January 27, 2023

Legalized & Leasing - The Dilemma Facing NYC Landlords And Unlicensed Marijuana Dispensaries

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The cannabis cash grab is fully underway in New York City and many commercial landlords (whether willingly or unwillingly) find themselves as key participants in the industry. Since the legalization of marijuana in New York, a slew of smoke shops and dispensaries have opened their doors throughout the five boroughs. These shops have thrived since the state legalized cannabis last year, flourishing in the confusion over their legality and a lack of enforcement. New York requires all marijuana sold in the state to have been grown, processed and tested within its borders, but most cannabis retailers in the city sell products in packaging with an out-of-state stamp (primarily California), and some also offer illegal drugs as well such as candies and solutions made with psilocybin mushrooms.

While lawmakers and policing authorities deal with the growing number of illegal dispensaries, many NYC commercial landlords find themselves dealing with a growing number of lease offers from smoke shops and potential cannabis dispensaries. Additionally, many commercial landlords are dealing with the reality of illegal cannabis sales by smoke shop tenants under current leases. There are several options for commercial landlords facing the prospect of leasing space to a smoke shop or cannabis retailer, with some (especially those hit hardest by the COVID-19 pandemic) taking the "lease now, ask later" approach. This approach raises the greater question regarding the potential liability faced by commercial landlords that lease to unlicensed cannabis enterprises.

There is no doubt that property owners should exercise a high degree of caution before entering into a lease with a tenant that could potentially operate a cannabis dispensary or smoke shop. If the tenant is selling, the tenant is liable and the landlord could also face liability under federal and state law. As such, it is advisable for commercial landlords to take certain steps to shield themselves from the prospect of leasing to an illegal enterprise. The first, and most obvious, shield is to not lease to these tenants at all, however this does not solve the conundrum of legal smoke shops conducting illegal activities. In this situation, a basic level of protection can be found in the underlying lease. Most, if not all, commercial leases in New York City prohibit tenants from engaging in illegal activity in their spaces. The lease language could potentially let the landlord off the hook, provided the landlord takes the necessary steps to terminate the lease upon learning of the illegal activity as opposed to turning a blind eye to the activity.

It seems that the crackdown on these illegal business is underway as police and sheriff's deputies conducted raids in early November, 2022, at a cannabis dispensary in Bay Ridge, Brooklyn and a smoke shop in Greenwich Village. Additionally, New York City council member Justin Brannan and state Senator Andrew Gounardes drafted a letter to New York City Police Department Commissioner Keechant Sewell to crack down on unlicensed storefronts selling cannabis products. It is likely that this crackdown will continue and state and local authorities will be incentivized to weed out the illegal marketplace to make way for the legally licensed businesses that are expected to open their doors in 2023. This places a greater sense of urgency for landlords leasing to current cannabis tenants and those contemplating a lease to an unlicensed cannabis enterprise to exercise a greater degree of caution than previously exhibited.

These are only some of the issues that landlords should consider when leasing to a tenant involved in the sale of marijuana.

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