Up in Smoke: Retail Leases With Unlicensed Cannabis Dispensaries Laced With New Legal Risks
New York’s Recently Enacted Series of Smoke Shop Laws Now Authorize State and City Agencies to Penalize Owners for Knowingly Renting to Unlicensed Marijuana Sellers
By Adam Lindenbaum | also published in The Real Deal | October 2023
Introduction
As New York City’s recently-licensed cannabis dispensaries have begun to operate after the State first legalized recreational marijuana use in 2021, City and State leaders are cracking down on unlicensed, “quasi-legal” dispensaries that have popped up throughout the City. Cannabis dispensaries have helped fill a substantial void in the retail landscape in the fallout of the COVID-19 pandemic. However, with new State and City legislation enacted during the past few months that targets commercial landlords who rent retail space to unlicensed cannabis dispensaries, New York has signaled that it intends to hold property owners accountable for the sins of their tenants. Where does this leave landlords with tenants selling cannabis and drawing the attention of law enforcement? And with the chaotic state of the legal and licensed cannabis retail market still in flux, where do commercial property owners go from here?
This article by Rosenberg & Estis, P.C., New York’s preeminent real estate law firm since 1975, seeks to answer these questions and to inform New York’s developers, landlords, owners, brokers and managing agents about the current state of the intersection between New York City’s real estate and marijuana markets.
New York Legalizes Marijuana, and Unlicensed Smoke Shops Proliferate
Marijuana is the most commonly used federally illegal drug in the United States. On March 31, 2021, New York State joined 20 other states, plus the District of Columbia, in legalizing marijuana for adult recreational use. The “Marihuana Regulation and Taxation Act,” more commonly known as the Cannabis Law, created the Office of Cannabis Management (OCM) and tasked the newly-formed agency with developing regulations and issuing licenses so businesses could participate in this newly-legalized industry in New York.
In the first year and a half following the State’s passage of the Cannabis Law, the OCM was slow to issue Conditional Adult-Use Retail Dispensary (CAURD) licenses to retail entrepreneurs while it developed its regulatory criteria. The OCM’s original guidelines, which called for 50% of licenses to go to “social and economic equity applicants,” were recently called into question by a Hudson Valley judge who sided with a group of disabled veterans in temporarily halting the OCM’s licensing process. Prior to the injunction being granted, the OCM had issued seven full CAURD licenses and over one hundred provisional CAURD licenses to retailers in New York City.
While New York was struggling with the bumpy rollout of the Cannabis Law, commercial landlords were struggling with the slow return of shoppers and retail tenants in the post-pandemic era. Building owners had empty storefronts, and many began receiving inquiries from brokers on behalf of prospective tenants interested in signing leases for a new breed of smoke shop. New York City has long been known for the “slightly illicit” version of the corner bodega—i.e., one that sells smoking paraphernalia next to the potato chips—but these new stores were different. These “budding” retailers ditched the snacks, clearly intending to capitalize on the void created by the Cannabis Law’s decriminalization of marijuana and the OCM’s delayed issuance of CAURD licenses. Tenants correctly reasoned that, because the Cannabis Law had legalized recreational marijuana, no one would be prosecuted for buying or selling weed, and law enforcement would be slow to issue fines. Unlicensed smoke shop operators were keen to pay above-market rents as a result, which helped seal the deal for many property owners who were still trying to recover from the pandemic.
The State and City Swing Back the Pendulum
By the beginning of 2023, New York City was reportedly home to anywhere between 1,400 and 8,000 unlicensed smoke shops, and State and City officials had seen enough. Law enforcement began to crack down in response to complaints from local residents seeking to close the new smoke shops. The City and State’s enforcement efforts would no longer be targeted solely at the stores themselves; rather, the strategic decision was made to start going after retail landlords.
In February 2023, Manhattan District Attorney Alvin Bragg sent letters to more than 400 property owners, warning of evictions and fines pursuant to Real Property Actions and Proceedings Law (RPAPL) Section 715(1), which requires owners and landlords to commence eviction proceedings if a commercial tenant is engaged in “illegal” trade or business. Legal observers questioned whether the new smoke shops were truly illegal, in light of the Cannabis Law, or rather, were merely unlicensed businesses, and thus more akin to an unlicensed cigarette seller. Rather than litigate the issue, State and City officials set about passing new laws aimed squarely at penalizing commercial landlords who rented to unlicensed smoke shops in order to try to stamp out the unlicensed weed market, as explained below.
A. RPAPL § 715-A
On May 3, 2023, New York State enacted RPAPL § 715-A, which requires landlords “to make an application for the removal of a commercial tenant” if the landlord receives written notice from a state enforcement agency—which includes the Attorney General and the OCM—that the tenant is in violation of either Penal Law § 222 (which criminalizes the possession of distribution-quantities of cannabis without a license) or Cannabis Law Article 6 (which regulates the permitting and licensing of dispensaries). RPAPL § 715-A requires landlords to initiate the equivalent of an illegal-use eviction proceeding against tenants engaged in the unlicensed sale of cannabis, regardless of whether or not the tenant has violated any of the terms of its lease.
