CREJ - Property Management Quarterly - May 2015
Recreational and medical marijuana are legal in Colorado. However, this does not mean that landlords are required to allow the drug on their property, not even medical marijuana. In fact, allowing marijuana creates risks to property owners that all landlords should be aware of before allowing it because medical and recreational marijuana are illegal federally. Because all marijuana is illegal federally, allowing a person to possess, sell or grow marijuana on a property can put that property at risk of seizure by the federal government. Additionally, an owner who knowingly allows the possession, cultivation, use or distribution of marijuana on his property is at risk of being classified as a conspirator to a federal crime, which carries a punishment of up to 20 years in prison and a fine of up to $500,000. And, let’s not forget about issues like mortgage obligations, insurance, zoning and neighbors. Fortunately for property owners in Colorado, the federal authorities have taken little action against Colorado properties when that property is used in a marijuana business that sells or grows marijuana in accordance with state law. However, that policy is simply that – a policy, not a law – and thus the policy may change without notice. The marijuana industry in Colorado is a very lucrative business. The industry sells tens of millions of dollars worth of marijuana per month. In 2014, the recreational and medical marijuana industries were collectively responsible for around $700 million of retail sales. Thus, many property owners are interested in a piece of that action. Landlords in Colorado have two options: allow marijuana or not allow marijuana. Either way, a landlord should ensure that his lease specifies his intent to allow or not allow it on the leased property.
When a landlord decides not to allow marijuana, he should explicitly state in the lease that marijuana is not to be sold, grown, used or possessed on the property. This specificity has numerous landlord benefits. First, specifically stating that marijuana is not allowed on the property will give the landlord an avenue for recourse in the event that the tenant possesses, sells, uses or grows it on the property. Specifically disallowing marijuana makes a breach of the lease clear and eviction easier. Second, in the event that a federal agency seizes the property as a result of marijuana activity, that specific clause could help prove that the landlord did not knowingly allow the illegal activity. This is important because when the federal government seizes leased property, the owner may assert an “innocent owner” defense to recover possession of his property. If the owner was indeed ignorant of the activity, but not through willful ignorance, the seized property may be returned to the owner.
If a landlord decides that he wants a piece of the marijuana brownie, the landlord should ensure that the lease has certain provisions to protect from risks and nuances associated with marijuana tenants. Marijuana tenants often need high levels of security. As such, the lease should specify the security provided by the landlord, methods of obtaining additional security and how the security systems will affect the lease charges. Additionally, certain marijuana operations require increased electrical and water capabilities. Marijuana-grow operations require a lot of electricity and water in order to replicate the appropriate conditions for growing it. A good lease will ensure that the tenant will pay for the increased utilities, as well as control how the building may be modified, what modifications are allowed and who will pay for the modifications. Another major issue that landlords of marijuana tenants face is how the tenant pays the rent. These businesses are unable to work with most banks and credit unions. Accordingly, marijuana clients tend to pay in cash because normal banking services like credit cards, debit cards, checking accounts, wiring services, etc., are not available. The landlord should specify in the lease how the tenant may pay the rent. Also, physical damages to a property from grow operations can be significant. The required extra water and electricity creates an environment that is likely to cause mold growth. Following the tenancy of a grow operation, the repair and remediation costs can be substantial. Thus, in addition to increased rent, an increase security deposit is advisable as well as the unencumbered right of entry for inspection. Finally, a landlord needs to ensure that his insurance provider will cover damages done by a marijuana client. If additional insurance is needed, the lease should specify who will pay for it. Other things to consider are how the property’s lender will feel about the activity and does the lease violate the terms of your financing agreement, as well as issues with neighbors and zoning. The decision of whether to rent to a marijuana tenant is the choice of the property owner. Either way, the lease should specifically detail the agreement of the parties.