Cannabis Comes Out of the Shadows in Legal Disputes

SAN FRANCISCO—Last month, a California jury rendered a verdict in favor of Grupo Flor, a Salinas cannabis company, against its prior landlord and real estate developer, Nader Agha and the Moss Landing Commercial Park LLC. The case concerned Grupo Flor’s leaseholds at Agha’s Moss Landing Commercial Park, a World War II-era industrial park located in Moss Landing.

After almost three weeks of testimony by cannabis cultivators, manufacturers, distributors, and industry experts and professionals, the jury ruled in favor of Grupo Flor. The jury found that Moss Landing Commercial Park LLC breached its written contracts with Grupo Flor, said Jonathan Shapiro, partner of Baker Botts LLP of San Francisco, trial counsel to Grupo Flor.

As cannabis operations continue to gain more traction, it may be more common to see similar scenarios play out in courts across the state. In this exclusive, Shapiro shared insights into the trial, resources and ways cannabis tenants can protect themselves.

GlobeSt.com: How did the trial offer a window into the Wild West of the state’s cannabis industry?

Shapiro: The cannabis industry is reinventing itself at speed that may be unprecedented in the modern economy. Recreational legalization brought enormous challenges to an industry that was historically built on black and gray markets, bringing a new and ambiguous regulatory regime and business expectations that are a lot more like Wall Street and Big Ag than off-grid weed cultivation. For three weeks, this jury had a front row seat to all that, really unlike anything else I’m aware of in an American court.

The very fact that there was a public jury trial over these leases was a first. The leases were themselves huge. Just visualize what can be grown on two football fields that happen to be indoors and climate controlled. Just five years ago, cannabis cultivators didn’t have formal leaseholds. The legal risk of documenting major cultivation was far greater than a landlord walking away from a handshake deal. For the same reason, the compulsivity with which major agriculture and consumer companies account for their business was foreign even to cannabis industry leaders who today are now awash in audited books, records, compliance and personnel files. This was a high-stakes jury trial for a venture-backed company that is plainly sophisticated yet had run its business on a largely cash basis that the jury ultimately understood was already something of a historic relic even by the time of trial.

GlobeSt.com: What types of issues should cannabis tenants be aware of when signing leases?

Shapiro: There is no question that cannabis clients are disadvantaged, indeed vulnerable, when negotiating all commercial contracts and leases in particular. Meanwhile, even the most sophisticated cannabis clients can only ramp so quickly and, again, they want the leases.

There are any number of traps for the unwary. Cannabis tenants should avoid hyper-technical default provisions and pay great attention to utility provisions because those are of course critical to cultivation and indeed can involve expense greater than the rent itself. Treat any requests for profit sharing with extraordinary skepticism. A landlord with an interest is an empowered landlord and often not an ideal investor or stakeholder. And because many cannabis companies can and do lawfully conduct substantial business in cash, negotiate a cash payment term if that in fact is how rent may be paid.

GlobeSt.com: Other than legal action, what else should a cannabis tenant do to protect his or her interests in a lease?

Shapiro: Starting with legal action, every cannabis tenant should negotiate aggressively for a private, confidential  arbitration alternative to a public trial. We were able to successfully pick a fair-minded jury, but juries exist so the community can weigh in on disputes–and sometimes personal convictions and bias of those in the community will favor a landlord over a growing business that may be legal, and indeed honorable, but to some may still look like a drug dealer. It is also is critical to document the relationship with the landlord compulsively. Keep track not just of payments, but requests, response, email, unannounced visits–all the issues that standing alone may not seem like big deals, but in the aggregate can disadvantage the tenant and tell a very different story.

GlobeSt.com: Are there resource groups or other associations that have proven to be helpful with these types of issues?

Shapiro: Frankly, the best resources for cannabis tenants–or those looking to go into the business–are other cannabis tenants. What has worked and what hasn’t? What landlords have overreached, why and how? The cannabis industry is as brutally competitive as any emerging-growth space, but at the same time there remains a sense of shared purpose, shared vulnerability, where competitors have room to be colleagues. And always find a lawyer who gets the business, understands the ecosystem and the pressure that even the most successful, most well-financed cannabis firms endure every day.