The Illegal Cannabis ‘Whack-A-Mole’ Problem Finally Solved?

Lynn C. Schulman, a councilman for New York City, filed a measure in April 2023 that would make it illegal for landlords to lease to business tenants who are engaged in the unauthorised sale of cannabis. On Thursday, June 22, the bill was sent to and passed by the entire Council after being authorised by the Committee on Public Safety. The bill will now be delivered to Mayor Eric Adams’ desk, having been given 30 days to sign it into law or veto it.

If passed, the bill would dispatch city inspectors to the thousands of alleged unlicensed cannabis outlets. The landlord might be fined between $5,000 and $10,000 if the inspector discovers that illegal cannabis is being sold on the property. The penalty can be avoided if the landlord can show evidence that eviction proceedings have started since the initial inspection. A second inspection would then happen. The measure would permit the mayor to select any state agency to inspect for such offences in addition to the state agencies already allowed to do so. Even though the imposition of fines on landlords may significantly lower the number of unauthorised cannabis outlets, several provisions of the bill may allow for these illegal stores to take advantage of a loophole.

Since Governor Kathy Hochul gave the Office of Cannabis Management (OCM) authority to enforce recently authorised by the state’s FY 2024 Budget, actions against the illegal enterprises themselves have already started in earnest. The Governor’s report that roughly $11 million worth of illegal cannabis goods have been seized so far around the state, and the passage of the bill comes at the same time. It’s been suggested for a long time that the extra step of imposing penalties on landlords who intentionally rent to unregistered operators should serve as a disincentive to the black market.

The Coexistence Challenge: Legal and Illegal Cannabis Markets

The Marijuana Regulation and Taxation Act (MRTA) established the legal cannabis industry in New York in March 2021, and the strict regulatory framework of the OCM constrains it. In contrast, the illegal cannabis industry is much larger, older, and unconstrained by the limitations placed on valid license holders, such as the payment of taxes and public safety restrictions on operating in areas of concern or selling to underaged children.

It was obvious that the two industries could not really coexist before the first state-licensed dispensaries opened their doors. Since the MRTA legalised cannabis throughout the state, the unlicensed market (also known as the legacy market, the grey market, or the black market) has opportunistically exploded. It has continued to spread at an alarming pace in contrast to the legal market, whose rollout has sputtered along under the weight of bureaucracy. Even California, which has one of the oldest adult-use (recreational) cannabis programs in the country, sees up to $8 billion in illegal sales annually, bringing in a lot more money than the legal industry does.

In response to the issue, politicians at different levels of state government have proposed measures to hold landlords accountable for leasing unlicensed cannabis businesses. The aim is to discourage landlords from entering into such leases or to impose penalties if they do. By doing so, operators would struggle to find suitable space or face eviction if they have already signed a lease. This would force illicit operators to either go completely underground, cease their operations, or consider entering the legal marketplace by obtaining a dispensary license. However, many existing operators may find this option unfeasible.

New York took the lead by prioritising justice-involved license applicants through its Conditional Adult-Use Retail Dispensary (CAURD) program. Despite this, after over two years since the passage of the Marijuana Regulation and Taxation Act (MRTA) and the submission of thousands of adult-use cannabis applications, only a limited number of legally compliant dispensaries are operational in New York. Landlords who lease to unlicensed operators cannot claim ignorance to evade fines. The proposed bill poses a significant risk of enforcement action against such landlords, especially after receiving warning letters from city agencies that undermine any claims of ignorance. Falcon Rappaport & Berkman can assist landlords in drafting leases with stronger use restrictions to discourage unlicensed cannabis sales and simplify eviction procedures in case of any illicit activities.

Challenges and Considerations

Imposing fines on commercial landlords and encouraging them to evict illicit cannabis tenants is a crucial step in the implementation of New York’s legal cannabis market. Without these measures, legitimate license holders would remain at a disadvantage, and both consumers and the general public would miss out on the advantages of a well-regulated marketplace.

However, it is essential to carefully consider the approach to fining commercial landlords or implementing other enforcement actions. A specific provision in the proposed bill, section C.1., states that written notices and potential fines apply only to properties exclusively used for selling illicit cannabis and “not occupied for any other licensed or lawful purpose.” While the bill may still result in fines for landlords of unlicensed cannabis stores, this provision means that if the premises are used for another lawful purpose alongside illicit activities, the fines may not apply. This creates a potential loophole where landlords of bodegas and convenience stores selling cannabis products could potentially avoid penalties under this bill.

We must recognise the complexity and adaptability of the unregulated market. This bill would certainly hinder significant competitors to licensed adult-use dispensaries if enacted. However, it falls short of addressing the entire unregulated cannabis market in New York. Regular reassessment of enforcement actions and implementing well-crafted policies will be necessary to foster a thriving adult-use cannabis industry in New York.

Bottom Line

Approving the measure in New York City to fine landlords and encourage evictions for unlicensed cannabis sales is a crucial step in regulating the legal cannabis market. While it addresses the issue of illicit operators, some potential loopholes and challenges need to be carefully considered. Ongoing evaluation, reassessment of enforcement actions, and well-crafted policies will be necessary to ensure the success of the legal adult-use cannabis industry and effectively curb the unlicensed market in New York.

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