As most cannabis operators and applicants know, securing compliant real estate is often the most consequential -- and difficult -- step in launching or expanding a cannabis business. Licenses are location-specific and in many states, difficult to move without receiving regulatory approval and incurring substantial expense. A location may satisfy local zoning requirements and support a state license application, yet if the business does not own the property itself, the lease can expose the operator to substantial legal, business, and financial risk.
That leasing risk begins with the continuing federal illegality of cannabis. Although the vast majority of states have legalized cannabis for medical and/or adult use, cannabis remains a Schedule I controlled substance under the federal Controlled Substances Act (the “CSA”), subject to narrow exceptions which do not apply to any adult-use (or “recreational” or “personal use”) cannabis business. This disconnect can affect landlord financing, insurance, enforcement rights, and the durability of an operator’s occupancy. And even a Schedule III re-classification of all cannabis under the CSA, which is currently being considered by the DEA, would not necessarily protect adult-use businesses operating in accordance with their state and local programs. For this reason, cannabis operators should treat the lease as a core regulatory-risk document, not like a standard real estate form.
Address Federal Illegality Directly
Federal illegality is the giant elephant in the room, and if the operator is not registered as a Schedule III facility, a cannabis lease must address that elephant directly. Operators should include a “Permitted Use” section, providing an express acknowledgment that the premises will be used for cannabis activities authorized under applicable state and local law and that the parties understand those activities may remain unlawful under federal law.
The lease should also provide that the CSA and other federal laws prohibiting cannabis will not, by themselves, constitute a default or be used by the landlord as a defense to its obligations or to enforcement of the lease. While some states (including in New York) have afforded regulatory protection to contract enforceability, without this protection, a landlord may later argue that the lease agreement is illegal or unenforceable after the operator has already made substantial buildout, licensing, inventory, and general business investments.
A Mortgage May Be a Deal Breaker - Do Not Ignore the Landlord’s Financing
A landlord’s mortgage can create an overlooked but material risk. Most institutional lenders, including FDIC-insured banks, continue to prohibit or otherwise penalize and restrict cannabis-related use of mortgaged property. Typically, mortgage documents contain a provision that require the borrower to represent compliance with “all state and federal laws.” If the cannabis business operates in open violation of federal law, the landlord of that business will immediately go into default, as aiding and abetting and/or conspiring in the cannabis business activities. If a lender discovers a cannabis tenant without proper disclosure, it is likely to assert that the landlord has breached the mortgage, potentially leading to acceleration, foreclosure, and/or pressure on the landlord to terminate the lease (again, at a time after substantial investment has accrued).
Before signing, an operator should insist upon representations concerning existing mortgages, deeds of trust, and other encumbrances, including whether any lender restrictions prohibit the proposed cannabis use and whether entry into the lease would result in a default of any other contract to which landlord is a party, including (without limitation) any mortgage. Where a mortgage exists, the operator should seek landlord confirmation that the use is permitted or obtain a lender consent or non-disturbance agreement where commercially feasible.
Get Out Easy - Build a Regulatory Exit into the Lease
Cannabis regulation changes quickly and varies state-by-state. A cannabis business license may be denied, delayed, suspended, or revoked for reasons unrelated to a tenant’s wrongdoing; a municipality may change its zoning rules; law enforcement priorities under federal, state, or local law may change over time; new federal, state, and/or local laws, or rules may prohibit or restrict the proposed cannabis operations; or changes in governmental agency policies, rule interpretations, and guidance may make the proposed operation commercially impracticable or illegal. The tenant should therefore have a clear termination right if an event outside its reasonable control prevents lawful operation at the premises.
This provision should cover, at a minimum: failure to obtain or maintain required licenses or approvals despite diligent efforts; a change in law or regulation that prohibits the intended use; a governmental order affecting the premises or business; and loss of a required local authorization. The termination should be without penalty, accelerated rent, or continuing liability, other than amounts accrued before termination and reasonable restoration obligations. It should be treated as a matter of course for any cannabis lease, with negotiations centered upon the scope of permitted termination, duration of notice, and any termination fee.
Practical Do’s and Don’ts
- Do make the “Permitted Use” broad enough to cover all licensed cannabis activities reasonably anticipated during the term, including cultivation, manufacturing, distribution, delivery, retail, storage, on-site consumption, and ancillary operations, as applicable under your license type and jurisdiction.
- Do condition enforcement of the lease or other key obligations of the lease —particularly rent commencement and major buildout commitments—on receipt of cannabis business licenses and state and local approvals necessary to operate, with particular attention to appropriate verbiage and processes for such approvals.
- Do your municipal research and confirm that the premises complies with zoning, buffer, security, parking, and local-control requirements before committing significant capital. For example, some states, like New York, give municipalities only limited control over the license approval process (time, place, and manner restrictions, only) so that the state agency has final say over approval of a cannabis license; other states, like New Jersey, give municipalities free reign to create independent license application and approval processes if they so choose, some of which may be substantially more competitive, complicated, and/or detailed than the state application.
- Don’t accept a generic “illegal use” default without a state-law cannabis carve-out specific to violations under the Controlled Substances Act.
- Don’t rely solely on the landlord’s assurances regarding lender consent, zoning, or municipal acceptance; require written representations and, where appropriate, supporting documentation including non-disturbance and subordination agreements.
- Don’t overlook casualty, condemnation, insurance, assignment, and default provisions. Each should account for the realities of a regulated cannabis business and the possibility of rapid legal change. Landlords may require a buffet of insurance policies that are simply not available to or affordable for a cannabis business in the state where it operates.
Real Estate Is a Critical Cannabis Compliance Issue
For cannabis operators, a lease is not simply a right to occupy space. It is part of the licensing strategy, capital plan, and risk-management framework. A carefully negotiated lease can protect the operator’s investment if federal enforcement priorities, lender requirements, or state and local regulations shift. A poorly drafted one can turn an otherwise viable license into a stranded asset.
Cannabis businesses should involve experienced real estate and regulatory counsel early—ideally before submitting a license application or signing a letter of intent—to ensure that the location and lease support, rather than undermine, the business plan.
At Rudick Law Group, we advise cannabis businesses, founders, landlords, and investors on the real estate agreements and regulatory issues that can affect a transaction long after signing. If you are negotiating a cannabis lease, assessing a proposed site, or facing questions about lender restrictions, licensing contingencies, or changing legal requirements, contact us to speak with an attorney.
This article is provided for informational purposes only and does not constitute legal advice. The application of real estate, cannabis, and regulatory laws to a particular transaction requires individualized legal analysis.
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