With the recent legalization of medical marijuana in 19 states and the District of Columbia and recreational marijuana in Colorado and Washington State, commercial landlords interested in leasing vacant retail and warehouse space to medical marijuana dispensaries and growing operations of marijuana are facing complicated issues related to the interplay of state and federal law.  There are risks to commercial landlords associated with leasing to tenants that produce, distribute or sell marijuana, even in states where such production, distribution and sale is legal under state law.

According to the United States Justice Department, production, distribution and sale of marijuana is still a federal crime under the Controlled Substance Act (“CSA”), because marijuana is a Class I drug (i.e. drugs with no currently accepted medical use and a high potential for abuse).  The United States Deputy Attorney General, however, has issued guidance memoranda to all United States Attorneys, one on August 29, 2013 and one on February 14, 2014, stating that federal enforcement of what is otherwise the legal production, distribution and sale of marijuana at the state level is a low priority.  There are some aspects of marijuana enforcement that are still priorities which are listed in each of the guidance memoranda and include preventing distribution to minors,  preventing revenue from marijuana sales to going to criminal enterprises and preventing diversion of marijuana from states where it is legal under state law to other states where it is not legal. These guidelines are just that; they neither have the force of law nor modify existing federal laws.

There is also an as yet undecided issue of whether the various state laws legalizing marijuana are invalid because they are in conflict with federal laws prohibiting marijuana.  Preemption, which occurs when federal law applies to conduct also the subject of state law,  is established by the Supremacy Clause of the United States Constitution and provides that in the event of a conflict between the federal law and state law governing the same conduct, federal law applies.  Marijuana advocates have argued that the federal CSA does not preempt the state marijuana legalization laws so long as the states are regulating the production, distribution and sale of marijuana in a manner that does not obstruct federal objectives.  At least one federal court has noted in dicta that state laws are not preempted stating that “Federal preemption is not an issue because no part of the Colorado law must give way in order for federal authorities to fully enforce the CSA.”   (In re Rent-Rite Super Kegs West Ltd, 484 B.R. 799 (Bankr. D. Colo. 2012))

Even if state laws are not preempted by federal law, the federal law is still in effect and enforceable.  In addition to penalties under the CSA that commercial landlords may be subject to by leasing their property to tenants using such property in violation of the CSA, commercial landlords also risk civil forfeiture.  Under the Civil Asset Forfeiture Reform Act of 2000, the federal government can seize real property used in connection with activities that violate the CSA and are punishable by more than one year’s imprisonment.  Civil forfeiture does not require any judicial proceeding nor does it require anyone to be charged with a crime.  In the Rent-Rite case cited above, the United States Bankruptcy Court for the District of Colorado, in determining whether to dismiss a voluntary bankruptcy, found that a commercial landlord leasing warehouse space to tenants who the landlord knew were engaged in the business of growing marijuana in violation of the  CSA was jeopardizing its warehouse property by subjecting it to civil forfeiture. Further, commercial landlords may be in violation of existing loan documents or ineligible for future loans on their property if they permit use of their property in violation of the CSA.  Recently, we have seen lenders add violation of the CSA or Civil Asset Forfeiture Reform Act of 2000 as recourse carve outs in guaranties.  Another consideration is whether marijuana operations violate use restrictions in other leases, declarations or other recorded covenants that affect the property.

Commercial landlords should be aware that the production, distribution and sale of marijuana remains illegal under federal law and may result in civil forfeiture of their property and other penalties when determining whether to lease space to tenants engaging in the production, distribution and sale of marijuana, even in states where marijuana has been legalized.