In November 2022, Colorado voters approved Proposition 122, known as the Natural Medicine Health Act of 2022 (NMHA). This legislation decriminalized the personal use and possession of certain psychedelic substances, including psilocybin and psilocin mushrooms. Additionally, the NMHA established the legal foundation for healing centers – places where adults may consume and experience the effects of regulated natural medicines (such as mushrooms) under the supervision of licensed facilitators. Given the nascent stage of the psychedelic industry in Colorado, landlords and tenants should tread carefully in negotiating a commercial lease for space to be used as a healing center.
I. Federal Enforcement Actions under the Controlled Substances Act.
As with marijuana, certain psychedelic substances decriminalized under Colorado’s NMHA are classified as Schedule I drugs under the federal Controlled Substances Act (CSA) – meaning that the manufacturing, distribution, and dispensing of psychedelic substances is subject to compliance with the CSA. Violating the drug trafficking provisions of the CSA may result in criminal prosecution of those involved (which may include large fines and lengthy prison sentences).[1] It also means the federal government does not recognize any accepted medical use for psychedelic substances and takes the position that such substances have a high potential for abuse.
Accordingly, leasing space to be used as a healing center will likely result in legal exposure to the landlord and tenant. Nonetheless, as we have seen with marijuana, certain landlords and tenants are willing to risk such exposure. While there is nothing in a commercial lease agreement that can fully insulate either party from such liability, the parties can mitigate their liability to one another by considering the following:
- In the event the government takes enforcement action, who can terminate the lease?
- What level of enforcement action is necessary to trigger any such termination right?
- Will the parties indemnify one another under any circumstances related to law enforcement efforts?
- What happens if tenant is unable to obtain their requisite permits?
- What efforts are necessary to obtain such permits?
II. Local Regulation of Healing Centers.
The Natural Medicine Advisory Board, established by NMHA, is currently formulating state-level rules and regulations for the operation of healing centers and their employees. Given that local governments have the authority to regulate the time, place, and manner in which these centers operate, it should be expected that some municipalities will choose to regulate the operation of healing centers. It will be critical for landlords and tenants to understand these requirements to ensure that each party’s expectations for a particular space align with what is possible under applicable law.
If a local government requires an operator of a healing center to obtain certain permits or approvals, then the lease should address the possibility of potential delays and the impact of such delays on landlord/tenant’s work in the space and what happens if tenant is unable to obtain such permits or approvals (and the level of effort required to do the same).
III. Other Considerations.
Beyond the aforementioned factors, several additional considerations should be addressed when leasing commercial space for a healing center:
- Insurance: Will the regular presence of individuals under the influence of psychedelics affect the landlord’s or tenant’s ability to obtain commercially reasonable insurance policies?
- Space Planning: What are the state and local regulations regarding the storage of psychedelic substances on the premises and the required security systems for the facility?
- Permitted Use: Does the permitted use clause in the lease allow the healing center to possess and utilize all psychedelics permitted under state law, or only those allowed at the time of lease execution?
This blog post is the first in a series exploring the decriminalization of psychedelic substances in Colorado and its implications for commercial leasing. It is not the recommendation of this author, this blog, or the firm that you violate any laws, including the Controlled Substances Act. For questions about such topics and negotiating your commercial lease, reach out to the real estate team at Milgrom & Daskam.
[1] See the Congressional Research Service Report titled, “The Controlled Substances Act (CSA): A Legal Overview for the 118th Congres”, dated January 19, 2023: https://sgp.fas.org/crs/misc/R45948.pdf.
