The decriminalization of cannabis for recreational use in New York, a change that took place in 2021, has not only rewritten the rules but also introduced a new, intricate dance for commercial property owners and licensed cannabis operators. New York’s legal cannabis market is projected to generate up to $1.3 billion in revenue in 2023 and approach $3 billion by 2026. This would make New York the fifth-largest cannabis market in the United States by dollar sales. The growth of the market is expected to be driven by increasing demand for cannabis products, as well as the state’s favorable regulatory environment. New York’s Office of Cannabis Management, (OCM) is set to eventually license 175 cannabis dispensaries, far above and beyond the 8 Conditional Adult-Use Retail Dispensaries, (CAURD) licenses in operation to date. Many in the industry feel that although the Cannabis Industry has tremendous potential in New York, revenue projections for 2023 have fallen short due to OCM’s red tape and mismanagement, leaving an opportunity for a black market of illegal operators.
Despite the modern-day gold rush toward opening cannabis businesses, it remains very much in legal limbo. Federal law still considers cannabis a Schedule I controlled substance, which means dispensaries, growers, distributors, processors, and anyone they do business with may face significant legal risks.
Legal Risks for Commercial Property Owners in New York
Landlords leasing to cannabis operators face several risks regarding their tenant’s possession and distribution of cannabis, such as:
Tenants Who Violate New York Cannabis Laws
To protect their property, commercial real estate owners in New York should conduct thorough background checks on potential tenants, verify cannabis licenses, and include lease clauses prohibiting illegal operations. The Manhattan District Attorney’s Office recently issued notices to over 400 illicit cannabis shops, warning of potential eviction proceedings. This action comes after Mayor Eric Adams and Manhattan District Attorney Alvin Braggs announced a crackdown on landlords who host these businesses. This move comes as New York seeks to protect its growing legal cannabis market, which is expected to generate close to $40 million dollars in tax revenue in 2023, primarily from license fees. It is estimated that there are currently close to 1200 illicit cannabis shops in the city which pose a threat by offering cheaper, potentially unsafe, and untaxed products. The implications for commercial property owners are clear. Landlords must exercise due diligence and ensure that any cannabis-related business on their properties is operating legally and in compliance with all state and federal regulations. Failure to do so may result in criminal investigations related to their property and eviction proceedings from the District Attorney’s office.
Violations of Federal and Local Laws
Though possession and use have been decriminalized in New York State, the growth, processing, distribution, and sale of cannabis remain highly regulated.
The businesses that oversee these processes must obtain a state license and comply with an extensive number of stringent laws and restrictions. A cannabis business can inadvertently violate New York laws or regulations, leading it to lose its license, which would leave it unable to operate legally and pay its rent.
For the assurance of their business success and license compliance, it’s important that legal cannabis operators take the following steps:
- Ensure that their lease agreements explicitly permit specific operations and are in full compliance with the relevant regulations
- Stay informed on state and local laws
- Collaborate with their landlords on security measures
- Maintain accurate records
- Retain legal counsel with cannabis industry experience and expertise
- Obtain adequate insurance
- Remain informed of cannabis industry developments.
Risk of Interstate Drug Trafficking
Landlords also face a hidden risk due to New York’s specific legal requirements for cannabis businesses. The state law mandates that these businesses must only deal with products originating within New York. This regulation is designed to help the state and its licensed businesses steer clear of federal prohibitions against interstate drug trafficking. However, confronted with supply chain challenges, some businesses have resorted to sourcing from suppliers outside the state. Although it might seem contradictory, a legal New York dispensary violates state and federal laws when it sells otherwise legal cannabis sourced from California or Colorado. The dispensary could get shut down, and the owners could face criminal charges, while a landlord might lose a tenant, experience unwanted negative publicity related to their property, or worse face unwanted investigations for accomplice liability for facilitating a crime.
