How cannabis legalization in NY is affecting landlords one year later
Landlords should first check with their insurers before renting to determine whether any loss arising from marijuana use by a tenant must be excluded.
Under the Marijuana Regulation and Taxation Act (MRTA), the legalization of cannabis products in New York went into effect March 31, 2022. It is expected to become one of the largest regulated cannabis markets in the U.S., with a projected $4.2 billion in sales within five years. However, regulations and licensing details are still emerging, which has left both residential and commercial landlords confused when it comes to the substance’s use on their properties.
Landlords must sift through the haze when renting while the law on marijuana use, cultivation and distribution is still emerging.
What the law allows
New Yorkers 21 and older can now legally possess limited amounts of marijuana and concentrated cannabis for recreational use, and can legally smoke or consume marijuana in public almost everywhere they can smoke tobacco. There are exceptions. Not surprisingly, it is illegal to smoke at schools and workplaces; it is banned in parks, beaches, boardwalks, pedestrian plazas, playgrounds, where tobacco smoking is similarly prohibited; and is additionally banned inside cars (even while parked) and on outdoor patios at bars and restaurants.
Up to five pounds of marijuana may be kept at home as long as residents take “reasonable steps” to make sure it is stored securely. Home cultivation is not currently allowed, but 18 months after the first adult-use dispensary opens, New Yorkers will be able to cultivate up to six plants at home, with a maximum of 12 plants per household, for personal use.
Sales of recreational-use marijuana will not be legal until the state establishes regulations and issues licenses for growers, distributors, and retailers. Eventually, New Yorkers will be able to buy marijuana and other cannabis products from brick-and-mortar dispensaries and will be able to have cannabis delivered to their homes. The MRTA also allows for the creation of lounges and other adult-use consumption sites, but consumption will be limited to those with the on-site license.
How Does the Law Impact Commercial Properties?
Setting up a pot shop in New York has its challenges and restrictions. Not only is marijuana cultivation, distribution, and possession still illegal under federal law, causing many commercial landlords to be reluctant to rent to a tenant in that industry, all marijuana sold for recreational and medicinal use in New York must be grown and processed within the state. Thus, New York cannabis dispensaries will not be able to import goods from established operations in other states where cannabis is legal.
Before anyone can be licensed to sell cannabis in New York, officials must first determine how the industry will operate, from regulation and taxation of sales to allocation of licenses for cultivators, processors, wholesalers, retailers, and delivery services. Once regulations are in place and licenses are issued, club-like lounges or “consumption sites” where cannabis (but not alcohol) can be consumed can be established. Dispensary licenses are anticipated to be issued later this year and it is projected that cannabis will be available for sale for adult recreational use by the beginning of 2023. The state will also issue licenses for the creation of cannabis delivery businesses, something localities would not be able to block. Although no municipality can overrule the statewide legalization of cannabis, some individual cities, towns, and villages have elected to “opt out” of permitting dispensaries and lounges in their communities.
Commercial landlords that elect to rent to marijuana industry tenants should include lease provisions which limit the landlord’s liability and allow for lease termination in the event of federal enforcement, such as:
• Requiring annual or periodic proof of state licensure
• Providing for periodic inspections by the landlord specifically to assess potential issues caused by cultivation and ensure lease-compliant use of the premises
• Requiring that the tenant carry a certain level of insurance
• Providing that federal intervention and enforcement such as raids or criminal charges constitute lease defaults
Commercial landlords renting to companies in the marijuana business should also check that their bank will have no issues accepting marijuana-sourced rent payments either for deposit at the bank or for payment of a mortgage loan.
How Does the Law Impact Residential Properties?
Every New York resident knows that living in an apartment, whether a rental, cooperative, or condominium building, is often challenging, especially when your neighbors’ actions interfere with your life in unpleasant ways. The demand for smoke-free housing is increasing, especially with the passage of MRTA. Controlling the infiltration of odors, such as secondhand smoke, is one of the most common quality of life issues faced by landlords.
