Whether the prospective tenant is a cultivation or infusion operation, or a dispensary/clinic retailer of consumer products, numerous risks to the commercial landlord must be weighed carefully against the advantages of an MBE's occupancy and lease revenue prospects. Below are some pivotal financial risks.
Insurance Risks
Mold is a four-letter word in every insurance underwriter's vocabulary.1 Some landlords already know that no coverage can be bound for the adverse consequences of indoor cultivation of Cannabis on the premises' building systems or for claims by a multi-tenant building's other occupants.2 Since insurance companies prefer not to pay claims, savvy landlords will inquire in advance about the impact of the Insurance Services Office's ("ISO") CP 10-30 Cause of Loss Form upon their coverage. The language of that Cause of Loss Form typically enables insurers to deny claims arising from dishonest or illegal activities (under federal law, this includes an MBE's operations until Cannabis stops being a Schedule I drug) on the basis that requiring coverage would violate federal public policy. So the landlord should expect its carrier to deny coverage for fire stemming from shorting electrical wiring, from water damage and mold growth caused by cultivation humidification, from illnesses to employees and visitors arising in tenant spaces or common areas, and even from explosions of Cannabis oil distilleries.3 That means the landlord will be responsible for the significant expense of remediating and restoring the improvements.
Indoor air quality, property damage, and theft issues all require the landlord's property coverage underwriter's preleasing analysis when the lease of an MBE's operation is pending—assuming there is not a blanket rejection of coverage for an MBE tenancy. Government confiscating of the tenant's inventory of product eliminates the tenant's capacity to pay its rent. Still, essentially no insurance covers government seizures of marijuana products4 unless the seizure is proven to have been wholly unjustified. There may be some forward movement in the insurability of these operations, since no state insurance regulatory authority expressly has prohibited insuring marijuana industry operators. And in the case of Green Earth Wellness Ctr., LLC v. Atain Specialty Insurance Company, the Colorado federal district court suggested that one insurer who entered this marketplace would be bound to its coverage bargain made.5
Traffic, Parking, and Related Risks Affecting Future Tenant Opportunities
If the MBE operation generates substantial traffic, then shared parking issues may arise within the landlord's project, affecting not only existing occupants but also potential future occupants concerned about the available parking stall-to-requirements ratio.6 In addition, those customers of the MBE who arrive "under the influence" upon their dispensary visits create potential traffic hazards for other tenants or visitors to the project.7 State statutes or local ordinances may not prohibit inges-tion of marijuana products in parking areas located on private property. Landlords cannot count on law enforcement officials intervening on private property unless (i) they are responding to a report of a crime in progress or (ii) local or state law prohibits Cannabis consumption outdoors on nonresidential private property visible from public space.
Suits Involving Quiet Enjoyment Covenants
Other tenants, if inconvenienced in any material way (see Insurance Risks above) from any of the operations of the MBE, may file legal claims ranging from express breach of contract (specifically, the landlord's breach of the covenant of quiet enjoyment), to violations of a lease's good faith and fair dealing covenant,8 to constructive eviction of the tenant, to fraud in the inducement of the lease's making, to gross negligence stemming from the landlord installing an MBE tenant in its building or project. (The tenant's leasehold obligation to indemnify and hold harmless the landlord may exclude its landlord's grossly negligent conduct.) A dangerous or nuisance-causing MBE in a project may lead to judgment favoring a tenant plaintiff on its constructive eviction and gross negligence claims against its landlord.
Image Issues and Crime Prospects
Other tenants in a project hosting an MBE could realize fewer customer visits resulting from the diminished "reputation" of the project or assumptions about the MBE's "shady operators." Less trade could decrease lease renewals or increase demands for reduced rents for continuing to occupy an inferior business premises. It is human nature to fear that crime in the project hosting an MBE operation will increase. There is ample evidence that persons sufficiently desperate for drugs or cash will attempt to break (or succeed in breaking) into a dispensary and/or cultivation site or accost invitees of the dispensary operator to steal their marijuana inventory, consumable products, or cash.9 Owners and tenants of neighboring projects will be concerned about the diminished value of their own tenancies, of their property's appraised value, or their employees' and invitees' safety—all caused by being near the MBE's operations. This atmosphere may make a project or building's other suites less leasable at market rental rates after an MBE occupancy commences.10
Volatility of MBE Tenancies
A number of inexperienced MBE operators will enter every jurisdiction legalizing MBEs under state law—and they will fail. Even the governments' requirements for experience in operating a business and medical expertise cannot guarantee that an MBE's control parties have the seasoning and judgment to operate a new MBE facility successfully. This creates the potential for these operators failing to fulfill the full economic obligations in their leases as they close their doors to business.
Bankruptcy
Failing MBEs will default in the payment of rent, and some will file for federal bankruptcy protection. Whether the MBE gains any leverage in its landlord dealings depends entirely on where the MBE is located and what portion of the Bankruptcy Code a tenant relies upon for seeking relief. The Tenth Circuit's Bankruptcy Appellate Panel ruled in 2015 that a debtor engaged in the "marijuana business" cannot have relief under either Chapter 7 or Chapter 13 of the bankruptcy code—because engaging in federally criminal conduct shows a "lack of good faith" that bars confirmation of a Chapter 13 reorganization plan, and is cause to dismiss the MBE debtor's Chapter 7 liquidation case as well.11 (The Tenth Circuit is the portion of the U.S. Court of Appeals with jurisdiction over the State of Colorado.) The same legal doctrine appears to apply in Arizona since the ruling in In re Medpoint Management.12 Another federal bankruptcy court in Oregon in 2011 reached a similar result. It considered a proposed Plan of Reorganization filed by a debtor in a Chapter 13 (a personal...
