Cannabis Businesses and New Jersey Real Estate: The Landlord’s Perspective – Part Three: Terminations and Insurance 

by  Carmen Andrade

In the last section of the series aimed to help landlords navigate the evolving cannabis landscape, this article focuses on terminations and insurance issues.

Lease Terminations

When negotiating a termination provision in a lease, both landlords and tenants will want to include specific parameters regarding the “what, when and how” of the termination process.

The “what” concerns what the trigger is for the termination which can run from the generic to the very specific. By way of example, either party may want to have a broad termination right which allows each party to terminate the lease for any or no reason. Alternatively, each party, when it relates to the other party’s termination right, will want to limit the other party’s termination right to a specific trigger (e.g. inability to obtain approvals, revocation of license, and sale of property of which the premises are a part of, etc.).

The “when” concerns at what point will the termination right mature and how long will the right remain available for exercise by the party seeking to terminate, and how much notice must be given before the termination occurs.In allowing a termination right, the landlord should build in a sufficient cushion of time to allow for marketing of the space, securing a new tenant, retrofitting the space for the new tenant, and any rent concession period afforded to the replacement tenant. In particular, a landlord will want to limit the window of time during which a tenant may exercise the termination right. Ideally, from the landlord perspective, if the window passes, the termination right is deemed waived and the lease continues.

The “how” concerns the process for effectuating the termination including any monetary consideration to be paid for the right to terminate. Examples of monetary consideration may include reimbursement for unamortized costs relating to the initial tenancy such as broker’s commissions, alterations, work allowances and rent concessions. Other considerations include black-out periods to prohibit a landlord from exercising a termination during high volume production or selling seasons, to allow a particular growing cycle to be completed or to allow for the orderly transfer of product to a new facility.

Noxious Uses

Traditionally, leases contain restrictions on noxious uses. These may include uses that the landlord deems harmful, immoral, or contrary to the general character of the building, development, or site. Landlords will have to revise existing leases to allow for the incoming cannabis tenants to redefine what constitutes a noxious use. Landlords will also have to consider the impact of this revision on existing or targeted tenants to make sure the rules and regulations of the building or project site are uniform. As growers expand, and if the industry is legalized at the federal level, spaces suitable for cannabis tenants may become scarce, especially in densely populated areas like the metro areas of New Jersey. This rapid growth could trigger a greater need and demand for exclusivity provisions in favor of the tenant.

Insurance for Cannabis Tenants

Another consideration New Jersey landlords should think about before entering into leases with cannabis tenants is whether or not these businesses and their related activities will be able to obtain the type of insurance coverage that landlords typically require their tenants to obtain. While coverage for tenants engaged in cannabis operations is available, there are a limited number of carriers that offer this type of coverage which can be expensive and often contain gaps in coverage. This area is still evolving, and the question remains whether insurers will begin to make more readily available liability, property, worker’s compensation, rent loss and/or rent interruption insurance for space leased to tenants in the cannabis industry.

Cannabis-related businesses face many risks and obstacles. They share the same general liability and other risks agricultural and manufacturing businesses face, including workplace accidents, damage to property, and crop failure. Cannabis related businesses are especially prone to fires from both wild and internal sources. Other significant risks include theft, general liability, and product liability. As such, to address the risk of uncertain coverage, landlords may, if the type of coverage that a tenant is able to secure doesn’t comply with the landlord’s insurance requirements, consider requiring cannabis related tenants to self-insure their business.

The Future 

The expansion of the cannabis industry has so far proven to be inevitable across the country and New Jersey has been no exception. To date, many cannabis related businesses in New Jersey are going through the licensing process and are looking for commercial space for their current and future business operations. The New Jersey Cannabis Regulatory Commission recently announced that New Jersey would begin accepting applications for legal cannabis businesses in December of 2021 which will start with growers, processors, and testing labs. The application process for dispensaries will open in March 2022.

Now is the time for landlords to be knowledgeable and prepared to work with cannabis related businesses in this ever-changing and highly watched business landscape.

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