Denver Marijuana Business Wins Lease Battle

The Colorado Court of Appeals has given a big win to a marijuana business involved in a lease battle.

According to an unpublished Feb. 16 opinion, L’Eagle Services, LLC in Denver has operated a marijuana cultivation and retail business in the same location since 2011. The landlord, North Mountain Group, LLC, bought the property in 2016 and L’Eagle agreed to a rent increase in exchange for an option to buy the property. 

That option said L’Eagle wouldn’t have equity in the property and wouldn’t assert an equitable mortgage or interest in it. The parties agreed it was a material term of the purchase option contract. The option also said it was not to be recorded, but the option contract didn’t declare this to be a material term. Two days later, NMG recorded a subordination agreement that referenced the option and four years later L’Eagle recorded the option itself, according to court records.

Tensions arose between the parties over issues connected to parking and roofing. In May 2020, L’Eagle sent a letter to the property’s neighbors, whose lot was also owned by NMG, demanding they stop using some parking spaces that L’Eagle believed were covered by their lease. NMG responded that L’Eagle was in default of the lease, because in part, it failed to repair the roof at its site.

Under L’Eagle and NMG’s triple-net lease, L’Eagle was responsible for maintaining and repairing the roof. The repairs, however, were subject to NMG’s approval, which couldn’t be “unreasonably withheld,” according to court records. The lease also gave L’Eagle 30 days to cure or begin curing defaults, as long as L’Eagle tried to pursue the cure to completion.

Court records said NMG and L’Eagle discussed roof issues before NMG bought the property. Due to those discussions, L’Eagle performed some repairs to the roof but by August 2018, the parties quit discussing it and there wasn’t further written communications about it until NMG sent the default notice to L’Eagle in May 2020.

Within four days of the notice, L’Eagle got a bid for roof repairs, but was told they would be delayed due to COVID-19. L’Eagle contacted NMG to have the repairs approved and clarify what repairs were needed.

More than a month later, NMG responded claiming L’Eagle defaulted under the lease by not fixing the roof within 30 days. NMG didn’t approve any repairs or clarify what repairs were needed before trial, according to court records.

L’Eagle filed a complaint seeking declaratory judgment that it retained the purchase option and accused NMG of breaching the lease by failing to provide quiet enjoyment of the property’s parking. NMG filed a forcible entry and detainer claim separately, requesting possession of the property.

The cases were consolidated in district court and after a bench trial, the court found L’Eagle retained its rights under the purchase option as long as it repaired the roof and that NMG didn’t breach the covenant of quiet enjoyment. The district court denied NMG’s possession claim and requests for attorney fees on both sides.

NMG appealed the district court’s order and judgment finding L’Eagle didn’t materially breach their lease or their purchase option agreement, while also appealing the district court’s holding that it failed to terminate the lease under both its terms and Colorado’s FED requirements. L’Eagle cross-appealed the district court’s denial of its attorney fees.

The Colorado Court of Appeals affirmed the district court’s order and judgment that found L’Eagle didn’t breach the purchase option or the lease and the lease wasn’t terminated. The appeals court found L’Eagle’s recordation of the option contract wasn’t a claim of an equitable mortgage or interest in the property. 

NMG also argued L’Eagle breached the lease when it failed to repair the roof promptly. The appeals court disagreed, stating there’s support in the record L’Eagle complied with the terms to repair it or at least began a strong effort to pursue repairs to completion. The appeals court further concluded that since L’Eagle didn’t breach the lease, no default occurred.

The appeals court also only agreed with L’Eagle’s argument that it should get attorney fees for defending against the FED possession claim and reversed and remanded the case on that issue alone, citing statute.

Fortis Law Partners’ Henry Baskerville was the lead attorney on the case for L’Eagle.

L’Eagle Dispensary paid around $400k in additional rent payments during the past five years in order to have the option to purchase the building, and had we not been successful with the trial and appeal, this could have [been] money down the drain,” Baskerville, a partner at the firm, wrote.

Baskerville added small cannabis operators in Denver have the odds stacked against them as it’s tough finding a space to operate even when adhering to zoning regulations, as rent prices continue to climb.  

“Due to this and other banking restrictions, many cannabis businesses are no longer able to operate a cultivation facility in Denver and have to turn to purchasing wholesale cannabis instead,” Baskerville wrote. “L’Eagle cultivates their own cannabis and has worked tirelessly for years, diligently paying their rent so that they may have a chance at purchasing their building and setting themselves ahead of competitors.”

Baskerville added the ruling preserves L’Eagle’s right to purchase the facility.

“This decision shows that landlords do not have unlimited power over their tenants, but instead are equal partners, both of whom are bound by the terms of the lease,” Baskerville wrote.

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