amount that takes into account the deferred initial rate by adding the amount of the discount to the rent for the remainder of the lease term. In this scenario, the landlord still receives the entire annual amount of rent from the MRB while the MRB is able to stay afloat during the period it is waiting for a licensing decision. Typically, the lease will include a termination provision that is triggered if the tenant does not receive the license or otherwise violates state regulations, although some leases may only provide such termination option in exchange for a corresponding termination fee or liquidated damages.
Common Landlord Concerns Unfortunately for MRBs, not all landlords are willing to lease real property to them. This is due to a variety of concern, the most common of which are explained below.
Criminal Charges and Civil Forfeiture Even in states where marijuana is legal, landlords risk having the premises seized or facing criminal charges for aiding and abetting in a federal crime, as the CSA makes it unlawful for landlords to lease any real property for purposes of unlawfully manufacturing or distributing a controlled substance. See 21 U.S.C. 856(a)(2).
Civil forfeiture claims are easier to prosecute than criminal charges because the owner of property subject to civil forfeiture does not need to be convicted, or even charged with, a criminal offense. In such claims, the government actually sues the premises and the property owner is treated as a third-party claimant. As long as the government can show a substantial connection between the premises and the crime alleged, the civil forfeiture claim can be raised. Since being treated as a civil case, the burden of proof in civil forfeiture proceedings usually requires a preponderance of the evidence and falls on the owner attempting to reclaim the property. By comparison, in criminal cases involving a landowner, the government must prove the defendant’s guilt beyond a reasonable doubt. While these risks are very real, the federal government has, perhaps due to the financial restraints imposed on them by the annual federal budget (currently the Consolidated Appropriations Act, 2020 (H.R. 1158)) limited its civil forfeiture utilization and we are unaware of any cases involving state-legalized MRBs that are compliant with state laws and regulations.
Mold Even if landlords are willing to tolerate the potential criminal risks, there are other risks that may make them reluctant to enter into a commercial lease with an MRB. MRBs that cultivate, manufacture, or sell marijuana may create odor concerns and/or increase the premises’ humidity (when cultivating, primarily), which, if not properly addressed, can lead to the development of mold that may damage the premises. This ties into another landlord concern: insurance. At first glance, one might think that the landlord can simply submit a claim to their insurance company for the damages caused by the mold. Unfortunately, however, landlords run the risk of being denied coverage of such a claim, and, potentially complete loss of insurance coverage, because the landlord rented to a business that is engaged in federally illegal activity. For further discussion see Insurance Considerations, below.
Environmental and Health Concerns An additional concern for both rental and purchased premises is clean indoor air and compliance with environmental laws. Although consumers cannot use marijuana in most premises owned or leased by MRBs, hospitality locations (public spaces that permit public consumption of marijuana) are an exception. Landlords who lease commercial spaces to hospitality MRBs, may inadvertently violate clean indoor air and other environmental laws. The MRB may need to install specially designed infrastructure and fixtures to bring the space into compliance.
Banking Banking can also be a concern for landlords. Because federal banking and finance laws prohibit banks from accepting money from federally illegal activity, many MRBs operate on a cash-only basis. Current federal banking laws have created obstacles for landlords that attempt to deposit money that was received from MRBs. There are operational avenues that permit MRBs and landlords to operate without utilizing banks, such as paying and accepting rent in cash payment. However, there are associated risks with accepting large cash payment and, ultimately, the risk associated with handling money paid from MRBs deters landlords from leasing to MRBs.
Drafting Considerations Not all leases work for MRBs. Although traditional and MRB commercial leases share similar requirements and covenants, there are unique considerations that should be accommodated for when crafting a lease for an MRB. Carefully drafted MRB leases contain contractual provisions that protect the landlord from liability and forfeiture while clearly informing the MRB of its obligations. Importantly, to ensure that the lease accurately reflects the needs of both parties, MRBs must be honest with landlords and inform them of their activities. These disclosures must be given prior to entering into a commercial lease, unless, of course, the MRB adds new services, which may require landlord approval or a modification of the lease. This candor provides clarity to both parties and encourages an informed landlord-tenant relationship for the duration of the lease term.
