Can Tenants Sue to Block Leases for Legal Marijuana Uses?

Forty states have passed laws legalizing the sale of recreational and/or medical marijuana. If you’re in one of them, you may be able to make a lot of money by leasing to a properly licensed marijuana sales operation. But you also need to understand the legal risks you’d be taking. 

Risk of Federal Prosecution

Legalized marijuana is a myth. The manufacture, possession, and/or distribution of marijuana is illegal under a federal law called the Controlled Substances Act. The CSA prohibition applies even in states that have passed legislation purporting to legalize marijuana. Result: Those involved in the production and sale of the product, including the landlords that lease to them, are subject to federal prosecution even if those activities are legal under state law. 

So, why are roughly 10 percent of all commercial landlords in legalized marijuana states leasing to marijuana businesses? If what they’re doing is illegal, why aren’t they in jail? Answer: The current policy of the U.S. Justice Department’s is not to enforce the CSA and other federal laws banning marijuana in states where those activities are permitted, provided that the state’s law doesn’t pose a threat to public safety, public health, or “other law enforcement interests.” The DOJ will take legal action only when it believes it necessary to prevent: 

• Distribution of marijuana to minors; 
• Marijuana revenues from going to criminal enterprises, gangs, and cartels; 
• Diversion of marijuana from legalization to non-legalization states;
•  State-authorized marijuana activity from being used as a cover or pretext for trafficking of other illegal drugs or other illegal activity; 
• Violence and use of firearms in marijuana cultivation, use, and sales; 
• Drug-intoxicated driving and other adverse public health consequences associated with marijuana use; 
• Marijuana growing and its attendant public safety and environmental dangers on public lands; and 
• Use and possession of marijuana on federal property. 

Risk of Private Litigation

The legal danger of marijuana leasing isn’t limited to prosecution. Consider the following scenario, which is based on an actual case from New York where state law permits the retail sales of marijuana. 

WHAT HAPPENED

The owner of a 103-acre technology center leases a unit to a tenant for use as a retail marijuana dispensary. The tenant has obtained the state and local permits required to operate the dispensary. However, none of the other tenants wants to have a marijuana dispensary at the center. So, they go to court seeking an injunction barring the proposed marijuana lease. The center is run as a condominium in which all tenants own their respective units. The tenants claim that the proposed marijuana lease violates not only federal law but also restrictive covenants contained in the center’s bylaws, including:

Covenant 1: [N]o part of the Property or any improvements thereon shall be used or occupied for any purpose which in Declarant’s opinion constitutes a nuisance or is noxious or offensive or results in the emission or creation outside of any building of fumes or noise; or violates any federal, state, county or town laws (emphasis added);

Covenant 2: No . . . unlawful use shall be made of the property nor any part thereof and all valid laws, zoning ordinances and regulations of all governmental bodies having jurisdiction thereof shall be observed (emphasis added); 

Covenant 3: No Unit Owner shall permit anything to be done, or kept in his Unit, or in the common elements, which will result in an increase or the cancellation of insurance on the Building, or contents thereof, or which would be in violation of any law or regulation (emphasis added).

YOU MAKE THE CALL

Did the New York state court grant the injunction?

A.         Yes, because the marijuana lease violates federal law and the center’s restrictive covenants

B.         No, because the tenant has valid state and town permits to operate a dispensary

C.         Yes, because private parties can sue to enforce federal marijuana laws even in states where marijuana is legal

D.         No, because state marijuana laws override the center’s restrictive covenants

ANSWER

1. The court granted the injunction because the marijuana lease ran afoul of federal law and the restrictive covenants.

EXPLANATION

The current DOJ enforcement policy we discussed above clears the way for landlords to enter into marijuana leases without undue fear of prosecution. However, there’s another risk that some landlords may overlook: being sued by other tenants claiming that the marijuana lease violates the use restrictions contained in the lease or, in this case, condominium bylaws. The fact that the covenants banned uses prohibited by federal law bolstered the tenants’ case. But because they were seeking not just money damages but also a preliminary injunction to block the lease pending the outcome of the litigation, they faced the added burden (which the tenants were able to meet) of persuading the judge that:

• They were likely to prevail on the merits—the tenants met this prong because they had federal law on their side;
• They would suffer “irreparable harm” if the injunction wasn’t issued—in addition to generating smoke, odors, and heavy traffic in the parking areas, the dispensary’s busy retail operation was incompatible with the center’s purpose and use as a light-industrial facility; and
• The irreparable harm they’d suffer outweighed the harms the landlord would suffer if the injunction was issued—although it would torpedo the dispensary lease, the injunction wouldn’t deprive the landlord of possessing and using the property for a different use.   

So, A is the right answer [Stony Brook Tech. Ctr. Ass’n v. SRM 23 LLC, 2025 N.Y. Misc. LEXIS 7608, 2025 NY Slip Op 25210, 2025 LX 407522].

WHY WRONG ANSWERS ARE WRONG

B is wrong because state and local permits to conduct marijuana operations only make the business legal on the state and local level. They don’t make it legal under federal law. As a result, the permits don’t insulate the landlord and tenant from the risk of prosecution or, for that matter, private legal action asserting rights under covenants that require compliance with federal laws.  

C is wrong because it’s overbroad. Private individuals must have what’s called “standing” to bring a lawsuit seeking enforcement of federal laws. Simply being a citizen or taxpayer isn’t enough. To have standing, the plaintiff must show that it would suffer harm that’s: 

• Concrete, particularized, and imminent;
• The result of the defendant’s conduct; and
• Redressable by the court. 

The tenants in Stony Brook had standing not simply because the marijuana lease was illegal under federal law but also because it directly violated the restrictive covenants contained in the center’s bylaws.  

D is wrong because, as the court acknowledged, there’s no case authority—at least in New York—to support the notion that state cannabis laws override a restrictive covenant banning uses that are illegal under federal law.

TAKEAWAY

Before leasing commercial property for marijuana cultivation or sales, you must ensure that the proposed use is legal under the laws of your state and municipality and that the tenant has secured the necessary permits to carry out those activities at your property. The moral of the Stony Brook case is that there’s also one other thing to verify—namely, that the proposed use doesn’t violate any restrictive covenants contained in your current leases and property rules and bylaws. 

This could be a problem where those covenants prohibit activities that run afoul of federal laws. So, if you’re planning to get into marijuana leasing, you’ll have to trim back those use restrictions to allow for marijuana operations, provided that tenants have proper state and local permits and licenses to engage in those activities.