Legalize It – Real Estate and Pot in Colorado
(This is the second part of a two-part series on Colorado’s unique marijuana laws and their impact on real estate, property rights and the business of REALTORS®. In the November issue, I covered the uncertain status of Colorado’s state marijuana laws in relation to federal drug law and the implications on property ownership. In Part Two below, I will address some best practice tips and other considerations for REALTORS®, property managers and their clients when dealing with marijuana and real estate.) Click here to read the full version of this article. Click here to read Part 1.
Real Estate and Pot in Colorado – Best Practice Considerations
By Scott Peterson, CAR General Counsel
As we established in last November’s article, Colorado’s marijuana laws are in direct conflict with federal drug law. Further, based on the Supremacy Clause of the US Constitution, when a conflict exists between state and federal law, federal law generally prevails. This is unequivocally the case when it comes to drug law.
From the federal government’s perspective, marijuana still falls under Schedule 1 of the Controlled Substances Act, which is to say that it has: 1) a “high potential for abuse;” and 2) no “currently accepted medical use.” In the simplest terms, marijuana is “illegal.”
Enforcement of federal drug law falls to the Department of Justice under the Executive Branch of the U.S. government. Since 2009, the Department of Justice has essentially adopted the “position” that it will not enforce federal drug law when it comes to marijuana in states that have legalized it for medical and/or recreational purposes. Unfortunately, that is only a federal “position” and not a federal “law” that can be relied upon by the banking industry, insurance industry, mortgage or other industries that strictly adhere to federal law.
In addition to the confusion created among real estate’s directly related industries, the tenuous nature of the federal government’s “position” on marijuana laws creates some practical concerns for buyers, sellers, landlords, tenants and REALTORS® as they navigate real estate transactions in Colorado.
Buyers and their REALTORS®
Residential property owners in Colorado now have the state constitutional right to grow marijuana inside their residence for their own personal use. As a result, it is increasingly common for REALTORS® to encounter homes with existing grow facilities (or evidence of former grow facilities) as they tour properties with buyers.
REALTORS® working with buyers as they contract for a home with an existing or former grow facility need to make sure the property inspector is aware of the grow facility and is paying particular attention to any modifications that have been made to the home’s plumbing or electrical systems to accommodate hydroponic (water) grow systems or high powered grow lights. These modifications are often made by the homeowner – as opposed to a licensed contractor – and may not have been performed pursuant to applicable building code(s).
Another important consideration for an inspector is the potential existence of mold. Indoor grow systems are traditionally water-based and often require standing water. In addition, more sophisticated grow facilities will increase the growing area’s overall humidity to improve growing conditions. Both of these situations increase the possibility of mold presence within the home and additional care needs to be taken by a property inspector or other expert as they are reviewing the property.
Another consideration for REALTORS® representing buyers is the matter of disclosure. Importantly, the existence of a grow facility is not a mandated property disclosure for the seller. In the case of a current/active grow facility, its existence is obvious, and no disclosure is necessary. In the case of a former grow facility, the seller may decide to disclose, but has no legal obligation to do so. On the other hand if a buyer’s agent, for whatever reason, happens to know of the existence of a former grow facility at the property their buyer client is considering, a reasonable argument could be made that the buyer’s agent does have a duty of disclosure to their client.
Finally, if a REALTOR® is representing a buyer who is purchasing a property and the buyer wants the grow facility to remain with the residence, be very cautious of how this is structured in the contract. Lenders will not want to see “marijuana grow equipment/facility” listed under the “Inclusions” section of the contract. Rather, the offer should be written to generically describe the “lights” or “supplemental ventilation system” or whatever the case may be in the specific circumstance. Avoid any references to “marijuana” within an offer, regardless of the circumstances.
Sellers and their REALTORS®
The important factors for sellers in a real estate transaction on a property with a current/former grow operation are not as extensive as buyers. From my perspective, the most basic “staging” advice that a REALTOR® can offer their seller client as they assist them in preparing the house for the market is: “Shut down the grow facility while the home is on the market.”
