Many entrepreneurs in Oregon's psilocybin industry will soon begin negotiating leases for their new businesses. We have been drafting and negotiating leases for about seven years for our marijuana clients. With psilocybin and marijuana both listed as Schedule 1 drugs under the Controlled Substance Act (21 U.S.C. §801, et. seq. "CSA"), the parties negotiating leases in the psilocybin industry will face similar concerns and need similar protections and must make sure their leases are narrowly tailored to protect their respective interests. Here are some key concerns and provisions for Part 1 of this post:
1. Understand Institutional Lenders
The specific section of the CSA applicable to landlords and tenants is 21 U.S.C. §856 which states that it is unlawful to lease or lend money on any place involved in using, manufacturing, or distributing any controlled substance. The first question to ask a potential landlord is whether there is an institutional lender, like a Bank of America or U.S. Bank, with a mortgage on the property. We have seen landlords and tenants get blindsided when these lenders discover their secured property has been leased to a marijuana business and they call the loan due immediately. There may landlords willing to roll the dice that their lender will not discover the psilocybin tenant to get above-market rent, but psilocybin tenants should require the lender's consent before signing a lease.
2. Permitted Use Should be Specific
The Permitted Use section of the lease should state with specificity what type of psilocybin business will be operating in the space. There is no reason to give the unscrupulous landlord an argument that it was not on notice that a federally illegal business was operating on its property if the landlord decides it wants to terminate the lease early for some reason.
3. Compliance with Applicable Laws
Boilerplate commercial leases will contain a section requiring the tenant to comply with ALL laws. Landlords who have been leasing space for many years may attempt to use the same lease without hiring a psilocybin attorney to tailor it. If the tenant does not change this standard boilerplate section to require only compliance with state law, the psilocybin tenant will be in breach of the lease the moment it starts operating because it is violating a federal law. The smart landlord will add provisions in the lease requiring that the psilocybin business comply with all state regulations promulgated by the Oregon Health Authority. Tenant compliance with OHA regulations is crucial for the landlord because illegal activity may attract law enforcement which could result in a civil forfeiture action; and, if the OHA revokes the tenant's license it will no longer be able to generate income for rent payments.
4. No Cole Memorandum
State-licensed recreational marijuana businesses began operating several years ago with some guidance on federal law enforcement priorities found in the now famous Cole Memorandum. The Cole Memo was authored by the U.S. Department of Justice and provided 8 enforcement priorities, which if followed by the marijuana business, would (presumably) keep federal authorities uninterested in prosecution. The U.S. DOJ has not given similar guidance to the psilocybin industry. This adds a level of uncertainty and risk that should be considered by all industry participants.
Before entering into any psilocybin lease, please read our blog posts about the present uncertainty about which Oregon cities or counties may opt-out of allowing psilocybin businesses to operate in their jurisdiction. Part 2 will be coming soon with additional key provisions you will want to include in your psilocybin lease.