Matthew J. Schiller
Partner, Murphy Schiller & Wilkes LLP
Office: (973) 705-7431
Over the past decade, New Jersey has undertaken the challenging and controversial process of legalizing cannabis for both medical and recreational purposes. During this span, the New Jersey Legislature, municipalities, businesses, advocacy groups and property owners have engaged in significant debates regarding the wide variety of legal, economic and social justice challenges associated with the legalization of cannabis uses in New Jersey. Since November 2020 alone, New Jersey voters have authorized the amendment to New Jersey’s constitution to legalize recreational cannabis use (by individuals 21 or over), the Legislature has enacted the New Jersey Cannabis Regulatory, Enforcement Assistance and Marketplace Modernization Act (“CREAMMA”) legalizing recreational cannabis usage, and, in August 2021, the Cannabis Regulatory Commission (“CRC”) promulgated the first set of rules and regulations to permit the recreational cannabis industry to commence operations in New Jersey and empower the CRC to begin licensing such cannabis businesses pursuant to six classifications of licenses (Class 1: Cannabis Cultivator, Class 2: Cannabis Manufacturer, Class 3: Cannabis Wholesaler, Class 4: Cannabis Distributor, Class 5: Cannabis Retailer and Class 6: Cannabis Delivery) as well the issuance of conditional licenses in order to afford the building out operations for the licensees.
It is anticipated that the CRC will unveil the application process at any time within the next several weeks in order to commence the processing and issuance of recreational cannabis licenses in New Jersey. Thus, there is considerable excitement amongst real estate operators and potential cannabis businesses for the inevitable rapid and (likely) significant growth of the cannabis industry in New Jersey in the coming months and years. Notwithstanding such, as cannabis businesses will be highly regulated at both the state and local level (and remain illegal under federal law), it is critical that property owners and business owners fully evaluate the many regulatory, zoning, operational, and financing challenges associated with utilizing properties for cannabis uses.
Determining whether a site is a qualified location for a cannabis business at the onset of the site selection process is of the utmost importance as state and local requirements will significantly limit the number of potentially eligible properties. Municipalities will play a vital role in regulating the cannabis industry, as CREAMMA and the CRC afford municipalities with significant discretion to determine whether recreational cannabis businesses will be permitted under local zoning and/or subject to other regulatory restrictions (such as hours of operation, the number, kinds and location of cannabis businesses and whether the municipality will charge a 2 percent transfer tax). Notably, over 280 municipalities have enacted ordinances imposing various restrictions and/or outright prohibitions on the operation of cannabis businesses. As cannabis businesses will only receive state licenses by demonstrating (1) municipal support, (2) obtainment of all necessary zoning approvals and (3) satisfaction of any applicable municipal restrictions, a thorough understanding of all applicable local zoning laws and other ordinance requirements is essential for any potential cannabis business.
Even if a property is qualified under state and local law, recreational cannabis businesses and property owners must need to sufficiently address the significant additional legal and operational issues resulting from such operations. Although commercial landlords may desire to capitalize on a property’s availability for a cannabis businesses, landlords must be mindful that the cannabis regulations are constantly changing, (especially because cannabis remains illegal under federal law) and allowing a cannabis business to operate onsite may violate the terms of their loan agreements. Specifically, liability extends under §856(a)(1-2) of the Controlled Substances Act to those who “lease, rent, use, or maintain any place for the purpose of manufacturing, distributing, or using” marijuana” as well those who “manage … any place … either as an owner, lessee, agent, employee, occupant, or mortgagee, and knowingly and intentionally rent, lease, profit from, or make available for use, with or without compensation, the place for the purpose of” carrying on a marijuana business. Accordingly, notwithstanding that a cannabis business may comply with applicable New Jersey and local laws, for so long as cannabis remains illegal under federal law, the risk of an in rem forfeiture action and the seizure of the property by the federal government remains.
When entering into a cannabis lease, many other operational and legal issues must be sufficiently addressed that may not be otherwise found in standard commercial lease forms. Compliance with law provisions must be particularly tailored to the proposed use and state and local requirements as well as compliance with any applicable federal guidelines concerning cannabis uses. Early termination rights should be granted if a tenant fails to comply with state law and applicable federal guidelines. Security deposits under a cannabis lease may be significantly greater in order to adequately protect against the risks associated with the cannabis business. Other operational issues such as odors, adequate life safety, water supply and fire suppression equipment must also be given careful attention. Moreover, insurance requirements and the language of any particular policy must be given greater consideration and attention given the legal challenges associated with the cannabis business. As potential tenants commence the cannabis licensing process, licensing and zoning contingencies may also be required in the agreements as well.
There are many reasons for New Jersey’s real estate and business communities to be excited for the introduction of the recreational cannabis industry into our market. However, it is critical for all parties to remain cognizant of the many legal challenges and issues arising from such use and business. As the cannabis industry continues to evolve, it is critical for cannabis businesses and property owners alike to surround themselves with the right team in order to thoroughly evaluate and address any potential legal and operational challenges associated with such use.
Matthew J. Schiller leads the Commercial Leasing practice group at Murphy Schiller & Wilkes LLP, a commercial real estate boutique law firm based in Newark, New Jersey. MSW’s lawyers structure and negotiate leases on behalf of landlords and tenants for all kinds of commercial property, including office buildings, industrial and warehouse facilities, shopping centers, restaurants, healthcare facilities, marinas, sports arenas and other sites throughout New Jersey, New York, Connecticut and the rest of the country. Our lawyers have handled some of New Jersey’s largest commercial leases, including corporate headquarters and major industrial facilities, as well as leases for cannabis dispensaries throughout the state.
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