For businesses setting up in the cannabis industry in Rhode Island, there are enough regulatory hurdles to contend with without creating extra problems with the business contracts you draft and sign.
Cannabis contracts and leases create potential legal, tax and licensing hurdles that lead to extra unwanted headaches for business owners. These headaches can even escalate into full-blown legal disputes and litigation over leases and contracts that have severely impacted some operators in the cannabis industry.
Because of the extra challenges involved in running a cannabis business, it’s important to protect yourself from the common issues that can turn problematic. That requires the type of in-depth knowledge of the cannabis industry that only comes from experience.
The bottom line is that when preparing business contracts, without the right advice and attention to detail, you are placing unnecessary risks on your business.
At Cannabis Law Solutions, our lawyers have helped many cannabis entrepreneurs prepare the contracts and leases that protect their businesses and provide the best foundation for a profitable future in the industry.
What’s wrong with generic cannabis lease agreements?
Cannabis commercial space leases are complex by nature. Entrusting the future of your cannabis business to the types of generic agreements or templates downloaded from the web is inadvisable. Yet many new cannabis businesses attempt it in the mistaken belief that it will save money.
The amount you will save, when weighed against the risk of a poorly drafted cannabis business contract or lease agreement, is negligible.
Besides, while many types of businesses successfully use templated agreements without issues, cannabis businesses are under the microscope in Rhode Island and elsewhere. The industry is just starting and everyone’s eyes are on the industry, waiting to jump on mistakes.
Most commercial real estate leases include a clause related to “applicable law.” This usually states something like the following:
“…tenants cannot use the premises for any unlawful purposes, including, but not limited to, using, manufacturing, selling, storing, or transporting illicit drugs or other contraband, or violate any law or ordinance, or commit a waste or nuisance on or about the premises.”
While you may argue that cannabis has been legalized under Rhode Island law, it remains illegal under the federal Controlled Substances Act. That is unlikely to change anytime soon, so by using a generic agreement, you may be opening your business up to contractual disputes.
You must address the “disconnect” between state and federal laws. Cannabis business lease agreements need to remove exclusions from federal or state laws that might inadvertently prevent the operation of a cannabis business on the premises to be leased.
They should also explicitly state the “permitted use” activities on the premises, such as growing, manufacturing/extracting, dispensing or retailing.
This is just one notable example of why it’s important to consult with a knowledgeable cannabis business lawyer before drafting the contracts that will help to define your cannabis business in the years to come.
Other potential issues with cannabis lease agreements
The length of the lease term may not be given due consideration: this should be discussed with an experienced cannabis business lawyer before committing.
Local zoning and real estate location issues: the premises must comply with often-stringent local municipal regulations as well as state laws — and cannabis businesses need to check who the neighbors are.
Property alterations and utility use: the alterations that the landlord consents to acceptable water, electricity, and air quality/circulation usage must be specified in the contract.
Property insurance: most policies are not suitable for cannabis businesses and those that are suitable for a landlord may be prohibitively expensive for your business.
Profit-sharing: some commercial landlords expect a profit-sharing agreement that may not be suitable (or legal) for your cannabis business.
Hazardous materials/waste disposal: generic lease agreements that prohibit the use and storage of “hazardous materials” will not work if it could be argued that cannabis is a hazardous material — so this potential clause needs to be addressed.
Why is it so critical to get cannabis contracts right?
Without addressing the above in your contracts and lease agreements, you are risking the potential for disputes, litigation, and expensive delays in establishing and growing your cannabis business in Rhode Island.
You need to draft cannabis contracts and lease agreements that cover every angle — which can be challenging in such a rapidly changing sector.
Aim for clear, easy-to-understand and unambiguous language that sets out the terms of the agreement. Never sign any contract before having it reviewed by an experienced cannabis lawyer who is familiar (and up-to-date) with the local Rhode Island laws and regulations.
This will safeguard your interests while you remain focused on getting your business established.
How our cannabis attorneys can help you draft effective contracts
When you draft the necessary contracts for a cannabis business in Rhode Island, the support of our knowledgeable cannabis business attorneys can provide the complete peace of mind you are looking for.
We’ve watched the cannabis industry grow around the U.S. and have helped many entrepreneurs not only set up but flourish in their state. The foundation of this is watertight contracts and lease agreements that address local, state and federal issues.
With Rhode Island legalizing recreational cannabis but federal laws still prohibiting it, we can help you address this major disconnect and protect you from the time of business formation and beyond, as you grow and become more established.
The strongest cannabis businesses in Rhode Island will be those that have planned, prepared and protected themselves from the many complexities and challenges ahead — starting with your business contracts.
For informed legal advice, call 866-329-0729 for a consultation with a knowledgeable cannabis attorney at Cannabis Law Solutions.
Whether you are looking to form a limited liability company (LLC) or a corporation, our experienced business lawyers can discuss the pros and cons of both and help you incorporate your business with the optimal structure to achieve your goals.
Cannabis business licenses
If you want to run a cannabis business, you will need a valid business license issued by your state authority as well as local permits. Eligibility criteria are likely to be stringent and we can help you navigate the often-complex license application process.
Cannabis corporate documentation
Whether you need to prepare for a license application, transfer of business ownership, change of corporate structure, transfer business location, or another business process, we can help you identify and draft the documentation you need to operate legally in your state.
