by Legal Hotline Lawyer Annie Fitzsimmons
Growing, manufacturing, distribution and possession of marijuana IS a crime. Aiding and abetting another person to commit a drug crime IS ALSO a crime. A real estate broker who knowingly assists a buyer to purchase, or a landlord or tenant to lease, property for the purpose of growing, manufacturing, distributing or selling marijuana is subject to potential state and federal prosecution.
Under federal law, there are no exceptions to the above. Under state law, following implementation of Initiative 502, there are limited exceptions. The exceptions create a framework that limits quantity and the conditions under which marijuana can be possessed, grown and manufactured. Variance from the strict regulatory framework renders the conduct criminal, even under state law. Distribution is a crime under both state and federal law. (For the purposes of this article, medical marijuana has no special distinction. All of the warnings regarding I-502 marijuana practices apply equally to medical marijuana. In fact, all medical marijuana activity is now illegal in Washington State and garners no special protection under Fair Housing Laws.)
If a client seeks assistance in locating a marijuana business that is lawfully permitted under Washington law (typically referred to as a “502 business”), the business activity will necessarily violate federal law. The federal government has broad authority to seize real estate used in the commission of a crime that violates the Controlled Substances Act.
If this introduction to this topic stirs the rebel in you and challenges you to “play chicken” with state and federal prosecutors, then you should assist clients in creating real estate opportunities for locating 502 businesses. You should also read on for further thoughts and practices to implement into your service to these clients.
Always Advise Your Client To Seek Legal Counsel.
Whether your client is a 502 business that is buying or leasing real estate or your client is a property owner who will lease property to a 502 business, your client is contracting to violate federal law. Similarly, if your client is a seller, contemplating a seller financing transaction to a buyer who will use the property for marijuana related activities, your seller is subject to loss of the security for the loan (the property) through federal seizure of the land. Accordingly, in every client relationship, you must advise your client, in writing, to seek legal counsel before proceeding with the transaction.
Be warned, however, there are few lawyers who will represent your client. There is significant question as to whether a lawyer may “advise or assist” a client in the establishment of a 502 business. Washington’s Rules of Professional Conduct (lawyer code of ethics) prohibit lawyers from assisting a client in the commission of a crime. The Washington Supreme Court is currently considering a minor alteration to the Rules of Professional Conduct that will arguably permit representation in limited circumstances. But, understand that many lawyers will remain reluctant to represent a 502 business client or the landlord or seller who may wish to have a protracted business arrangement with the 502 business person.
502 Businesses Are Severely Limited In Their Ability To Obtain A Bank Account Or Bank Financing.
Federal anti-money laundering statutes prohibit banks from offering accounts, credit cards or loans to marijuana industry members. This means that most 502 businesses deal in all cash. Taken further, deposits and lease payments will be made in cash. Earnest money and monthly mortgage payment obligations will be paid in cash. In addition to having to deal with the increased logistics associated with accepting large cash payments, if federal prosecution results from the tenant’s or buyer’s cannabis activities, the person or company (landlord, property manager, broker, escrow or seller) who deposited the funds, could be charged with money laundering.
Landlord’s Underlying Financing Can Be Jeopardized.
If landlord’s lender becomes aware of the existence of a marijuana industry tenant in landlord’s property, it is possible and in many cases likely, that lender will call the note due based on lender’s determination that landlord jeopardized the collateral. Two different theories have justified this determination in recent cases. The first is the lender’s concern that the property could be seized through federal enforcement of the Controlled Substances Act. The second, in a commercial setting, is the lender’s concern that other tenants in the complex will revolt and abandon their leases in response to the presence of the marijuana business. Some marijuana businesses create negative impacts for other nearby tenants. Frequent complaints include foul odors, increased loitering activity, unusual operating hours and violations of local regulations. It can be risky for a landlord, with an underlying loan on the property, to lease any or all of the property to a 502 business. Statutorily Required Security Must Be Part of the Lease.
