Cannabis Contract Approval Headaches

Cannabis companies move a million miles an hour. Many cannabis companies don’t spend nearly enough time focusing on the “basics,” such as corporate governance and getting things in writing (for more posts on why handshake deals are bad, see articles linked at the bottom of this post). Another area where many cannabis businesses need some improving is in handling contract approvals.

Contract approvals are exactly what they sound like: a party to a contract cannot do something without the other party’s consent (usually prior and written approval). I like to think of cannabis contract approvals as falling into one of two buckets: contract approvals related to a contract, and contract approvals that are unrelated or somewhat related to a contract.

With respect to the first bucket, these kinds of things are generally fairly obvious. A contract usually will require one party to act a certain way, and the other party will need to consent to departures from these actions. One pretty common approval is the approval of a property lessor to an assignment or sublease. These can be a huge headache for buyers in M&A deals, as I’ve discussed before. The bottom line is that any time a cannabis business wants to take any kind of action that relates in any way to a written contract, it first needs to review the contract.

The second bucket of cannabis contract approvals can be a bit more difficult. These relate to actions that may be unrelated or only somewhat related to a contract. For example, a lender may require that a borrower not secure third party financing even on matters unrelated to the lender’s loan without the lender’s prior written approval.

This second bucket is where things often get hairy. Many cannabis businesses put very little thought into unrelated existing obligations, but they absolutely should, and a good cannabis attorney will be able to help a lot. Counsel will — depending on the deal type — ask their client for relevant documents to review to determine whether any contract approvals are required to get the deal done.

If a cannabis business doesn’t have legal representation and isn’t very diligent, there’s a good chance it will do things without securing required contract approvals. Sometimes, this can lead to immediate and direct claims for damages by the other party to a contract. For example, subleasing property without the lessor’s prior written consent will generally lead to a breach claim and possibly even lease termination.

Even where an unapproved action doesn’t lead to damages and a lawsuit, it still gives the other party to a contract leverage to claim breach and kick off a process that’s generally a huge headache. It’s also a very good way to upset someone, and to lose face and trust going forward. These issues can often be resolved by simply reading a cannabis contract and going through the motions prior to taking an action.

Here are those posts I mentioned about why handshake contracts are a bad idea:

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Business Basics