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Leasing to Cannabis Businesses

As commercial rent defaults significantly increase due to the COVID-19 pandemic, practitioners reviewing the default provisions in their clients’ commercial leases must ask themselves a crucial question: Does the provision set out a conditional limitation or a condition subsequent? The answer to this arcane question—which can trip up even experienced attorneys—will determine the forum in which an owner can recover possession.

As seen in New York Law Journal By Warren A. Estis and Alexander Lycoyannis August 3, 2021 On March 31, 2021, Governor Andrew Cuomo signed into law the “Marihuana[1] Regulation and Taxation Act” (MRTA), which legalizes recreational marijuana use in New York State. Cannabis businesses could begin to open as soon as next year, as the new Office of Cannabis Management issues licenses and promulgates rules.

Of course, most or all of these new businesses will need to lease commercial space in order to operate— and undoubtedly, many real estate owners are eager to meet this new demand, especially in light of the toll the COVID pandemic and the shift to online shopping have taken on bricks-and-mortar retail assets. However, owners and prospective cannabis businesses have many legal issues and questions to consider before entering into lease agreements.

Notwithstanding the passage of MRTA, marijuana remains illegal under federal law pursuant to the Controlled Substances Act of 1970 (CSA). The CSA provides that it is unlawful to knowingly open, lease, rent or maintain any space for the purposes of manufacturing, distributing or using any controlled substances, including marijuana (CSA, 21 USC §856). The Supremacy Clause of the U.S. Constitution establishes that when state and federal law conflict, federal law—in this case, the CSA—controls (US Constitution, article VI, clause 2).

Thus, a state’s legalization of marijuana cannot prevent the federal government, if it so chooses, from enforcing CSA violations in that state (see Gonzales v. Raich, 545 US 1 [2005] [upholding application of CSA provisions criminalizing manufacture, distribution, or possession of marijuana to growers and users of marijuana for medical purposes in compliance with California’s Compassionate Use Act, which authorized limited medicinal marijuana use]).

Accordingly, given that leases to cannabis retailers and the transactions occurring therein remain illegal under federal law, does that mean MRTA is illusory? Hardly. Notwithstanding such illegality, the federal government

over several presidential administrations has refrained from aggressively enforcing the CSA with respect to cannabis-related transactions, resulting in the growth of the cannabis industry in states where it has been legalized.

Nevertheless, unless and until the CSA is amended or superseded, a level of legal uncertainty will always exist concerning leases to cannabis retailers in New York. Thus, forward-looking practitioners should plan for the possibility that federal enforcement priorities could change due to unforeseen circumstances or if 2024 brings a new presidential administration with a different philosophy on the subject.

A primary risk to both landlords and tenants of operating a cannabis business is the possibility of civil (or, less likely, criminal) forfeiture pursuant to 21 USC §881. The statutory scheme permits the federal seizure of, among other things, monies traceable to illegal drug activity and any real property used in conjunction therewith. Notably, civil forfeiture of real property does not require that the government prove the landowner is guilty of any crime. Rather, the federal government files an in rem complaint against the real property, and the initial warrant for the property merely requires the government to allege specific facts supporting a substantial connection between the property and the crime alleged (see e.g. United States v. One Parcel of Prop. Located at 5 Reynolds Lane, Waterford, Conn., 895 F Supp 2d 305, 315 [D Conn 2012] [summary judgment granted to federal government on civil forfeiture claim where owners essentially conceded manufacture of marijuana on their property]). Notably, “in rem actions by the United States to forfeit real property used in a drug violation are commonplace and nation-wide” (895 F Supp 2d at 314).

However, federal law enforcement policy relating to marijuana began to change within the last decade. The “Cole Memorandum,” issued in 2013 under the Obama administration, advised federal prosecutors to refrain from enforcing marijuana-related CSA violations in states that had legalized cannabis. [See Memorandum from James M. Cole, Deputy Att’y Gen., U.S. Dep’t of Justice, on Guidance Regarding Marijuana Enforcement (Aug. 29, 2013), available at //www.justice.gov/ iso/opa/resources/3052013829132756857467.pdf.]

