Arizona Republic: “”Medical-marijuana-dispensary applicants are having trouble securing lease agreements for suitable dispensary sites, Phoenix-area commercial-real-estate brokers and observers say. The challenge is twofold, they say: State-imposed restrictions limit the locations and types of real estate in which a dispensary can operate, and many commercial-property owners don’t want marijuana-dispensary tenants.”
One of the important provisions included in my Addendum to Lease between a landlord and a tenant that intends to operate an Arizona medical marijuana dispensary is a condition that requires the landlord to deliver to the tenant a Nondisturbance Agreement from every person or entity that holds a deed of trust or a mortgage on the premises. If your not-for-profit dispensary entity intends to lease premises for the dispensary or the growing facility, a Nondisturbance Agreement from every lienholder is a must have document. This document protects the tenant from being evicted if the landlord loses the real property in a foreclosure.
Under Arizona real estate law, when the landlord defaults on a lien that encumbers real estate, the lienholder can foreclose and the land is sold to the highest bidder. The legal consequences of a foreclosure is that the foreclosure terminates / extinguishes the interests in the land of every party whose interest is of a lower priority than the foreclosed lien. Translation: If a lienholder whose lien was recorded before the tenant entered into a lease forecloses, the foreclosure terminates the lease.
Solution: If the premises your nonprofit entity leased or intends to lease are encumbered by one or more Deeds of Trust or Mortgages, the entity must get a Nondisturbance Agreement from every lienholder. This is an agreement signed by the lienholder in which the lienholder promises that if the lienholder forecloses on its lien, it will honor the tenants lease as long as the tenant does not default on the lease.
Example 1. Landlord borrows $X from Lender on January 1, 2011. The loan is secured by a Deed of Trust that encumbers the land of which the leased premises is a part. The Deed of Trust is recorded on January 3, 2011. Landlord leases premises to dispensary on March 4, 2011. Landlord defaults on the payments due to Lender on January 1, 2013. Lender forecloses by selling the property at an auction held by the trustee under the Deed of Trust on May 1, 2013. The foreclosure terminates the lease as of May 1, 2013. If the tenant cannot make a deal with the new owner to stay in the premises, the tenant will be out on the street and the dispensary will die. If the tenant can work out a new lease with the new owner, the new rent will probably be a lot higher because the new owner has the tenant over a barrel.
Example 2. Same facts as above except the lease required the landlord to get a Nondisturbance Agreement from the Lender and the Lender signed and delivered the Nondisturbance Agreement to the tenant. The tenant recorded the Nondisturbance Agreement on March 4, 2011. The foreclosure does not terminate the lease and the new owner becomes the new landlord and cannot evict the tenant as long as the tenant satisfies all of the tenant’s obligations under the lease.
Warning #1: During these difficult economic times, many landlords are defaulting on their loans. Do not take a chance that you might lose your entire investment in your Arizona medical marijuana dispensary because your landlord defaults on a loan. Your dispensary must get a Nondisturbance Agreement from every lender that holds a lien that was perfected before the date of the lease because the failure to do so could cause the loss of your entire investment in the dispensary if the landlord defaults and the property is sold at a foreclosure sale.
Warning #2: You can ask the landlord to disclose the existence of liens and the name and address of the lienholder(s), but the only safe way to determine if a lien, Deed of Trust or Mortgage encumbers your leased premises is to pay a title insurance company to give you a status report that lists all liens and encumbrances on the leased premises. If the landlord tells you there are no liens and you don’t verify that fact independently, you’ll wish you had purchased a status report from a title insurance company when the property sells at a foreclosure auction and your dispensary is evicted from the premises.
Solution: Every would be dispensary that leases premises that are encumbered by a lien must protect itself from potential eviction due to the landlord’s default on a lien by obtaining a Nondisturbance Agreement signed by the lienholder.
If you have already signed a lease, it’s not too late to ask the landlord to ask the lender to give you a Nondisturbance Agreement, but the landlord and the lender are less likely to to it if it is not a condition to the effectiveness of the lease.
As I said on February 8, 2011, a “Prospective Dispensary’s Single Most Important Task Before April 30, 2012 is to find a site to operate the dispensary and enter into a lease with the landlord that ties up the site. The must read article linked to below describes the difficulty would-be-dispensary owners are having finding a site in Tucson. No site, no application, no dispensary!
Arizona Daily Star: “Now that Arizona voters have decided to allow the use of medical-marijuana, just where will those who qualify be able to buy it? With strict regulations set by Tucson and other local municipalities layered on top of state rules, that question has become a nagging one for potential dispensary operators. . . . An initial challenge – before talking to a potential landlord – is finding a bit of real estate. . . . So far, the city has received three official requests from operators looking to open up pot dispensaries, he said. All three were sent back to the applicants because they had problems that would have kept them from getting approved,”
Question: Must I know my Arizona medical marijuana dispensary and cultivation locations before I file my application with Arizona Department of Health Services to obtain a dispensary license?
Answer: Yes. Arizona Revised Statutes Section 36-2804 states:
“Not later than ninety days after receiving an application for a nonprofit medical marijuana dispensary, the department shall register the nonprofit medical marijuana dispensary and issue a registration certificate . . . if . . . The prospective nonprofit medical marijuana dispensary has submitted . . . an application, including:
(i) The legal name of the nonprofit medical marijuana dispensary.
(ii) The physical address of the nonprofit medical marijuana dispensary and the physical address of one additional location, if any, where marijuana will be cultivated, neither of which may be within five hundred feet of a public or private school existing before the date of the nonprofit medical marijuana dispensary application.”
Therefore, Section 36-2804 requires that the application state the name of the dispensary owner and the actual address where the dispensary will sell to patients and where it will grow its marijuana. Now is the time for all prospective dispensaries to be looking for an buying or leasing the premises where they will operate and grow. Once you find a site, if the site makes sense and if the zoning allows for the use of the site for a dispensary or cultivation site, you must tie up the site, i.e., enter into a legally binding lease for the premises or a contract to buy it.
Note: Before you find your site, you must have formed you limited liability company so that it can be the party that signs the lease or purchase contract. You do not want the personal liability that goes with being the singer on a lease or contract. If you need me to form your Arizona limited liability company, see the links near the top of the right column of this website.
Because no applicant will know if the applicant will actually receive a dispensary license, it does not make sense for the dispensary to enter into either a lease or a contract to buy unless the lease or contract contains provisions that are unique to the medical marijuana business. For example, you want a clause in your lease or purchase contract that gives you the option to terminate the lease or purchase option if you do not actually get a license or if you get a license and later lose the license and cannot get it back. You’ll want a use clause that is appropriate for the business as well as clauses that allow you to make tenant improvements and take actions inside and outside the premises that are necessary to comply with Arizona’s medical marijuana law and the ADHS rules.