Landlord having trouble evicting marijuana dispensary | Waccabuc NY Real Estate

Q: I read recently about a California court that refused to evict a commercial tenant (a medical marijuana dispensary). California has legalized medical marijuana. Does this mean that California landlords cannot evict for medical marijuana use on their properties? –Stephen S.

A: You’re referring to a November 2012 decision by the Alameda County Superior Court, in a case known by the name of the marijuana collective, Harborside Health Center. The dispute between Harborside and its landlord is currently being litigated in federal court.

Briefly, possession, use and sale of marijuana is a federal offense; but in California, the Compassionate Use Act gives patients and their suppliers immunity from state prosecution if they adhere to the provisions of the act.

In the Harborside case, the landlord signed a lease with the cooperative many years before, allowing it to operate the cooperative. But the U.S. Department of Justice has been targeting cooperatives in California, accusing them of breaking federal law. Many think the DoJ is motivated by a belief that dispensaries are selling marijuana to just about anyone (no one can seriously dispute the ease of obtaining a medical marijuana card).

Federal prosecutors cleverly used the cooperatives’ landlords as their hammer: The feds sent letters to the property owners, threatening civil forfeiture of their property if they continued to allow it to be used to further a federal crime. Many landlords sent eviction notices to their tenants, as did the Harborside landlord.

But Harborside refused to move and the landlord was forced to file an eviction lawsuit. The eviction was based on a section of California law that provides for terminating a lease when the tenant has used the property for an “unlawful purpose.” (California Code of Civil Procedure §1161(4).)

The state court concluded that “unlawful purpose” must be understood solely with respect to California law, not federal law. Because the collective had complied with the provisions of the Compassionate Use Act, its activity was not “unlawful” under state law, and the eviction could not be upheld under that section of the law.

The state court’s decision emphasized that the landlord had not based its eviction on a breach of a private right of the landlord under the lease — namely, a clause prohibiting the tenant from disobeying all applicable laws. Of course, the landlord could hardly advance such a claim, because its own lease detailed the tenant’s anticipated use of the premises (as a dispensary).

The Department of Justice continues to pursue a forfeiture action against Harborside’s landlord. After the state court refused to evict Harborside, the dispensary’s landlord took its case to federal court. The judge overseeing the case recently denied the landlord’s requests for preliminary injunctions that would have shut the dispensary down.

Well now, back to your question. Good residential leases specify grounds for termination, and explain that they must obey all applicable laws. Failure to obey all applicable laws is a ground for termination that is separate than using the property “for an illegal purpose.”

The state court in the Harborside case wisely didn’t venture an opinion as to whether the case would have turned out differently had the basis for the suit been “failure to obey all applicable laws,” beyond pointing out the possibly fatal hurdle for the landlord of trying to argue this theory when the landlord knew full well at the outset what the tenant was about to do.

I’m sure you’re wondering even if the landlord had no advance knowledge of his tenant’s use of the property, is there really any difference between “using the property for an illegal purpose” and “failing to obey all applicable laws”? Maybe not, but we won’t know until someone litigates the question.

Q: I purchased a new carpet, some appliances and a hot tub for the condo I bought to use as income property. Can I deduct these costs from my taxes? –Rex F.

A: The cost of getting your rental business up and running is called a startup expense. You can deduct up to $5,000 worth of startup expenses in the first year you are in business, and the remainder in equal amounts over the next 15 years. Put another way, if your business were up and running, and you incurred these costs and could deduct them as regular operating expenses, then you can deduct them when the business begins as startup expenses.

The tricky thing about startup expenses is making sure you’ve categorized an expense correctly. These expenses include minor repairs needed to get a business or property up and running, but they do not include an improvement to the property, which is a capital expense.

So, for example, if you spend money repairing the furnace, that’s a startup expense; but if you buy a new furnace, that’s a capital expense, which is treated differently. It’s depreciated over the item’s useful life, which is five or seven years for most personal property. The carpet, appliances and hot tub are probably personal property. (IRC Section 195.)