Although the Trump administration nominally rescinded the Cole Memorandum, Attorney General William Barr stated that the U.S. Justice Department “operat[ed] under my general guidance that I’m accepting the Cole Memorandum for now” (Original Investments, LLC v. Oklahoma, CIV-20-820-F, 2021 WL 2295514, at *5 [WD Okla June 4, 2021]).

Under the Biden administration, Attorney General Merrick Garland has pointedly stated that “I do not think it the best use of the Department’s limited resources to pursue prosecutions of those who are complying with the laws in states that have legalized and are effectively regulating marijuana” (Responses to Questions for the Record to Judge Merrick Garland, Nominee to be U.S. Attorney General, //www.judiciary.senate.gov/ imo/media/doc/QFR%20Responses%202-28.pdf [last accessed Jul. 30, 2021]).

Thus, while the permissive federal policy likely means that New York cannabis businesses can operate without fear of federal prosecution for the time being, careful practitioners should plan for the possibility that the CSA will once again be strictly enforced as written. Indeed, courts are “bound to follow the law as written and may not depart therefrom based on enforcement decisions made by the executive branch” (In re Way To Grow, Inc., 597 BR 111, 133 [Bankr D Colo 2018], affd 610 BR 338 [D Colo 2019]).

An especially punitive feature of federal forfeiture law is that “in a forfeiture proceeding under section 881(a)(7), property in its entirety is forfeitable even if only a portion of it was used for illegal purposes” (United States v. Land and Bldg. at 2 Burditt St., Everett, Mass., 924 F2d 383, 385 [1st Cir 1991]). Specifically, the federal government, on a proper showing, is authorized to seize

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Rosenberg & Estis, P.C. Secures Appellate Division Win For Owner Against Tenant Seeking Attorneys’ Fees

Featuring Jeffrey Turkel January 3, 2022

Rosenberg & Estis, P.C., prevailed Tuesday before the Appellate Division, First Department of the New York State Supreme Court in a dispute over whether a residential landlord was responsible for a tenant’s attorneys’ fees arising from a DHCR luxury deregulation proceeding that eventually reached the Court of Appeals

The Appellate Division unanimously ruled that Brookford LLC, owner of an Upper West Side apartment building, was not responsible for tenant Margaret Schuette’s attorneys’ fees in a rent regulation case in which she prevailed. Jeffrey Turkel, a member of Rosenberg & Estis, P.C., represented Brookford, the defendant-respondent, in the case against Schuette, the plaintiff-appellant.

Justices Rolando Acosta, Judith Gische, David Friedman and Tanya Kennedy unanimously upheld a Jan. 10, 2020 decision by Justice Kathryn Freed of the State Supreme Court of New York County. The case stemmed from Brookford’s 2006 effort to deregulate Schuette’s rent via an administrative proceeding before the State Division of Housing and Community Renewal.

Schuette successfully challenged Brookford’s petition for a high-income-related rent deregulation, by arguing that DHCR could not consider her husband’s income because he had moved into an assisted living facility in March 2005 – prior to the April 2006 issuance of her income certification form. The Court adopted Schuette’s argument that in a high-income luxury deregulation case the tenant gets to decide what percentage of jointly filed income should count toward the luxury deregulation income threshold.

The State Supreme Court of New York County denied Brookford’s challenge and dismissed the proceeding, and both the Appellate Division and the Court of Appeals affirmed DHCR’s denial of the property owner’s rent deregulation petition. In March 2019, Schuette commenced an instant action seeking to recover reasonable attorneys’ fees in an amount to be determined at trial but for no less than $150,000.00, along with costs and interest for defending herself in the underlying proceeding.

The Appellate Division on Tuesday unanimously upheld Justice Freed’s January 2020 decision that Schuette cannot recover the attorneys’ fees she expended during the DHCR rent deregulation proceeding, subsequent Article 78 proceedings and appeals. Freed found that it is well-established, pursuant to Section 234 of Real Property Law, that “a tenant may not recover such fees in administrative proceedings or proceedings brought pursuant to Article 78.”

established precedent holds that DHCR proceedings such as the one that [the] defendant commenced here, do not trigger the reciprocal provisions of RPL 234 because ‘[a]n administrative proceeding is not an action,’” and the Court “has repeatedly interpreted the words ‘in any action or summary proceeding’ in RPL 234 not to include administrative proceedings.”