Lease Term To begin with, an MRB should enter into a commercial lease that will survive for a minimum of 12 months. In fact, MRBs are encouraged to enter into long-term commercial leases because securing real estate for the MRB’s activities is often crucial in obtaining and maintaining the MRB’s license. If the MRB enters into a lease for a term of less than 12 months, licensing authorities may be hesitant to issue the license because the lease is shorter than the life of the license. Furthermore, a term of less than 12 months can hinder the possibility of a license being renewed by a licensing authority. If an MRB is awarded a license but the landlord refuses to renew the lease, the MRB may find itself scrambling to find another suitable location that can quickly be retrofitted at a high cost so the MRB is able to renew its license. Any change of premises will generally require approval by the licensing authority prior to such change.
Risk Mitigation The landlord should include a provision that requires the MRB to mitigate particular risks. Specifically, the landlord should require the MRB to install the necessary fixtures or systems that are needed to ensure proper ventilation and odor mitigation. Additionally, some MRBs use solvents and other solutions in the course of certain specific cultivation, processing, and manufacturing activities. If the landlord intends to limit particular solvents and chemicals, the landlord must expressly include the limitations in the lease.
Default and Remedy Provisions As with any commercial lease, the lease should clearly set forth the potential courses of action that the landlord can pursue, including eviction or statutory landlord liens, if the MRB tenant fails to pay scheduled rent when due. Importantly, MRBs should be fully aware of the existence of any landlord liens. If the license is attached to the premises and the landlord executes a lien on the premises, the MRB’s license is impacted by the landlord’s lien.
Indemnification and Escape Provisions The lease should include appropriate indemnity and escape clauses. An indemnity clause can protect the landlord from federal enforcement of the CSA. Specifically, a CSA indemnity clause requires the MRB to defend the landlord if the federal government enforces the CSA against the MRB because the landlord leased the commercial property to the MRB for the purpose of engaging in federally illegal activity. Both the landlord and the MRB tenant may also want to include an escape clause providing that the lease is terminated if the
MRB’s license is denied or revoked (either due to breach or nonrenewal). The parties may also wish to include a lease provision that provides if the federal government enforces the CSA or that local laws are amended to render the MRB inoperable, then both parties can walk away. Unlike the CSA indemnity clause, these escape clauses protect both the MRB and the landlord.
Access to the Leased Premises MRBs need to consider who has access to the premises and under what circumstances such access can be made. Some state and local regulations expressly limit who can access specific areas of an MRB’s premises. For example, the premises as a whole are typically subject to a number of security requirements under most state regulations. The premises are then divided into different areas containing limited or restricted access areas. Often, only employees and other licensed individuals can access certain limited access areas, while restricted access areas are reserved for the public. In some states that only allow medical marijuana, certain restricted areas are not open to the general public, but only to those who have special medical marijuana identification cards issued to them by the regulating state agency. In some instances, unless an individual is escorted by a licensed employee or an authorized agent of the MRB, the general public and all non-licensed individuals cannot access limited access areas. State regulators often punish MRBs with fines and threats of license revocation or nonrenewals for any regulatory violation, including providing access to restricted or limited areas to those individuals who are not permitted access.
The lease should also address the landlord’s access to the premises. Because of the presence of marijuana, the landlord should not be permitted to access the premises without appropriate supervision by the MRB, or in some instances authorization from the applicable regulatory agencies. The lease should detail the conditions that must be met before the landlord may access the premises. For example, the MRB may permit the landlord to enter the premises in the case of an emergency, such as a broken water pipe, but the landlord may be permitted to access only the restricted access areas. On the other hand, the landlord may want to include a provision in the lease that allows the landlord to enter the premises within 30 days of the lease’s expiration to show the premises to a future tenant. Carefully delineating when and under what circumstances the landlord can access the premises provides clarity to both parties and reduces the likelihood of uncertainty and dispute. It also provides a regulator with information as to when the MRB tenant and landlord have agreed to permit access to the premises to the landlord, so that the regulator can approve or request a revision to those provisions in the lease that are not acceptable to the regulator.
