Firm’s Second Cannabis Lease Closes After Certificate of Occupancy Issue Is Resolved

Situation

Zeidel & Associates P.C. was retained to represent a tenant in a recreational cannabis dispensary leasing transaction in an upscale retail area in midtown Manhattan. This was the firm’s second New York City dispensary transaction in the past six months. The client planned to receive a conditional adult-use retail dispensary license from New York State as part of its program to award the first licenses to businesses owned by “justice-involved individuals.”

Approach

As part of our negotiations, we asked the landlord to represent that the leased space, which included portions of the building’s ground floor and basement and a mezzanine floor, had a valid certificate of occupancy (CO), but the landlord rejected the request. Our research uncovered that the landlord did not have a CO for the entire leased space: the original 1956 CO permitted the basement to be used for storage and shipping and the ground floor to be used for a retail store. There was no mention of the mezzanine level. However, an expired temporary CO from 2018 did reference the mezzanine’s use for retail but made no reference to the use of the ground level.

Zeidel & Associates consulted with the tenant’s architect to confirm our conclusion: the lack of specificity in the COs, coupled with the landlord’s unwillingness to make representations regarding them, exposed our client to unwanted risk, which, worst case, could involve the city requiring our client to demolish the mezzanine for an illegal installation. After exhaustive negotiations, the landlord agreed to obtain a CO, at its cost, that indicated that the mezzanine level could be legally used for a store.

Result

At the 11th hour, however, the landlord refused to represent in the lease that it owned the premises, as we had asked. Zeidel & Associates learned that the landlord did not, in fact, own the building but rather leased it under a ground lease. While this complication might have puzzled another firm and derailed the negotiations, our extensive experience with ground leases enabled us to quickly review the ground lease documents and understand what representations, warranties and covenants we needed to protect our client. The landlord agreed, and we closed the deal quickly.

Our client was so pleased with our ability to navigate the complexities of this transaction and negotiate a favorable lease that they asked us to handle three more dispensary leases, which are currently underway.