Cannabis M&A: Get to Know Your New Landlord

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Getting to closing on a cannabis M&A transaction is always a hurdle (read about that process in detail here). There are always a lot more contingencies to closing for cannabis M&A transactions than for run-of-the-mill businesses that don’t operate in highly regulated fields (e.g., cannabis acquisitions will require approval from state and possibly local agencies).

One closing condition that people often don’t focus on enough is landlord consent which often can be a huge challenge. In this post, I’ll look at why this is even an issue, and what makes it so challenging.

For the purposes of this post, I’ll focus mainly on business and asset purchase transactions. In California, M&A transactions generally involve business purchases given rules that prohibit transfer of license. Other jurisdictions may allow licenses to be transferred or at least obtained more easily while a business continues to operate and so purchases of all assets of the business (including their leasehold interest in the property they use) may be more common.

Whether someone is buying some of a cannabis business, all of a cannabis business, or just the assets of a cannabis business, the buyer is going to need to get the landlord that owns the property used by the seller or target company to sign off. Why? Because in virtually any lease, there are restrictions on assignment of the lease itself (automatically requiring landlord approval for any asset purchase) and leases will also specify that sales of certain percentages of equity in a cannabis business is treated as an assignment and requires landlord approval.

Landlord approval over assignments or changes of control is a critical lease component for landlords who want to know who they are leasing to. By prohibiting changes of control without landlord approval, landlords can have security that tenants won’t just try to sell their business to random people who may not be sufficiently capitalized to deal with above market rent (also very typical in cannabis leases).

As an aside, change of control language can be very highly negotiated as to the percentage of changes of control sufficient to trigger landlord consent requirements. If I rep a landlord, I want the percentage threshold to be low so my client always know who is operating the business. If I rep the tenant, I want it to be higher so the client is not burdened with going to its landlord every time they fundraise or someone sells their stock in the company.

I have said this before and I am sure I will say it again many more times, but the landlord-tenant relationship in this industry is the worst and most dysfunctional relationship of all. Landlords are overly suspicious of their tenants given the federal status of cannabis and long-time anti-cannabis prejudices that haven’t seemed to fade away, and often charge way over market for a lease. Tenants, on the other hand, are forced into what they often view (sometimes rightly) as very one-sided leases that require them to give up a ton and know that landlords have special leverage over them given that in many states, licenses can’t be moved (or at least can’t be easily moved) to new places.

So closing the loop here, in any M&A deal where a lease would be assigned or all or the majority of a business would be sold, you can virtually guarantee that the landlord will need to sign off in some capacity. And that means its as good idea as possible to get on the horn with that landlord as soon as humanly possible. There are two main few reasons for this beyond the obvious reason that a buyer will need landlord approval.

  • It’s good to find out as soon as possible whether the landlord is the right “fit”. If a buyer and the landlord don’t get along well from the get-go, that’s something that the buyer should evaluate when deciding to enter into the transaction or to close it. Obviously, this is better to do even before signing a deal to save money if it’s a total deal-breaker.
  • In many M&A deals I’ve worked on, especially where smaller companies are bought, the original leases are not good for a host of reasons and we end up asking for a new lease. From the landlord’s point of view, there’s really little reason to spend time negotiating a new lease. Some landlords are still willing to do it, and this is also good to find out early on.

In cannabis M&A transactions, there are tons of moving parts and it almost seems like there’s not enough time in the day to get done everything that needs to get done. Meeting, interacting with, and getting to know a future landlord isn’t just a smart idea, but is something that wise buyers prioritize.

Source: https://harrisbricken.com/cannalawblog/cannabis-ma-get-to-know-your-new-landlord/

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