Cannabis administrative law
State authorities watch licensed and unlicensed cannabis businesses closely. If you violate regulations, you could face an administrative penalty. Our attorneys can provide representation or help you prepare for an administrative hearing, settlement conference or appeal.
Cannabis disputes and litigation
Whether you have a dispute with another business, a legal issue with one of your partners or a licensing or administrative issue, you may need legal assistance to help resolve it. We are adept at alternative dispute resolution methods as well as civil litigation.
As the cannabis industry emerges in states around the U.S., it is more heavily regulated than most other industries. We can help your business navigate the red tape and plan to stay on the right side of the regulatory authorities in whichever state you are based.
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Opening a successful and legal marijuana dispensary begins with hiring a knowledgeable cannabis attorney and learning all that you can about this industry and the applicable laws. The next step is to set up a corporate business structure and create a retail business plan, which an attorney can also help you with. You will also need to research potential locations for your business to find out where licensing is legal.
Next, obtain the necessary licensing to operate your cannabis business and ensure that your operational infrastructure follows all laws and regulations. If you are not growing or producing your products yourself, you will need to contract with cultivators and product manufacturers to supply your business.
Before you begin the process of applying for a cannabis license, you need to establish a business from which to apply. The state will not consider an application from an individual; instead, the applicant must be a business entity in good standing with the state.
Your business will begin when you choose a legal entity and file the appropriate paperwork with the Secretary of State. After that, you will file with the IRS and obtain a taxpayer identification number.
You would start with articles of incorporation and include other key corporate provisions in the bylaws that state how your company will be governed. If your business is a partnership or limited liability company, you will need an operating agreement. Depending on your line of business, you may also need other licenses to operate.
In addition, you will also need other corporate documents that the Department of Health will want to see when they are considering your cannabis application. Of importance here, your application would ask you to provide:
Your articles of incorporation
Certificate of good standing
An attorney can help you both choose the appropriate business entity and draft and file any necessary documentation. When you are seeking to enter the cannabis field, it is important to get your business formation process right to make the best possible impression on the Department of Health. Doing so will allow you to devote as much time as possible to your cannabis-related business arrangements.
As a precursor to even being able to apply for state approval of your cannabis business, you must have a properly formed business entity. As a result, the first documentation you must file is the documentation establishing your business.
Next, you will need to obtain a tax identification number by registering with the IRS. In addition, the licensing application also asks you to provide your current state business license registration.
Beyond your general business licenses, you would also need specific permission to operate a cannabis business. This involves a very strict registration process where the state will closely scrutinize your application. You can expect the state to review each of the licenses that they request since it wants to be sure that your business complies with laws before they are granted the right to operate in the cannabis industry.
Compliance means making sure that you follow the myriad of laws that apply to your state’s cannabis businesses. Further, the regulatory landscape is fast-changing as the state gains more experience overseeing the businesses.
What this means for you is that knowledge is one of the most important things that you can have. Not only do you need an expert in the current laws, but you also need to be able to anticipate future changes in the law. This means that each business needs an expert who understands the laws and can advise them as to the best means of following them.
Also, compliance also means that you have sound policies and procedures in place that govern your business. The Department of Health is already looking at your policies when they evaluate your initial application. However, they reserve the right to audit and inspect your business to verify that you are complying with the law. You should always be ready for an inspection by documenting how you are following the regulations.
The best way to show compliance is by keeping your paperwork organized and conducting your own internal audits. The Department is interested primarily in your safety procedures, so you should be ready to show how you are following your own procedures. Further, you should always reevaluate your own policies to see if there are any weaknesses or changes that can be made to strengthen them.
The major thing that the Department of Health is interested in is the safety of both the product and the operation. As a baseline, the state wants to know who all of the owners are and the people who will be working in the operation.
While there are common documents among all the application classes that the Department is seeking, there are also special requirements for each of the categories.
For example, when the Department is evaluating a manufacturing application, it will pay close attention to measures that your business takes to ensure proper hygiene and testing methods. The Department also will pay attention to the manufacturer’s procurement practice and the security of its inventory.
With regard to laboratory submissions, the focus is partially on the testing processes and equipment that the business will use. The Department wants technical, scientific details of the exact tests and the quality control that the laboratory will use for testing. The emphasis is on ensuring product safety.
For courier businesses, the Department will scrutinize the safety and security of the delivery process, including the vehicles and the delivery routes that are used. The emphasis is on the safety of qualified patients, primary caregivers, and courier staff in light of the product being delivered. In addition, since there is interaction with patients, the Department wants to see how the applicant plans on protecting patient privacy.
Cannabis legalization often works in a series of steps. Broadly speaking, cannabis policy reform occurs in the following stages:
Prohibition: Criminal penalties apply for the possession or use of cannabis.
Decriminalization: Low-level criminal penalties are removed for cannabis usage (e.g., personal possession) and criminal penalties may be replaced with civil fines.
Medical legalization: Full medical legalization with commercial licensing and testing may come straight away or in a series of stages.
Legalization: State laws are changed to make any cannabis activity a crime no longer. Cannabis must be removed from the Controlled Substances Act and new rules added for the legal commercial cultivation, distribution, testing, and sales of cannabis.