Again, the growth of marijuana is legal within the state and the federal government has suspended enforcement of its own laws. Assuming that a seller is complying with state law in terms of plant quantity, building codes, etc., there is little opportunity for criminal liability. That said, a seller does potentially incur some risk in making access to their grow facility available to the general public through showings, open houses or property tours. Alternatively, mysteriously locking off a section (the grow facility) of the residence creates questions and confusion among potential buyers and may impair marketing efforts. For a variety of reasons, it is generally best to remove the grow facility during the listing period.
The other potential consideration for sellers is the matter of property disclosures. As mentioned above, marijuana use/growth is not a mandated seller property disclosure. Obviously, issues that may impact electrical, plumbing, existence of mold, or other environmental issues (presence of pesticides/herbicides) likely are mandated disclosures. A seller can always choose to disclose and, in some cases, that may be the best option. In either case, REALTORS® should have a thoughtful discussion early in the process to inform their seller clients regarding all disclosure considerations.
Landlords and their REALTORS®
Subject to the conflict with federal law, an individual’s right to grow/possess/use marijuana within their own property is clear and now authorized by the State of Colorado’s constitution. In situations where a lease is involved, that right is much less clear.
Generally speaking, a property owner has both the right and obligation to control the activities that take place on his/her property. That includes the right to restrict or prohibit the growth/possession/use of marijuana on leased premises. From a risk management perspective, I would encourage a Colorado residential landlord/property manager to specifically prohibit marijuana uses by a tenant in a lease. Whether or not a manager or landlord cares to enforce the provision is up to them, but at least they will have the clear right to do so.
Marijuana growers and users are not a “protected class” for the purposes of Fair Housing or other state/federal legislation. A property owner has a right to discriminate against them for the use/possession/growth of marijuana. While this is even the case in instances of “medical” marijuana, extreme caution should always be taken to ensure that no legitimate allegations of discrimination can be made against a property owner related to any other protected categories.
It is also important for property owners to be aware that most property insurance policies reserve the right to deny coverage for casualties based on illegal activities. As we have clearly demonstrated, marijuana is an “illegal” activity under federal law. For the purposes of example, imagine a grow facility’s high powered lights catch fire and a property burns down. Theoretically, a property insurer could attempt to deny coverage to the property owner due to the fact that the casualty was caused by an “illegal” activity.
Similarly, most loan documents specifically restrict the use of loan proceeds from being used for illegal activities. Allowing marijuana activity in a leased property could put the property owner at odds with existing loan covenants and allow a lender to call a note. This has occurred regularly in commercial leases when properties are leased to commercial marijuana tenants. Many property owners are then forced into expensive secondary market loans when traditional lenders accelerated the loans.
Regardless of a property owner’s political sentiments related to Colorado’s marijuana laws, it is critical that they consider its implications in relation to their property. REALTORS® and property managers need to make sure that their clients are making informed decisions as they consider tenants and, most importantly, a tenant’s growth of marijuana on leased premises. Clearly, there is more to consider than just the potential impact of increased electrical and water bills.
Tenants and their REALTORS®
There are also important factors for REALTORS® representing tenants who desire to grow marijuana on leased premises. Obviously, if it is in a “commercial” context, municipal restrictions will need to be considered. Local municipalities may opt in or out of commercial marijuana uses and, even in cities that allow it, there are substantial restrictions related to zoning, proximity to schools, etc. Make sure your tenant clients are considering properties that are suitable for their intended use and that landlords are amenable to that use.
In residential leases, I would encourage tenants that intend to grow marijuana for their personal use to have a candid conversation with a potential landlord up front. If a landlord is not going to allow a tenant to grow marijuana on leased premises, it is much better to know that before moving in and setting up an expensive grow facility. Even in the case that marijuana is not specifically prohibited in the lease, it is likely that a landlord could evict a tenant for growing marijuana.
Under any analysis, Colorado is at that forefront of evolving marijuana laws in the United States. As such, there are unique implications to Colorado real estate that are primarily driven by our conflict with federal law. REALTORS® have a front row seat to the action but need to make sure that their clients are able to make informed decisions when it comes to real estate transactions.