“Rosenberg & Estis is committed to defending landlords from all manner of frivolous claims, including instances in which tenants wrongly seek to be compensated for attorneys’ fees,” Turkel said. “Important precedents such as the one upheld by the Appellate Division help ensure the fair treatment of landlords and other parties.”

Rosenberg & Estis, P.C. Names Two New Members, Promotes Two Attorneys To Of Counsel

Leading NYC real estate law firm positions for continued growth

Featuring Jolie Meer, Stefanie M. Graham, Richard B. Corde and David Fries December 13, 2021

Rosenberg and Estis, P.C., a leading New York City real estate law firm, has announced a series of personnel changes to best meet the growing legal needs of its diverse client roster. The firm has named two new members while promoting two attorneys to of counsel.

“We are extraordinarily fortunate to have a team of talented attorneys to support New York City’s real estate industry at a time of increasingly complex legal requirements,” said Rosenberg & Estis managing member Michael Lefkowitz. “The skill of these attorneys is an asset to our clients and we congratulate them all on their new positions.”

Jolie Meer, who joined Rosenberg & Estis in 2007, serving as co-chair of the firm’s leasing subgroup, has risen from of counsel to member in the firm’s Transactional Department. Meer’s practice concentrates on commercial real estate law, with an emphasis on leasing, acquisitions, dispositions, and financing.

Meer earned a bachelor’s degree from Cornell University in 2002 and completed a J.D. at Benjamin N. Cardozo School of Law at Yeshiva University in 2005. Named to the Crain’s New York’s list of Rising Legal Stars in 2020 and to the New York Super Lawyers Rising Stars List in 2014-15, Meer is regularly requested by the firm’s top transactional clients for work on especially complex matters. Her list of past client services includes working on a wide range of office and retail leases, including representing the landlord on the retail leases at VIA57West, Frank57West and EOS and helping the ground lessee of the Bank of America Tower in New York City secure $1.3 billion in permanent financing via an unprecedented mix of Liberty Bond and CMBS debt, which were combined in a single mortgage instrument.

Stefanie Graham, who joined Rosenberg & Estis in 2013, has been promoted from of counsel to a member in the firm’s Transactional Department. Her practice involves all aspects of commercial real estate, including representing owners, lenders, developers, managers, landlords and tenants in acquisitions, dispositions, development, financing and leasing.

Prior to joining Rosenberg & Estis, Graham served as an associate with Walsh Markus McDougal & DeBellis, LLP. She holds a bachelor’s degree from Fordham University, earned in 2005, and a J.D. cum laude, which she completed in 2010 at New York Law School. Among other notable work, Graham helped Nightingale Properties and Wafra Capital Partners secure $89 million, via a Commercial Property Assessed Clean Energy loan, to fund energy efficiency upgrades at 111 Wall Street. The C-PACE loan was the first in

New York City and the largest in U.S. history. She was also among a team who represented The Durst Organization in the refinancing of the One Bryant Park tower. The deal combined a $950 million commercial mortgage-backed securities loan from Bank of America and $650 million worth of public-assisted financing that dates to a decade ago.

Richard Corde, who joined the firm in 2016, has risen from associate to of counsel in the firm’s Litigation Department. Mr. Corde’s practice involves complex commercial and residential lease disputes, construction litigation, Article 881 proceedings, coop/condo law, and appeals. He also has extensive experience drafting and negotiating construction contracts and license agreements. Mr. Corde regularly appears in state and federal court on behalf of a broad range of clients, including real estate developers, property owners, commercial tenants, cooperatives, and nonprofit organizations.

David Fries, who joined the firm in 2014, has been promoted from associate to of counsel in the firm’s Transactional Department. Fries focuses on commercial real estate and financing transactions, mezzanine finance, joint ventures and partnerships.

Fries received a bachelor’s degree in political science in 2011 from Washington University in St. Louis and earned his J.D. from Benjamin N. Cardozo School of Law at Yeshiva University in 2014, where he was an associate notes editor of the Cardozo Public Law, Policy and Ethics Journal. Among his notable clients, Fries has represented the Quinlan Development Group as it acquired, financed and developed a number of rental and condo projects and The Durst Organization in acquisition and financing work for the giant Queens Plaza Park residential development in Long Island City.