The owner of a warehouse in Hialeah signs a long-term lease with a medical marijuana treatment center that wants the space for processing. The rent is above market, the tenant is well capitalized and the build-out is paid for by the tenant. At renewal, the property carrier asks for an updated tenant schedule, sees the new tenant and issues a notice of non-renewal. The building is now uninsured in sixty days, and the lender requires coverage. A cannabis tenant can be a good tenant, but the decision to lease to one is also an insurance decision, and it should be made before the lease is signed.
Why Property Carriers React
Many property carriers exclude or decline buildings with cannabis tenants because of federal law, the higher fire risk of cultivation and processing, the cash and inventory that attract theft and the possibility of government action against the property. A carrier that wrote a building as a warehouse or retail center may not be willing to keep it once the occupancy changes, and the occupancy change itself may need to be reported under the policy’s conditions. Failing to disclose a cannabis tenant can give the carrier grounds to deny a claim or rescind the policy.
What the Occupancy Means for the Building
Not every cannabis tenant carries the same risk. A dispensary in a retail center looks very different to an underwriter than a cultivation or extraction facility. Cultivation adds heavy electrical loads, irrigation and humidity inside the building. Processing with flammable solvents adds a much more serious fire and explosion exposure. Even a dispensary changes the building’s crime and liability profile because of the cash and inventory on site. The landlord’s policy should be written knowing which kind of tenant is in the space.
Finding Coverage That Fits
When the current carrier will not continue, specialty and surplus lines markets can usually write the building, though the premium, deductibles and terms will reflect the occupancy. Some landlords with mixed-tenant buildings find it more practical to insure the whole building with a market that accepts the cannabis tenant than to fight exclusions on a standard policy. Our article on lessors risk and tenant mix explains how one tenant can change the insurance for an entire building.
What to Require From the Tenant
The lease is the landlord’s best protection. It should require the tenant to carry general liability and product liability at meaningful limits, with the landlord and its property manager named as additional insureds on a primary and non-contributory basis and a waiver of subrogation in the landlord’s favor. It should require property coverage on the tenant’s improvements and equipment, since grow room and processing build-outs are often worth more than the building shell, and it should make the tenant responsible for damage its operations cause. Workers’ compensation, umbrella coverage and proof of coverage at every renewal round out the requirements.
The lease should also address code compliance for electrical and extraction work, inspections and access for the landlord and its insurer, and what happens if the tenant’s license is suspended or revoked.
Liability for the Landlord
Landlords can be named in lawsuits involving their tenants’ operations, from customers injured at a dispensary to claims tied to products or security incidents. The landlord’s own general liability should be confirmed to cover premises leased to a cannabis tenant, since some policies exclude liability arising from cannabis operations. An umbrella over that coverage adds protection for the building owner.
Worth Confirming Before You Sign
- Will your current property carrier accept a cannabis tenant, and has that been confirmed in writing?
- Does your general liability exclude cannabis operations on your premises?
- Does your lender’s loan agreement allow the occupancy, and will its coverage requirements still be met?
- Does the lease require the tenant’s liability, product liability and property coverage with you as additional insured?
- Who is responsible for the tenant’s build-out, electrical work and extraction equipment?
- What happens to the lease if the tenant loses its license?
Talk to Prestige Insurance Group
We insure commercial property owners across Florida and can review a cannabis lease and your building’s coverage before you sign. See our cannabis insurance page and our commercial property insurance page for more. Call the office nearest you. Se habla español.
Miami: 305-969-8776
Orlando: 407-993-2331
This article is general information and not legal advice. Consult qualified counsel about your lease and loan documents.
