Cannabusiness Advisory

On January 17, 2024, the Massachusetts Cannabis Control Commission (“CCC”) released the long-awaited model host community agreement (“Model HCA”) for public comment. This comes just over two months from the CCC’s new regulations on rules and restrictions governing the relationship between cannabis operators in Massachusetts and their host municipality.

The financial relationship between cannabis businesses in the Commonwealth and their host towns and cities has experienced much tension during the past several years, with many municipalities requiring mandatory charitable fees and other egregious charges above the 3% gross sales community impact fee (“CIF”) cap permitted by statute. The Model HCA and the CCC’s new regulations attempt to these correct issues.

The Model HCA includes several protections for Massachusetts operators that nod to the CCC’s new regulations in an attempt to heal past wounds, including:

• Sets a general standard for terms and definitions that should be included in HCAs across the Commonwealth. Many operators desired this, given the disparate fluctuation of terms and conditions in HCAs across the state. For example, the City is required to provide an itemized invoice of CIF costs that is “Reasonably Related” (as defined in the CCC’s new regulations) to the operations of the cannabis business and its impact on the Municipality.
• Sets a time period calculating the CIF by the cannabis operator based on the operator’s license renewal date. This timetable also includes payment of the CIF by the operator at the later of 90 days from renewal of the license or the CCC’s certification of the CIF.
• Acknowledgment of the CIF cap at 3% gross sales and prohibition of municipality-mandated charitable contributions, future monetary payments, or in-kind contributions not permitted under the statute.
• Sets a clear term of the CIF that municipalities cannot charge a CIF after nine years.
• Town has the ability to opt out of charging a CIF for any license year.
• Covenants (promises by a party during the term of the agreement) such as:
  • for all parties to comply with applicable law.
  • for the operator to continue to abide by municipality’s bylaws, laws, zoning ordnances, etc.
  • for all parties to act in good faith to carry out the purpose of the HCA. While, under MA common law, all contracts have an implied good faith and fair dealing, this covenant give the parties a contractual obligation to act in good faith.

In addition to the operator’s statutory right to breach of contract for a municipality’s failure to abide by the statute, the covenants in the Model HCA allow an operator to bring a breach of contract claims for any  breach of covenants and representations and warranties agreed to in the host community agreement.

The Model HCA further provides for some favorable terms for the municipality:

• It requires the operator to acknowledge that the HCA does not affect the authority of the Municipality to issue or deny permits, licenses, or other approvals under the statutes and regulations of the Commonwealth, or the bylaws, local laws, zoning, and ordinances of the Municipality nor does this Agreement affect the Municipality’s ability to enforce any applicable law.
• It provides a placeholder for a list of generally occurring fees the Municipality customarily charges to non-cannabis businesses operating within the Municipality that are not subject to the restraints of a CIF.
• Non-waiver provision stating that a municipality’s failure to assess CIF in a particular license year doesn’t mean fee waiver in other years.
• Inclusion of other covenants that favor the hiring and engagement of local suppliers and employees within the town, other than senior positions. These somewhat neutral provisions, which may likely get highly negotiated as municipalities often desire the cannabis business to commit to a percentage hiring requirements of local residents while operators typically favor having the freedom to hire as the market dictates.
• Allows the municipality to notify the operator of its wishes to discontinue the relationship with advance notice for reasons other than bad faith.

While the Model HCA certainly addresses some key concerns desired by operators over the years, it still leaves some gaps, including failure to address:

• A dispute process for the operator to correct the host community’s calculations of a CIF and a process for resolution of any such dispute. This is a critical area that is unaccounted for in the Model HCA, as currently written, it leaves open the question of processes and rights the cannabis business has to dispute a CIF on its own other than rely on the CCC’s review of such CIF certification proposed by the host community.
• Requirement of the host community to deliver reasonable documentation to back up the host community’s CIF invoice.
• A winddown period or other notice requirement in the event a Municipality wishes to deliver a notice of discontinuance. As currently drafted, operators are not given a period to find a new host community after a notice of discontinuance is delivered by a host community.
• There is also some ambiguity on whether the nine-year end term on CIFs applies to successors or assigns the business, or if the clock starts over if, for example, an operator sells to a third party.

The Model HCA is up for public comment until today, January 31, and the CCC is scheduled to discuss public comments at its next public meeting on February 8.