Assignment and Subleasing If state regulations permit an MRB tenant to assign its lease or sublease the premises, the lease should describe the conditions under which the MRB will be permitted to do so. It is common for landlords to require the assignee or sublessee to also be an MRB and for the license to be transferred to the assignee/sublessee. Importantly, the landlord may reserve the right to reject a transfer for reasonable reasons. Prior to including such provision in the lease, the parties should confirm that applicable state regulations permit the MRB to transfer interest. Colorado, for example, expressly precludes subleasing unless certain criteria are met. 1 CCR 212-2 R 302(C).
Modification of the Leased Premises Regardless of whether the MRB rents or owns the premises, the MRB may need to receive regulatory consent prior to making modifications to the premises. Some regulatory authorities require MRBs to receive prior approval from the licensing authority for any modification to the premises, to ensure that those modifications are compliant with regulations. Colorado, for example, requires MRBs to apply and receive approval prior to making any modification that materially changes the premises.
1 CCR 212-3 R 2-260(A). Colorado defines a material change to the premises as:
- Increasing or decreasing “the total physical size or capacity” of the premises
- The sealing off, creation of or relocation of a common entryway, doorway, passage or other such means of public ingress and/or egress, when such common entryway, doorway or passage alters or changes limited access areas, such as the cultivation, harvesting, manufacturing, testing, or sale of marijuana within the premises—or—
- Any physical modification of the premises which would require the installation of additional video surveillance cameras
1 CCR 212-3 R 2-260(B).
If the modification does not materially change the premises, it may not require regulatory approval. However, under the lease, it may nonetheless need to obtain the landlord’s approval. To this end, the lease should clearly define which modifications require the landlord’s approval and which do not.
Commercial Purchase and Sale Considerations
Rather than leasing space, an MRB may opt to purchase real estate directly. MRBs that own their premises enjoy unique benefits that MRBs that lease do not. Possibly the most attractive of these is that the MRB possesses exclusive ownership rights to the premises, allowing it to (subject to state statutes and regulations and local zoning laws) use the premises without third-party intervention or limitation. Put differently, purchasing real estate for its direct use allows an MRB to make, and play, by its own rules within the confines of state and local laws and regulations.
The principles of traditional real estate transactions generally apply to real estate transactions that include at least one MRB. Unfortunately, however, MRBs can encounter a number of challenges during the purchase and sale process.
Financing Issues Commercial real estate transactions are often financed with secured loans, but MRBs have a difficult time using banks for financing. The CSA expressly prohibits banks from accepting money deposits from a federally illegal activity and providing financial services to MRBs. In particular, 21 U.S.C. § 856, commonly referred to as the “crack house statute,” imposes criminal and civil charges against banks (as well as landlords) that provide MRBs with the ability to manufacture, store, distribute, or use a controlled substance. To avoid the risk of federal prosecution, most banks refrain from providing financial services to MRBs.
If an MRB is wealthy enough to purchase the real estate with cash, it will, fortunately, not face these particular financial hurdles. But many MRBs are not in a position to do this, and at least until there are changes in federal law, they need to look elsewhere for financing. Many turn to seller financing. While seller financing avoids banks completely, it requires a willing seller/lender to carry a promissory note, usually for decades. Typically, these loans are given at a higher interest rate than a traditional bank loan. As with most real estate acquisition loans, the seller/lender typically requires the MRB/borrower to secure the loan through a mortgage or deed of trust on the property.
Future changes to the federal laws may make it easier for banks to lend to MRBs. The proposed Secure and Fair Enforcement Banking Act (“SAFE Banking Act”) would prohibit the federal government from punishing banks that work with state compliant MRBs and ancillary businesses. The SAFE Banking Act recently passed in the U.S. House of Representatives and is waiting for approval in the U.S. Senate.
