Recreational use and possession of smaller amounts of cannabis/marijuana have been legal in NYC since 2019. But selling marijuana for personal use remains illegal unless the business is properly licensed. The problem is that only 37 retail outlets have been approved for New York. See the Bloomberg media report here. The constraint on legal cannabis dispensaries has resulted in a notable explosion of illegal sales outlets in the city, as reported here by The Real Deal back in October 2022.
Aside from having a valid business license, a legal dispensary must follow a whole stack of regulations. For example, no “door-dashing” your cannabis sales, and the store cannot be open past midnight or before 8 in the morning. See Leafly media report here. What is a landlord to do if their legal cannabis dispensary tenant commits violations of the cannabis sale regulations? Go even further and ask: what is a landlord to do if the tenant starts selling drugs and substances that remain illegal under New York law?
Surprisingly enough, illegal activity by a tenant is NOT uncommon for commercial landlords. Consider if a tenant begins operating an illegal gambling business, sells counterfeit goods, becomes a fencing operation for stolen goods, or a restaurant flagrantly violates food safety regulations.
Common Lease Clauses to Protect the Landlord from Tenant’s Illegal Activity
Commercial landlords protect themselves from legal liability for a tenant’s illegal activity by including several provisions in the commercial lease. A few of the more important provisions are:
- Mandating that the tenant obey and comply with all laws, ordinances, and regulations
- Insisting on hold-harmless and indemnity provisions, the tenant will hold the landlord harmless for lease violations and laws, ordinances, and regulations.
- Requiring the purchase of high-end top-rated indemnity insurance products with the landlord being among the beneficiaries of those products — where possible, these policies should cover loss of rents, judgments, fines, settlements, fines, administrative penalties, etc.
- Making criminal and illegal activity a violation of the lease and a default under the lease, allowing immediate termination of the lease and repossession of the leased space
- Allowing robust and swift self-help remedies for repossession of the leased space
Additional clauses Landlords may want
If potential illegal activity is of particular concern, a commercial landlord might consider these additional protections:
- Offer only short-term leases (one-year maximum with no auto-renewal) — liability risk associated with a tenant’s illegal activity is minimized with a very short lease.
- Verify the quality and contents of the insurance products and require them in hand, paid in full, before the leased space is turned over to the tenant.
- Use a progressive step termination process — legal liability is generally imposed on a landlord for knowing about illegal activity and then not terminating the lease, but it may be financially difficult to “jump” straight to lease termination upon learning of illegal activity; thus, a lease-mandated two or three-step termination process still protects the landlord, gives the tenant time to “cure” and helps manage any potential financial impact from terminating the lease.
- Specifically, prohibit certain types of criminal behavior.
Contact the NYC Commercial Lease Negotiators at Wright Law Firm NYC Today
For more information, call the experienced New York commercial lease and real estate attorneys at Wright Law Firm NYC. We provide top-tier commercial real estate legal services for the NYC business community. To schedule a consultation, contact our office by e-mail or call us at (212) 619-1500.