While most standardized leases do not require a tenant to include certain security measures within the operation of the tenant’s business, Washington’s marijuana law requires industry members to incorporate security within their business premises. Failure to comply with the law’s security requirements would result in a forfeiture of the 502 license, making the operation illegal. As a result, any lease to a cannabis business should make the tenant’s failure to maintain the required security an event of default justifying termination of the lease. The same is true of any seller financing documents. It is not suggested that brokers draft leases or seller financing documents incorporating these provisions. Rather, brokers should recognize that standardized leases and financing documents do not contain provisions necessary to this unique situation. Again, it is critical for brokers to advise clients, both tenants/buyers and landlords/sellers, to seek legal counsel for assistance in drafting these specialized documents. Insurance is difficult to obtain.
Not surprisingly, insurance can be difficult for a marijuana business owner to obtain. While most commercial landlords require a tenant to carry insurance and name the landlord as an additional insured, there are few insurance companies that will insure a cannabis business. Landlord or seller-financing seller should be advised to consult with their insurance provider before executing binding documents with the 502 tenant or buyer to be certain that landlord’s/seller’s insurance will not be jeopardized. Any lease or financing documents should put a burden on tenant or buyer to be adequately insured, naming landlord/seller as an additional insured.
Leases and Seller Financing Documents Should Make Non-Compliance With State Law an Event of Default and Should Allow For Termination in the Event of State or Federal Enforcement.
The current federal administration wrote a memo in which it explained that it would not expend prosecutorial efforts enforcing the Controlled Substances Act for marijuana related crimes in states where marijuana is lawful and regulated so long as the marijuana related activities conform to state law and do not violate several specific tenets identified in the memo. This memo provides comforting, although somewhat false security for 502 businesses and those who assist in the establishment or support of the businesses. It should be clearly understood that the present administration could change this approach without notice because the memo does not have the force of law. Moreover, a new administration could adopt a different enforcement model.
Perhaps a greater risk, however, is that the 502 business person could violate state law or one of the conditions set forth in the federal memo. In either event, landlord or seller may have no knowledge that tenant’s/buyer’s conduct subjected both tenant/buyer and landlord/seller to aggressive prosecution by the federal government. In that event, landlord/seller has got to have a lease or loan provision that allows immediate termination.
Again, brokers are not expected to draft unique provisions for leases or seller financing documents but brokers should recognize that the standardized documents suited to most business settings are not adequate for the creation of real estate relationships with the marijuana industry. Brokers must advise their clients to seek legal counsel for assistance with preparation of the documents that will create these relationships. Local Regulations May Prohibit The Location of the 502 Business.
It is not enough for a business person to be properly permitted for a 502 business under state law. The local jurisdiction, where the business will be located, must allow the business operation. Recently, some local jurisdictions have been reactive to the location of 502 businesses and have modified ordinances to prohibit a marijuana business even after the business was established. Business owners, as well as landlords and sellers, must be ready to respond to a changing regulatory environment, recognizing that regulations can change at every level, including the local level.
This article is not an exhaustive treatise on all issues surrounding the creation of a real estate relationship in support of a cannabis business. Rather, the purpose of this article is to put members of the Washington REALTORS on notice that there can be significant risks to brokers and firms, as well as landlords, sellers and the 502 business person, whenever a 502 business is established. 502 businesses are sprouting up around the state and those business owners are going to need real estate brokers to assist them in locating property and store fronts. If you are one of the brokers who assists this industry, proceed with caution, call on legal counsel and refer your clients to legal counsel, in writing, throughout the transaction.
Hotline Attorney Annie Fitzsimmons writes the Legal Hotline Question and Answer of the Week. If you’d like to submit questions to the Legal Hotline, e-mail them to firstname.lastname@example.org or call (800) 562-6027. Please have your NRDS number ready when you call or e-mail the Hotline with your question. The Legal Hotline lawyer does not represent Washington Association of REALTORS® members or their clients and customers.