As of January 2020, the bill stands with the Senate Banking Committee which has requested public feedback addressing some concerns raised. If passed as drafted (which seems increasingly unlikely), the SAFE Banking Act will also provide protections for ancillary businesses and ensure that ancillary businesses will not be charged with money laundering and other federal financial crimes for dealing with state-compliant MRBs.
Escrow Issues In many jurisdictions, the most common method for closing commercial real estate transactions is through escrow. The parties exchange the documents and funds necessary to transfer title to the property through an escrow agent—a neutral third party who holds the parties’ documents and funds until the specified closing conditions are satisfied. At that point, the escrow agent causes the deed and other recordable documents to be recorded and delivers the remaining closing documents to the intended recipients. Title companies are commonly used to provide escrow services in many jurisdictions; however, because marijuana remains illegal under federal law, many title companies are not willing to serve as the escrow agent in a transaction involving an MRB.
Fortunately, the parties to a purchase and sale transaction are not required to use title company as escrow agent. They can instead use an attorney. Although using an attorney will likely cost the MRBs more than using a title company, an experienced attorney will know how to handle the transaction and guide the MRB through the process. Further, although title companies are unwilling to facilitate escrow in a transaction involving an MRB, some title companies will handle the nonfinancial aspects of purchase, which include issuing title insurance.
Title Insurance Issues The purchaser (as well as the lender) in a real estate purchase and sale transaction, whether involving an MRB or not, should always purchase title insurance. Title insurance provides a property owner with coverage for loss resulting from defects, liens, or encumbrances against a property’s title. While state law does not require that purchasers acquire title insurance, most lenders (banks and private) tend to require it as a condition for making a loan. Fortunately for MRBs, title companies can issue an MRB title insurance because title insurance relates to the integrity of title to the property which is unrelated to MRB’s activities on the property. However, some title companies are nonetheless weary of doing business with MRBs because of current federal laws.
Availability Regardless of whether the property is leased or owned by the MRBs, all MRBs are subject to statutory and regulatory insurance coverage requirements that vary from state to state. Insurance providers are aware of the unique risks that MRBs face and many will not offer coverage to MRBs. But not all providers avoid insuring MRBs, and, fortunately, niche insurance companies have emerged to fill this profitable vacancy. Unfortunately, the limited number of insurance providers that are willing to issue policies to MRBs charge expensive rates. Nevertheless, MRBs should seek out policies that provide coverage to their business activity that fits their needs and budget since it is far too risky for an MRB to operate without some form of coverage. MRBs should, at the very least, purchase insurance policies to cover employee liabilities, injury to people and tangible business assets, and damage to buildings and fixtures.
Necessary Coverage Each MRB has unique coverage needs for the particular activities it performs. It is important for MRBs to fully disclose their activities and operation methods to insurance providers. Disclosure ensures that the policy will be tailored to the particular activities that will occur on the premises. The MRB should also be fully aware of what is not covered by the policy. In fact, knowing what the policy doesn’t cover is as important as knowing what is covered. This knowledge can help the MRB to take steps to decrease the likelihood that an uncovered incident will occur, as well as to mitigate the harm if it does.
Each step of the supply chain presents its own risks. For example, cultivators and retail storefronts do not share all the same risks. Some risks, like theft, overlap while others, like utility costs and the use of solvents and other substances in cultivation and processing and the risk of customers injuring themselves on the way into a retail location, do not. If permitted by applicable statutes and regulations, MRBs often consolidate multiple steps of the supply chain, if not the entire process, in one location. This can reduce both operating and insurance costs. But, regardless of how many activities the MRB conducts at a location, the MRB must have insurance coverage for each activity.
Cultivators and processors share similar risks and the insurance policies available for these activities are also similar. Insurance policies that cover cultivation should include the riders needed to provide coverage for increased levels of humidity and moisture produced by this activity. If not properly ventilated, this increased moisture can create
mold, which if not remediated will damage the premises and can infect growing plants and finished product. Most MRBs cannot easily absorb the costs of mold remediation, much less the costs of starting the MRB up again. Cultivators and processors also use high amounts of electricity to conduct their activities. This increased energy usage can overload electrical systems if the circuits are not well maintained or up to date. The electrical overloads can lead to devastating fires and MRBs should ensure that their policies cover fire damage.
