Marijuana, Real Estate

Asset Forfeiture: Why Your Boilerplate Lease Won’t Cut It For A Marijuana Business

What can landlords and tenants do to prevent asset forfeiture or federal intervention altogether?

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Many commercial landlords will not rent to marijuana businesses. In addition to the remote possibility of the U.S. Department of Justice arresting them for violating the federal Controlled Substances Act, landlords face the real threat of losing their property via civil asset forfeiture. The federal government can and does seize property used for cultivating, manufacturing, or selling marijuana. Since 2008, the Feds have netted more than one billion dollars from seizing personal and real property used to manufacture or distribute federally illegal drugs, including marijuana in those 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 committing 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 government has the burden of proving by a preponderance of the evidence that the property is subject to forfeiture. Civil asset forfeiture of real property does not require the government to prove the landowner is guilty of any crime; it is enough if the government shows 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.

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In many states where marijuana is legal (either for recreational or medical use), the innocent owner defense is usually not available because the state mandates that the marijuana business’s lease explicitly allow for cultivating, manufacturing, or selling marijuana. And, in most marijuana-friendly states, having a lease that allows for marijuana activity is also required to receive an operational license from the state.

So, what can landlords and tenants do to prevent asset forfeiture or federal intervention altogether?

Real property leases involving a marijuana business should include “escape clauses,” listing federal intervention, changes of federal enforcement policy, forfeiture threats, and federal enforcement actions (be it a DEA raid or the DOJ filing criminal charges or administrative actions) as defaults constituting lease violations or cancellations. This will likely help the landlord appease the Feds by virtue of removing the marijuana tenant and stopping the tenant’s marijuana activity altogether.

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 “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.

The marijuana commercial leasehold should also 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 way to handle the illegality issue is to write the lease to forbid only those actions that violate state (not federal) law.

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It is also important to include provisions in a marijuana lease relating to hours of operation, the tenant’s treatment of its surrounding commercial neighbors, loitering, odors, the use of hazardous substances, the number of people permitted on the property, and constant compliance with any and all state and local regulatory rules and with the DOJ ’s Cole Memo.

Federal marijuana prohibition and the fluidity of state law marijuana regulatory schemes make standard commercial lease agreements inappropriate for leases involving cannabis businesses. You need a lease that accounts for the realities of running a marijuana business. Or prepare to face the consequences.

Hilary Bricken is an attorney at Harris Moure, PLLC in Seattle and she chairs the firm’s Canna Law Group. Her practice consists of representing marijuana businesses of all sizes in multiple states on matters relating to licensing, corporate formation and contracts, commercial litigation, and intellectual property. Named one of the 100 most influential people in the cannabis industry in 2014, Hilary is also lead editor of the Canna Law Blog. You can reach her by email at hilary@harrismoure.com.

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