Despite the legalization of cannabis in New York, licensed cannabis operators continue to face significant banking restrictions due to federal laws. The primary obstacle is the federal Bank Secrecy Act (BSA), which prohibits banks from providing financial services to cannabis businesses. This is because, at the federal level, cannabis is still classified as a Schedule I drug, making any transactions involving cannabis potentially reportable under the BSA.
The implications of the BSA restrictions are far-reaching and create a number of operational challenges for cannabis businesses. For instance, these businesses often struggle to access basic financial services that are readily available to other industries. This includes not only checking accounts but also loans and credit cards.
Additionally, these banking restrictions not only affect a cannabis business’s ability to secure commercial leases but also create hesitation among landlords, especially those with mortgages from banks. The potential legal and financial risks associated with violating the Bank Secrecy Act (BSA) make commercial landlords cautious about renting to cannabis businesses.
At Woods Lonergan, we have a real estate practice with 30 years of experience, allowing us to protect your interests in navigating the complexities of New York’s Commercial leasing laws. We are also well-versed in the emerging cannabis legal regulatory landscape, ensuring comprehensive guidance tailored to the unique challenges of the industry.
Understanding the Legal Hurdles for Cannabis Businesses in Navigating New York’s Commercial Leasing Landscape.
As a cannabis operator entering into a commercial lease in New York, it’s crucial to be aware of potential legal risks that could impact your business, including:
Risk of Eviction Due to Alleged Illegal Activities
Commercial leases typically contain a ‘permitted use’ clause. This clause stipulates that tenants can face eviction if they engage in illegal activities on the leased premises. It’s important to note that even if your landlord is aware of your involvement in the cannabis industry, they may still have the right to evict you under these clauses during the lease term. Therefore, it’s essential to seek experienced legal counsel and thoroughly review and understand the terms of your lease agreement to navigate these potential risks.
Having No Recourse if the Landlord Breaches the Lease.
Landlord Breaches and the ‘Unclean Hands’ Defense
Commercial landlord-tenant laws include a defense known as ‘unclean hands.’ This defense can be invoked by a party who has breached their lease. For instance, if a landlord were to violate the lease agreement by entering the premises without prior notice, they might argue that the tenant cannot seek recourse for this breach due to their ‘unclean hands’ – a reference to the tenant’s involvement in the cannabis industry, which is still considered a drug business at the federal level. Therefore, it’s crucial to understand your potential defenses and seek legal counsel to protect your business interests.
Commercial Property Owners Struggling to Comply with New York’s Cannabis Regulations
Additionally, when they rent to cannabis businesses, landlords become associated with a highly regulated industry and thus become liable for compliance with New York cannabis laws, such as:
- How and where the products are stored
- Cleaning and maintenance of the property
- Security measures and systems on the property
- The layout of the property
- Exterior signage
- Interior and exterior displays
Many landlords might not realize the regulations that govern the premises of a cannabis business, and if they violate these rules, the tenant’s cannabis license could be put in jeopardy.
Balancing Landlord-Tenant Interests in NYC Cannabis Leasing: Navigating your Legal and Business Risks
Unfortunately, landlords and tenants often find their interests at odds. Tenants naturally desire their landlords to acknowledge the nature of their business, yet a stance of intentional ignorance may serve landlords in avoiding accomplice liability. Consequently, there’s no one-size-fits-all solution to mitigating risks in a cannabis business lease. Both parties must acknowledge their individual risks and strive to find a mutually agreeable method to address them.
Navigating these complexities requires expert guidance. Our team at Woods Lonergan has over 30 years of experience in our New York Real Estate practice group and is at the forefront of the ever-evolving regulatory landscape of Cannabis Law.
We understand that every legal issue is unique and take a comprehensive approach to each case we handle. Our attorneys are true experts in their fields, and we use our knowledge and expertise to help our clients achieve their goals. Whether you’re dealing with a complex legal matter or simply need guidance on a particular issue, we’re here to help. Trust us to provide you with the thoughtful, insightful representation you need to succeed.
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