An additional consideration for cultivators and processors is insuring against damage caused by pesticides, fertilizers, and other solvents used during production. The most popular solvent, water, is used by every cultivator and most likely by every processor as well. Sometimes, the policy’s language relating to water damage can be tricky because the source of water may be the difference between the claim being accepted or denied.
Regulatory Requirements Most state and local statutes and regulations require implementation of the same protective measures. Common issues are theft and security. State laws and regulations, and some insurance policies, require that MRBs install security cameras, fences, alarm systems, and motion detectors, and also store cash and finished product in a vault or safe. These measures are intended to deter theft and mitigate any harm should a theft occur. The installation and use of ventilation systems to maintain humidity levels and mitigate emitting odors is also commonly required by state law and regulations as well as under some insurance policies. Another potential requirement is that the MRB contract with a certified electrician to conduct all electrical repairs and upgrades.
Restrictions on Consumption of Marijuana Products within Residential Property
Prior to the recent spate of state legalizations, marijuana consumers often consumed in private either for comfort or because of the fear of being charged with a crime. Today, consumers may not fear the being charged with committing a crime as they did before their state legalized marijuana. However, states that have legalized marijuana have not legalized overt and unrestricted public consumption. With the exception of public hospitality locations that are licensed for the public consumption of marijuana (similar to a bar or a coffee shop) in states where adult-recreational use is permitted, these laws require consumption to be in private and out of the public eye. But the word “private” does not have the same meaning across the spectrum of homeowners or renters, or even among houses, apartments, or condominium and co-op units. “Private” is generally defined as out of public view, however, not all private locations protect private consumption. Hotels, both common areas and a rented hotel room, also do not always fall under the definition of private as these tend to be places where the public has access to generally.
Renters An important distinction must be made between homeowners and renters. Overall, homeowners generally experience little to no intervention with any conduct that takes place on their property, unless it is a nuisance or otherwise criminal or the property is located in a homeowners’ association and covenants prohibit such use. Whether homeowners cultivate, extract, and make oils, or simply invite friends over to partake in personal consumption, homeowners and their guests are otherwise generally only bound by the statutory and regulatory limitations imposed by the state and local governments.
Renters do not always share the same freedom as homeowners in this respect. Even in a state where medical and/or recreational marijuana use is legal, a residential tenant may have their ability to participate in marijuana-related activities limited by the terms of the lease. Fortunately for consumers, landlords are not required to ban this use. However, some landlords choose to do so both because marijuana remains federally illegal and also due to concerns over secondhand smoke and the derivative odors produced by marijuana. If a landlord already prohibits smoking in its property, extending the prohibition to marijuana smoking is fairly straightforward. More difficult to monitor are other methods of ingesting cannabis, such as using a topical lotion or eating a gourmet THC chocolate bar. These often go unnoticed, and in many cases the landlord might not care.
Owners Subject to the Rules of Common Ownership Associations Condominium associations, homeowner associations, and other common ownership associations can impose limitations on owners’ and occupants’ marijuana use. In some cases, the association may wish to limit use only in common areas, but in others, the association may wish to ban use in individual homes and units as well. In general, an association’s prohibition on use in a general common area works in tandem with statutes and regulations that prohibit public consumption or forms of nuisance. Where things become less clear is when the association seeks to restrict use in a limited common area (such as a balcony or patio).
There are a few ways that common ownership associations can approach placing restrictions on marijuana use. Most associations have rules and regulations that can be amended by a simple majority vote of the board of managers to address marijuana use. However, restrictions of this nature may be challenged if they are implemented only through the rules and regulations without amending the association’s governing documents (typically, the bylaws and declaration). Often, these documents can only be amended with the approval of a supermajority of owners. That said, if the governing documents already ban smoking in general, and the new rule only prohibits ingesting marijuana in smokable form, this is less likely to be an issue. And, as with residential leases, the governing documents for common ownership associations often include general prohibitions on violating the law and creating a nuisance and the board may attempt to use these to curtail consumption of marijuana and other cannabis products.
