Michigan business Archives - ARTAEV AT LAW PLLC

Smoke ’em if You Got ’em: 4 Questions to Ask When Selling Commercial Real Estate in the Marijuana Era

In 2018, Michigan citizens overwhelmingly approved Proposition 1 to legalize recreational marijuana. While medicinal marijuana has been legal in Michigan for several years now, the recreational marijuana law will certainly expand the availability of the drug across the state. But what does that mean for the Michigan business community?

Legalization will impact your business, even if your business has nothing to do with the burgeoning marijuana industry. Recently, there have been a number of publications that counsel owners on the proper way to handle marijuana in the workplace. For instance, more access to marijuana means you will need to revisit your drug policies and make sure everyone is aware of the rules. This impact is rather obvious – but there are other effects on your business that are not as intuitive, but just as important. These “hidden” impacts may surprise you.

For example, you might be surprised that legalization presents a whole host of unique issues when buying or selling real estate. Imagine you are a small auto parts manufacturer located in the city of Pontiac. One of your facilities is in an area that will be zoned for marijuana dispensaries. A weed entrepreneur approaches you and presents a buy-sell agreement offering a significant premium.

Warning – this is not like every other real estate buy-sell! Consult with your attorney and accountant to ensure that you are adequately protected. At a minimum, here are 4 fundamental questions to ask before signing off:

Do you have adequate assurances from the buyer before entering into the “due diligence” period? Perhaps the biggest variable related to the marijuana industry is regulatory approval. The prospective weed entrepreneur must obtain licenses and approvals on both the state and local levels before they can open up shop. There may be local zoning hurdles to overcome as well. The licensing process may take 6-8 months or longer. Accordingly, as a seller – how long are you willing to wait? What are the risks to your ongoing operations during the due diligence period? Is the buyer depositing an adequate earnest money deposit to bind you to the sale? Increased uncertainty may warrant a greater down payment or non-refundable deposit to compensate the seller.
Does the chosen title company handle marijuana-related transactions? Not all title companies will issue a policy where the transaction involved a marijuana-related business. Right now, this is more of a matter of policy rather than the law. However, right now, Westcor appears to be one of the few major insurers that will insure title in a marijuana business property sale. And even they have limits as to the amount of the policy. The worst thing that you can do is deceive your insurer on the nature of the buyer or fail to disclose this critical fact. Like any other kind of insurance, a misrepresentation will likely void any policy and may lead to conflict and even litigation down the road between the parties.
How are you getting your purchase price? You probably already know that federally-regulated banks (which is pretty much all of them) do not accept funds from marijuana-related businesses. This is because while marijuana may be legal under state law, it is still a Schedule-1 prohibited substance (like heroin or cocaine) on a federal level. Accordingly, do not expect the typical wire transaction to work. Rather, your buyer might bring a cashier’s check for a large amount to the closing. Maybe they even want to pay in cash. Be sure to address exactly how the purchase price will be paid well in advance of closing.
Are you violating any other lease or covenant? This is where it is especially critical to involve your attorney. Imagine a situation where you own a strip mall with several tenants and a marijuana business approaches you to either purchase or lease on the of the units. Did you know that selling or leasing to them might violate your leases with the other tenants? Frequently leases for a unit in a strip mall have a covenant that prohibits a landlord from leasing or selling a unit to an entity engaged in “illegal” activity. Again, marijuana is still “illegal” as a matter of federal law. Further, do you have a mortgage on the property? Does the mortgage prohibit “illegal” activity? Last thing that you want in an inadvertent default on either your other leases or to your bank under some obscure provision in a financing document.

Contact attorney Dan Artaev today at dan@artaevatlaw.com or by phone or text at (269) 930-0254.

Non-Compete vs. Non-Solicitation: Key Differences that Every Employer Must Know

No matter what industry you are in, you have probably encountered non-compete and non-solicitation agreements. In Michigan, standard pre-employment paperwork often contains obligations for the employee not to compete with the employer (non-compete) and not to solicit the employer’s existing customers or other employees (non-solicitation).

Although these obligations may be in the same boilerplate paragraph of the documents your employees signed before or on that first day of work, non-competes and non-solicitation covenants are very distinct in terms of their enforcement by the courts. As an employer, you should understand the different goals of these two types of covenants, the differences in the applicable law, and also understand that Michigan courts will not automatically enforce an agreement just because an employee signed it.

For the uninitiated, a non-compete agreement obligates the employee to not “compete” with the employer’s line of business for a set period of time after leaving employment. The non-compete not only prevents direct competition (for example, an employee starting his or her own rival company), but also prohibits an employee from working for a competitor located within a certain area. By way of example, an employee working as a sales rep for a medical supply store might agree not to work for any competing medical supply store located within 100 miles of their current employer for a period of 1 year after leaving. In essence, the non-compete seeks to preserve the employer’s competitive advantage by restricting its employees’ ability to go work for a rival or to start their own competitive enterprise.

Because the non-compete restricts the free labor market, the Michigan Antitrust Reform Act of 1984 (MCL 445.774a) requires non-competes to:

Protect a reasonable competitive business interest;
Be reasonable in terms of duration;
Be reasonable in terms of geographical area; and
Be reasonable in terms of the the type of employment or business affected.

What is reasonable is a question of fact that depends on the scope of the restrictions and on the nature of the work to be restricted. For example, an agreement prohibiting a medical supply sales rep from competing for a year within 100 miles of his current territory is likely reasonable. However, the same agreement prohibiting the sales rep from working in the any medical-related field for 50 years anywhere in the world is probably not reasonable.

Also, the non-compete must protect a “reasonable competitive business interest” – meaning that agreements targeting back-room employees like maintenance or unskilled workers may be vulnerable to challenge because restricting those employees furthers no legitimate business interest. Before drafting and requiring a non-compete, an employer should ask themselves exactly what they are trying to protect. If the answer is something concrete like “customers” or “sales contacts” – then the agreement likely meets the reasonable competitive business interest criteria. If they struggle to come up with an answer or the answer is “I don’t want the employee working somewhere else” – then the agreement may not be considered reasonable and may not be enforced.

A non-solicitation agreement on the other hand is a promise not to interfere with the employer’s actual business by stealing their customers and employees. The non-solicitation is easier to enforce than a non-compete for several reasons. First, a non-solicitation agreement is NOT subject to MCL 445.774a because it does not “expressly prohibit[] an employee from engaging in employment or a line of business after termination of employment.” Thus, the statutory “reasonableness” requirements set forth above do not apply. Second, the non-solicitation by its nature is directly tied to legitimate competitive interests. There is little question that a business’s customers and employees are valuable assets. To prohibit an existing employee from interfering with those assets is not much different than prohibiting stealing on the job. Third, a non-solicitation agreement will not apply to a lower-level employee because they are not as likely to have no reason to or opportunity to steal customers or employees. After all, a maintenance tech working at a manufacturing plant is not likely to quit his or her job to start a rival manufacturing plant and steal customers and employees. But a C-suite executive may very well become a direct competitor.

As an employer, it is always a good plan to update your on-boarding documents and employee handbook to ensure that you know exactly what your employees are agreeing to. It is grave mistake to simply print some forms from the internet and cobble together a policy that does not make sense in the context of your business. After all, it pays to have a solid, enforceable document. If there are problems, it is better to find out that the document is problematic before it is held unenforceable by the courts.

Have more questions? Contact Dan Artaev at dan@artaevatlaw.com or 269-930-0254 to set up your free initial consultation.