If a landlord receives a violation notice from an enforcement agency that its tenant has violated RPAPL § 715-A, such notice triggers the landlord’s obligation to initiate proceedings against the tenant within five days after receipt. If the landlord fails to timely commence such a proceeding, or if the enforcement agency believes the landlord is not prosecuting the proceeding “diligently” and “in good faith,” then the statute authorizes the enforcement agency to prosecute the eviction proceeding against the tenant, “as though the [City] were the owner or landlord of the premises.” RPAPL § 715-A provides that if the enforcement agency takes over the prosecution, then the owner and tenant shall each be treated as co-respondents in the proceeding.
Incredibly, RPAPL § 715-A requires the landlord to go forward with the eviction proceeding even if there has not already been an independent finding by a criminal court that the tenant violated Penal Law Section 222 or Cannabis Law Article 6. Indeed, RPAPL § 715-A appears to hold landlords responsible for de facto prosecutions of Penal Law Section 222 or Cannabis Law Article 6, in the context of a landlord-tenant eviction proceeding filed in the Civil Court.
If the Civil Court sustains the violation, RPAPL § 715-A authorizes the immediate removal of the tenant and the imposition of a civil penalty in an amount up to three times the rent charged during the violation. If the owner was a named co-respondent with its tenant in the proceeding, then the owner may be liable to pay the penalty. There is, therefore, significant financial incentive for an owner to act quickly and diligently in response to a notice received from an enforcement agency that the tenant is violating Penal Law § 222 or the Cannabis Law.
B. Cannabis Law § 16-A
Cannabis Law § 16-A was also enacted by the New York State Legislature on May 3, 2023 and amends the Cannabis Law of 2021 to give State enforcement agencies the additional power to shut down unlicensed smoke shops by suing landlords in Supreme Court for preliminary injunctions, temporary closure orders, temporary restraining orders and permanent injunctions. Cannabis Law § 16-A further authorizes enforcement agencies to name the real property itself as a defendant and to file a notice of pendency or lis pendens against the property, which gives law enforcement the power to close a store even if the landlord and tenant fail to appear to contest the court proceeding. A notice of pendency is a significant concern for most owners, especially those with conventional mortgages placed at risk of triggering a default thereunder.
Similar to RPAPL § 715-A, Cannabis Law § 16-A provides that a landlord that merely permits an unlicensed smoke shop to lease retail space may be held liable, even where it was not actively involved in cannabis sales. Cannabis Law § 16-A not only gives courts the power to close unlicensed cannabis distributors, but also gives the courts the power to impose monetary penalties on landlords. Specifically, if a court finds that the landlord “intentionally” permitted the unlicensed smoke shop to operate, it may fine the landlord up to $10,000 a day for each day of the violation.
C. Local Law 107
New York City Local Law 107 of 2023, which was enacted by the New York City Council on July 23, 2023,[1] dovetails with RPAPL § 715-A and Cannabis Law § 16-A. Local Law 107 prohibits commercial landlords from knowingly leasing retail space to smoke shops that sell unlicensed marijuana, cigarette or tobacco products. Similar to RPAPL § 715-A and Cannabis Law § 16-A, Local Law 107 requires landlords to ensure that commercial spaces are leased only to licensed businesses.
Pursuant to Local Law 107, City and State agencies that conduct inspections for unlicensed marijuana or tobacco sales, such as the New York City Police Department, must provide a written warning to the property owner requiring that the owner “ensure that the unlicensed sales…are ceased.” Owners have 15 days to appeal the written notice. Unless the appeal is granted, the warning constitutes presumptive evidence that the owner has knowingly leased the commercial premises in violation of the law. Subsequent violations will result in the issuance of a civil summons to the owner, which carries a $5,000 fine for the first violation after a written warning and a $10,000 fine for each subsequent violation.
Conclusion and Practice Tips
Although New York’s retail marijuana market may not show signs of slowing down—with one think tank predicting a $6 billion market by 2030—it is clear that only fully legal and licensed dispensaries will survive in New York in the long term. Commercial landlords considering entering into new leases with OCM-licensed CAURDs should conduct careful due diligence on the prospective tenant.
With the recent enactment of RPAPL § 715-A, Cannabis Law § 16-A, and Local Law 107, many retail landlords who entered into multi-year leases with unlicensed cannabis shops between 2021 and early 2023 may already be exploring means of limiting their exposure. With the possibility of increased agency enforcement, landlords and their agents should be on the lookout for warning letters from City and State enforcement agencies and should act immediately if such a letter is received.
The best way for landlords with unlicensed smoke shop tenants to avoid liability is to immediately direct their tenants to become licensed, or to at least begin the process with OCM. Although OCM has been temporarily enjoined from issuing new CAURD licenses, its oversight board meets once a month and is expected to continue issuing new licenses as soon as the litigation over licensee criteria is resolved.
Alternatively, landlords can protect themselves against an RPAPL § 715-A and/or Local Law 107 violation by issuing a default notice and/or commencing a proceeding to evict the tenant. Most commercial leases have a clause that requires the tenant to comply with all federal, state, and local laws, rules, regulations, and ordinances, even those enacted after the lease was executed.
Landlords should consult with their attorneys to carefully prepare their cannabis shop leases and to ensure that such leases will not violate the terms of their mortgages. Landlords should also have their attorneys review commercial leases to determine the best strategy for protecting their property and defending against violations for unlicensed cannabis sales. Rosenberg & Estis, P.C. will continue to track the implementation and enforcement of these new City and State laws as we gain greater clarity regarding how the new laws play out in the Courts.
[1] Codified as Section 10-186 of the New York City Administrative Code.