As with restrictions on marijuana use in rental properties, definitions are key. Some restrictions define “smoking” and “vaping” as different activities, while others may group the two together under smoking. In some cases, the association may choose to simply adopt the statutory definition of smoking by reference. Some states and local jurisdictions have adopted specific statutory or regulatory guidance for common ownership associations. For example, when it recently legalized recreational cannabis use, the Illinois legislature also amended the Illinois Condominium Property Act to provide that condominium boards may prohibit the smoking of cannabis through traditional combustible means, but not other methods of ingesting cannabis (such as through vaping or edibles), in individual units and limited common elements and may also prohibit all cannabis use in general common elements. 765 Ill. Comp. Stat. Ann. 605/33. The statute further requires that any prohibitions be implemented through the condominium’s governing documents. Thus, if the condominium’s bylaws and declaration do not already ban smoking, the ban cannot be implemented solely through the condominium’s rules and regulations.
As with residential landlords, it is almost impossible for common ownership associations to know what unit owners do in their own homes. It is more likely that associations will take issue with smoking because of odors or neighbor complaints than with activities like having a pack of THC gummies or a THC bath bomb in their apartment.
Cátia Kossovsky, Of Counsel, Hoban Law Group
Cátia Kossovsky heads Hoban’s Corporate, Securities, and Mergers and Acquisitions Practice Group. She has more than seventeen years of corporate transactional experience. Having worked at two AM200 law firms, in New York, and in Pittsburgh, Cátia has vast experience in the areas of general corporate law, commercial transactions, mergers & acquisitions, joint ventures, strategic alliances, private equity (including fund formation), venture capital financing, regulatory compliance, and securities filings. Additionally, Cátia has experience with cross‐border transactions, specifically with a focus on Latin America, and has conducted corporate governance, compliance monitoring, and management of operational risk.
Cátia owns Kossovsky Law PLLC, a boutique law firm focused on assisting cannabusiness clients with corporate, business, financing, securities laws and regulations compliance.
Cátia sits on the Board of the International Cannabis Bar Association and is the Chair of the Allegheny County Bar Association’s Medical Marijuana and Hemp Committee. She is an avid speaker and writer in cannabis law and regulation.
Garrett O. Graff, Managing Attorney, Hoban Law Group
Garrett Graff, Managing Attorney at Hoban Law Group, is nationally recognized as a Cannabis Law Trailblazer by National Law Journal. He specializes in the representation of both the marijuana and hemp industries. Garrett’s practice involves corporate and M&A, real estate, regulatory/compliance, FDA/FTC compliance, intellectual property protection, and civil and commercial litigation.
Garrett regularly counsels clients regarding corporate formation and structuring, M&A and business and real property assets, various corporate agreements, regulatory compliance as well as resolving and/or litigating commercial disputes.
As to hemp businesses, Garrett represents companies across the country and world on matters including import/export, cultivation, processing and manufacturing, distribution, and navigating legislative and regulatory frameworks such as FDA regulation. He frequently works with federal, state and local authorities on policy and enforcement matters.
Notably, Garrett represented hemp industry stakeholders against the DEA, before the Ninth Circuit Court of Appeals, in confirming the 2014 Farm Bill’s hemp provisions pre-empt DEA authority and the CSA. He also regularly works with stakeholders in drafting model legislative and regulatory policy. Garrett also serves on the board of the Colorado chapter of the Hemp Industries Association.
Related to marijuana businesses, Garrett represents numerous companies on matters including licensure, successfully obtaining licenses in numerous states in both competitive and noncompetitive licensure processes. He also assists clients in general corporate matters, protecting intellectual property, establishing partnerships and joint ventures, and expanding clients’ footprints across multiples states and/or countries, along with regulatory compliance matters.
Garrett has testified in judicial proceedings related to regulatory matters and frequently speaks in many forums — conferences, symposiums and other events regarding various issues concerning marijuana and hemp law.