Guest post contributed by Abe Cohn to THC Legal Group and can be read in full HERE
Our cannabis attorneys are often asked to provide guidance in balancing and prioritizing cannabis agreements that are mutually dependent – if the execution of one contract is contingent on the execution of a contract with a third party, which to enter into first? For example, a cannabis company interested in opening a dispensary will likely need to raise capital from an investor, rent property from a landlord, and obtain a license from the state. However, in order to proceed with one contract, the other contracts must first be satisfied and agreed upon. One can imagine why this is a challenging situation – Let’s explore it further.
A Circle of Contractual Contingencies
The nature of these contingent agreements is such that states will often only approve the location when the applicant has first secured a signed lease. In parallel, landlords may only grant a lease if the state has approved a license and the business has the proper financial backing. Finally, investors may only agree to fund the business if a lease and legal license are in place.
In this circle of contingencies, each component is dependent on its parallel part. In order to solve this problem, cannabis business owners should utilize standard conditional agreements with agreed-upon closing periods.
Using Conditional Agreements
Cannabis business owners should draft commercial leases with contingencies that allow for cancellation if either:
- the State rejects the license application, or
- the tenant determines that the business model is simply untenable during the first few months of the lease term.
Investment contracts in the marijuana industry may be structured under a similar set of conditions. An equity purchase or loan agreement between a marijuana business and an investor may be contingent on their licenses’ approval by the state and procurement of a lease agreement. If both of these conditions are not met, the equity and/or loan agreement need not become binding. Speak to a competent Cannabis attorney to learn more about this process and the legal mechanisms available to assist a marijuana business in navigating through this tricky terrain.
Abe Cohn manages THC Legal Group, a team of Marijuana Lawyers specializing in the marijuana industry.