Although Arizona has legalized the use of marijuana for medical purposes, federal law does not recognize or protect medicinal marijuana possession or use. This contrast creates a number of potential legal implications, including an interesting real estate lease issue decided on April 18, 2017 by the Arizona Court of Appeals in the case of Green Cross Medical, Inc. v. Gally.

The facts of the case are not in dispute. In 2012, John Gally, the owner of a commercial property located in Winslow, Arizona, entered into a lease agreement with Green Cross Medical. The intention of the lease was for Green Cross Medical to operate a medical marijuana dispensary if it obtained the necessary approval from the Arizona Department of Health Services.

However, less than two weeks later, Gally sought to revoke the lease.1 In response, Green Cross Medical filed a breach of contract lawsuit. Ultimately, the Najavo County Superior Court ruled in Gally’s favor, holding that because the lease was for the operation of a medical marijuana dispensary, it violated the law and was void for illegality.

Green Cross Medical proceeded to appeal the Superior Court’s decision. At issue before the Court of Appeals was whether a contract for the lease of real property to a party applying to operate a medical marijuana dispensary is void for violating Arizona and/or federal law.

Rather quickly, the Court of Appeals concluded that the lease is not illegal under Arizona law in light of the Arizona Medical Marijuana Act (AMMA), which exempts from prosecution dispensaries such as the one Green Cross Medical intended to operate. See A.R.S. § 36-2811(E).

Specifically, the court held:

An interpretation that allows a dispensary to lease premises for use compliant with the AMMA, but authorizes the State to prosecute a landlord leasing property to a dispensary associated with the AMMA (or a court to void an AMMA-compliant lease) would render the statute futile and violate A.R.S. § 36-2811(E).

The Court also determined that to declare the lease illegal under Arizona law, so as to preclude Green Cross Medical’s breach of contract action, would contradict the intent of the parties and the public policy underlying the AMMA. After all, both Green Cross Medical and Gally knew the purpose of lease at the time it was executed.

While the application of Arizona law to the subject facts was fairly straightforward, the issue of illegality under federal law proved more challenging. The federal Controlled Substances Act, 21 U.S.C. §§ 801 et seq., makes it unlawful to lease, use, rent or maintain any place for the purpose of distributing or using any controlled substance.

Simply stated, it’s illegal under federal law to lease property knowing it will be used for the illegal production or distribution of a controlled substance such as marijuana.

However, in citing a 2016 District of Colorado case captioned Green Earth Wellness Ctr. v. Atain Specialty Ins., Co., the Court noted, “the United States had shown an ambivalence in prosecuting medical marijuana cases when the use or distribution was authorized by state law.”

In fact, beginning in 2009, before the Green Cross Medical lease was signed, the United States Justice Department instructed U.S. Attorneys not to prosecute persons acting in compliance with state medical marijuana laws.2 This caused the Court to determine that “while the lease might technically be in violation of 21 U.S.C. § 856(a)(1)-(2), Congress has, for the time being, forbidden enforcement of that section for all purposes relevant to this case.”

The Court went on to hold:

Given the federal government’s lack of interest in prosecuting individuals in compliance with the AMMA, as well as a public policy that favors enforcement of the lease compliant with state law, the purported illegality here does not render the lease void as illegal, at least for purposes of a damages claim.

In reaching this decision, the Court was able to support what it considers to be a strong public policy, namely, enforcing contracts and leases that comply with state law. It also allowed the Court to avoid undermining the medical marijuana program approved by Arizona voters.

Potentially, Gally may file a Petition for Review with the Arizona Supreme Court. Furthermore, the federal government may change its position and begin using federal funds to prosecute violations of the Controlled Substances Act, but for now, Green Cross Medical’s contract to lease real property for purposes of a medical marijuana dispensary is not void for illegality.

1At the time Gally purported to terminate the lease, Green Cross Medical had not yet received permission from the State of Arizona to operate a dispensary. Nothing in the lease suggested it would be void or voidable if Green Cross Medical did not obtain such approval.

2Furthermore, Congress has barred the Department of Justice from using federal funds to prosecute the use or distribution of medical marijuana in compliance with state law.

Scott Drucker Scott M. Drucker, Esq., a licensed Arizona attorney, is General Counsel for the Arizona REALTORS® and serves as primary legal advisor to the association. This article is of a general nature and reflects only the opinion of the author at the time it was drafted. It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.

Tags: , , , ,