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United States:

Cannabis And Coronavirus: Issues For Cannabis-Related Businesses To Overcome

06 April 2020

Thompson Coburn LLP

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As the rest of the world reels from the effects of COVID-19 and
“social distancing,” the legal cannabis industry is
feeling the pain as demand declines and sales suffer. Despite this
and the general aversion toward in-person sales, many states and
localities, such as New York and San Francisco, declared medical
cannabis dispensaries to be “essential” business (in a
similar fashion to pharmacies) that may remain open, but only for
delivery and pickup sales. Similarly on the recreational side,
Nevada has allowed dispensaries to remain open so long as such
dispensaries comply with “social distancing” measures,
though Nevada strongly prefers that consumers utilize online
ordering and delivery services.

That’s not the only thing that cannabis related businesses
have to contend with in the COVID-19-era; in states where cannabis
dispensaries are under a closure order, such businesses (and other
cannabis-related businesses throughout the supply chain) may be at
risk of default due to provisions in their supply contracts
relating to force majeure, material adverse changes, unforeseen
risks and acts of god, as well as in their leases and loan
documents. Additionally, cannabis related businesses must also
comply with state and federal employment laws and regulations,
which in the times of COVID-19 are fluid and in constant flux.

Force majeure and Material Adverse Change

Many contracts, including supply contracts and license
agreements, contain force majeure clauses or termination for
convenience clauses that excuses one or both of the parties from
performing under the contract. Often, these clauses are triggered
by language such as “natural disasters,” “acts of
war” and “acts of god.” While it remains to be
seen (and litigated) whether the national emergency caused by the
COVID-19 outbreak triggers these clauses, it is likely that many
businesses that perceive that they have an unfavorable or
unprofitable contract will attempt to utilize these clauses to
escape performance. Moreover, many commercial loan documents
contain “material adverse change” change clauses that
place borrowers in default if there is a material adverse change in
the borrower’s financial condition, operations, and business

The legal cannabis industry has already seen major declines in
demand for in-person cannabis sales due and it is likely that the
resulting financial hit that many cannabis businesses will take can
be considered a “material adverse change” that can
place a cannabis borrower in default. Cannabis borrowers should
communicate early and often with their lenders to come to an
arrangement to avoid being placed in default under “material
adverse change” clauses.

Lease and loan covenants

It is a grim reality that businesses in nearly every industry
are hurting financially as a result of “social
distancing” policies and closure orders that sharply and
suddenly decreased demand and limited the operations of many
businesses. Reduced revenues are to be expected, and defaults in
financial covenants contained in leases and commercial loans are
likely to follow. That is not to say, however, that lenders and
landlords are blind to the circumstances. To the extent that
cannabis businesses have leases and loan documents that contain
financial covenants, lenders and landlords may be open to
discussing forbearances or other accommodations in order to retain
the leasing or lending relationship, as the case may be.

Employment and Federal Sick Leave legislation

The effectiveness of pandemic mitigation policies is greatly
reduced if employees who are sick are required to report for work
because they have to make a choice between staying home sick or a
day or more of wages. To address this, some employers are electing
to give their employees two weeks of paid sick leave if they are
infected with the coronavirus and a great deal of employers are
allowing and encouraging their employees to work remotely. Both
steps significantly reduce the amount of in-person contact that
sick employees may have with the general public and their
co-workers, reducing the risk of infection. These steps are
critically important in the manufacture and distribution of medical
cannabis and cannabis-derived products whose end-users are often
the most vulnerable members of the population, the elderly and the

These policies are also at the heart of recent legislation passed by the federal
 with respect to employers that takes
effect on April 2, 2020. As the COVID-19 crisis develops in the
United States, we are likely to see additional workplace policy
proposals; it is extremely important for cannabis-related
businesses to stay current as policies shift.

Finally, even though cannabis-related businesses do not enjoy
any deductions (other than for the cost of goods sold) under the
Internal Revenue Code, these businesses may delay filing their 2019
federal tax return and payment of their 2019 federal income and
self-employment taxes until July 15, according to Notice 2020-17
issued by the U.S. Treasury Department on March 18, 2020 and an
announcement by the Internal Revenue Service on March 21, 2020. The
return filing and payment delay may give some flexibility to
cannabis-related businesses with respect to their cash flow.

We will continue to actively monitor developments in the
COVID-19 situation and reactions in the legal community. If you
have any questions, feel free to reach out to any Thompson Coburn
attorney with whom you regularly communicate.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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