Some landlords see an advantage to permitting marijuana use and/or cultivation in residential units, as they may be able to increase the pool of potential tenants, obtain above-market rents, and appeal to a niche market for such activities. Still, there are compelling reasons that landlords may choose to prohibit marijuana use and/or cultivation.
Marijuana smoke, like tobacco smoke, can produce odors that may be a nuisance to neighboring tenants, can cause damage to the walls and furnishings in units, and can lead to a higher risk of smoking-related fires. Odors can seep into neighboring units and common areas. Many residents are also concerned with the potential health effects of secondhand smoke, especially for those with respiratory problems or who have children at home, which could cause negative respiratory symptoms and measurable concentrations of THC in blood and urine. The indoor cultivation of marijuana may result in humid conditions leading to mold. Moreover, insurance companies may not cover damages caused by “illegal activities” which include marijuana use and cultivation under federal law.
To curb these risks, landlords should consider implementing a no-smoking policy, make theirs a smoke-free building, or explicitly forbid marijuana use and/or cultivation. The prohibition must be incorporated into the lease which, in cooperatives and condominiums, means amending the proprietary lease or by-laws. To be most effective, the prohibitive language should be clear, unequivocal, and specify that it includes activities illegal under federal law.
Possible Exceptions
Landlords and boards are reminded that even if they implement a no-smoking policy, persons with disabilities may be entitled to a reasonable accommodation to permit them to smoke cannabis in their home. Both the Fair Housing Act and the New York Human Rights Law prohibit discrimination in housing based on a disability and require providers to make adjustments in rules, policies, practices, and services when necessary to give a disabled person an equal opportunity to use the premises.
The federal prohibition against marijuana use is at odds with the requirement to provide a tenant a reasonable accommodation, which may include smoking pot. Non-smoking alternatives may be an appropriate compromise. Residents are cautioned that, despite the MRTA, using and possessing marijuana is still illegal under federal law.
Related Considerations
Banks. Property owners with loans or mortgages from federally chartered banks are hesitant to rent to any businesses affiliated with the use and sale of cannabis. The Secure and Fair Enforcement (SAFE) Banking Act says federal banking regulators cannot penalize depository institutions for providing services to cannabis-related businesses. The measure has passed the House of Representatives five times, but not the Senate. It passed the House again in February 2022. Hopefully the sixth time is the charm.
Banks are lobbying for the legislation as they seek to lend to an industry that is experiencing explosive growth, but want more certainty. Without SAFE banking, lending to a federally illegal sector brings greater risk than simply accepting deposits, because lending adds credit risk. With New York on the cusp of opening its dispensaries and consumption lounges, the timing for passing SAFE banking is critical. If the law is adopted, real estate owners may have more choices in where to deposit, and borrow, their funds.
Care must be taken to avoid losing funding sources and other banking services. Landlords who own their property outright, or only engage in business with local banks, could be well-positioned to benefit from the situation.
Insurance. Landlords should first check with their insurers before renting to determine whether any loss arising from marijuana use by a tenant must be excluded. Commercial insurance carriers may not cover damage caused by marijuana operations under policy exclusions. Insurers may deny claims related to the use of marijuana in residential apartments claiming that it is a material increase in the risk not contemplated by the policy.
Given this possibility, a safe approach would be to ban smoking of any substance (legal or illegal), prohibit unlicensed sales of any products (legal or illegal), and restrict indoor growing operations (distinguished from ordinary gardening), on the premises. By regulating behaviors rather than a substance, landlords can keep their properties attractive to a wide range of prospective tenants.
Conclusion
The legalization of marijuana for recreational use in New York is predicted to provide a significant boost to the state’s economy as cannabis businesses emerge to meet the high demand. Larger landlords are generally staying out of the industry since marijuana is a controlled substance under federal law, but smaller landlords are more likely to take the risk associated with regulatory concerns, motivated by the possibility of higher-than-market rent.
It is complicated to rent property at a time when the law on marijuana use, cultivation, and distribution is so dynamic, and it is unlikely that the haze will lift until more regulations and guidelines have been put in place. Landlords should keep apprised of relevant laws, and set their own policies related to the use of marijuana.
Michelle P. Quinn is a partner at Gallet Dreyer & Berkey.