Common Cannabis Industry Contract Issues You Should Consider

Common Cannabis Industry Contract Issues You Should Consider

By Cátia Kossovsky, Esq.

If you’ve been in this industry for more than 5 minutes you know that there are many legal issues that come up. For each legal issue raised, multiple other additional issues generally also arise.  While this article will not come anywhere near addressing all of these legal issues, there are some that appear most commonly in cannabis industry contracts.  These tend to be included in a majority of contracts, but they are not the only ones that should be included. Situations tend to differ from transaction to transaction, and additional protections should be assessed and reassessed in order to address those concerns as well as any changes in laws and regulations.

Cannabis Contracts

For starters, it’s of course extremely important to understand and provide general protections in contracts addressing the fact that marijuana is federally illegal.  This can be covered in agreements to show that the parties understand the federal illegality and that they are entering into the agreement in spite of such fact and in strict compliance with state-specific laws and regulations.  Depending on the nature of the contract, it is important to have the parties understand that property seizure and criminal consequences can affect the parties if not acting in compliance with state laws and regulations.

Additionally, the inclusion of arbitration and indemnification language and the selection of state court jurisdiction over disputes is also of extreme importance.  If federal courts are permitted to adjudicate a cannabis contract dispute, it is likely that the federal court would apply the Controlled Substances Act instead of state laws and regulations which permit the cannabis business to operate.

Even before entering into contracts with third parties, it is also important to look at the company’s own organization.

Cannabis Contracts and Relationships

If the business has more than one owner, how does the company’s governing documentation address a partner whose status could jeopardize a cannabis license?  Are there provisions in place to salvage the license by terminating relationships with those jeopardizing parties?

Therefore, prior to entering into agreements with third parties, such as distribution, supply, wholesale, or endorsement agreements, and many more everyday transactions, it is highly advisable to have a cannabis corporate attorney review the document and understand the transaction.  If cannabis products exchange hands, it is prudent to include language in these agreements with respect to testing product for THC and CBD content percentages, pesticides, and other contaminants.  Also of importance, is how long the recipient of product has to inspect the product upon delivery, how to properly store, handle, and label the product.  If there is any marketing or promotion of the product, the parties need to be aware of, understand, and comply with state regulations.  As a result, language is included in the contract with respect to representations and warrants with respect to compliance with applicable federal and state laws and regulations.

Cannabis and Real Estate

If real estate is being acquired, are there zoning restrictions?  Do lease terms last longer than a license term? To satisfy regulators, since most licenses are valid for one-year terms, lease terms should encompass the entire licensing period so as not to disrupt business operations. Furthermore, since licenses are generally restrictive in access to premises containing cannabis, it’s important to see what lease agreements provide with respect to landlord or agents entering the premises.  For a more detailed understanding of real estate issues, read State-Legalized Marijuana and Real Estate.

As you can see, many issues were presented here, and as indicated they tend to lead to additional questions.  So if you have any, feel free to reach out to me or anyone of our corporate attorneys who can provide you with personalized assistance for your specific legal needs.

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