Landlord for Medical Marijuana Dispensary Done in by Its Lease

A case from the Alameda County Superior court in California gives us a fascinating lesson on a very basic issue: Rely on a “standard lease” at your peril. I bet the plaintiffs in that case, landlords who leased commercial property to a medical marijuana dispensary, are ruing the day they used a canned lease. They lost their case.

Here’s the background. Possession, use, and sale of marijuana is a federal offense; but in California, the Compassionate Use Act gives patients and their suppliers immunity from state prosecution if they adhere to the provisions of the Act. In the California case, the landlord signed a lease with the Harborside collective many years before, allowing it to operate a dispensary. In recent years, the United States Attorneys in California began targeting cooperatives, on the grounds that they were in fact selling marijuana to just about anyone (no one can seriously dispute the ease of obtaining a medical marijuana card). The prosecutors cleverly used the cooperatives’ landlords as their hammer: The feds sent letters to the property owners, threatening civil forfeiture of their property if they continued to allow it to be used to further a federal crime. Many landlords sent eviction notices to their tenants, as did the Harborside landlord, but Harborside refused to move and the landlord was forced to file an eviction lawsuit.

The landlord lost—the case was dismissed. The eviction was based on a section of California law that provides for terminating a lease when the tenant has used the property for an “unlawful purpose.” (California Code of Civil Procedure §1161(4).) The court concluded that “unlawful purpose” must be understood solely with respect to state law, not federal law. Because the collective had complied with the provisions of the Compassionate Use Act, its activity was not “unlawful” under state law and the eviction could not be upheld under that section of the law.

The Harborside decision emphasized that the landlord was not basing its eviction on a breach of a private right of the landlord under the lease—namely, a clause prohibiting the tenant from disobeying all applicable laws. Of course, the landlord could hardly advance such a claim, because its own lease detailed the tenant’s anticipated use of the premises (as a dispensary).

Good residential leases specify grounds for termination, and explain that tenants must obey all applicable laws. Failure to obey all applicable laws is a ground for termination that is separate than using the property “for an illegal purpose.” The Harborside court wisely didn’t venture an opinion as to whether the case would have turned out differently had the basis for the suit been “failure to obey all applicable laws,” beyond pointing out the possibly fatal hurdle for the landlord of trying to argue this theory when the landlord knew full well at the outset what the tenant was about to do.

I’m sure you’re wondering—even if the landlord had no advance knowledge of his tenant’s use of the property, is there really any difference between “using the property for an illegal purpose” and “failing to obey all applicable laws?” Isn’t the issue the same—whose laws? We won’t know until a court decides this question.

But in the meantime—isn’t there a better way for a landlord to protect itself? Yes, and this gets us back to the drawbacks of that canned lease. The parties could have simply omitted the use clause, or simply described a “retail use” instead of giving specifics. That would have avoided the problem of having the landlord seek to evict based on behavior that he specifically approved of in the lease. The landlord could have insisted on the right to evict based on a violation of any law, federal included, and that would have been that. Not the best position to be in, as far as the tenants are concerned, but tenants in weak bargaining positions often agree to harsh terms and hold their breath. Conversely, landlords desperate to rent out their space might cut corners by using a canned lease form and renting to tenants whose activities are counter to federal law. Perhaps that’s what happened here.