JD Supra
https://www.jdsupra.com/legalnews/ccc-s-model-hca-approval-process-1750654/
In May, the Massachusetts Cannabis Control Commission (“CCC” or the “Commission”) released a bulletin (the “Bulletin”) regarding some administrative license extensions in response to the Commission’s new framework and processes governing host community agreements (“HCAs”) in Massachusetts.
Under the CCC’s new regulations governing HCAs, licensees, and their host communities, licensees are required to submit to the CCC a compliant HCA that is approved by the Commission before the licensee can be granted approval for their final license or an annual license renewal.
The Bulletin states, “To afford additional flexibility while adjusting to this new process, at its May 23, 2024 Public Meeting, the […] Commission […] voted to approve a limited delegation of authority to the Chief of Investigations and Enforcement (CIE) to administratively extend License expiration dates under certain circumstances.”
Under this new administrative relief, licensees are afforded the opportunity to extend their license period for up to 120 days for any reason at the CCC’s discretion, and an additional extension of up to an additional 240 days for “the exclusive purpose of allowing the Licensee to submit a compliant Host Community Agreement or Host Community Agreement waiver.” To utilize this remedy, operators must pay a prorated license fee for the period for which they are receiving an extension.
The financial relationships between licensed cannabis businesses in Massachusetts and their host towns and cities have experienced much tension during the past several years, with many municipalities requiring mandatory charitable fees and other charges above the three percent gross sales community impact fee (“CIF”) cap permitted by statute, regardless of whether such amounts are reasonably related to or actually incurred by the host community as a result of the operator’s business. The Commission’s new regulations and model host community agreement (“Model HCA”), which was finalized after public comment earlier this year, attempt to correct many of these issues.
The Model HCA includes several protections for Massachusetts operators that nod to the CCC’s attempt—through its new regulations—to remediate previous issues that licensees experienced, including:
- Sets a general standard for terms and definitions that should be included in HCAs across Massachusetts. Many operators advocated for this, given the disparate fluctuation of terms and conditions in HCAs across the state. For example, the Host Community is now 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 Host Community.
- Sets a time period calculating the CIF by the cannabis operator based on the operator’s license renewal date. This timetable also requires the operator to make the CIF payment at the later of 90 days from renewal of the license or the CCC’s certification of the CIF.
- Requires an acknowledgment of the CIF cap at three percent gross sales and prohibits Host Community-mandated charitable contributions, future monetary payments, or in-kind contributions not permitted under the statute.
- Sets a clear term of the CIF, such that Host Communities cannot charge a CIF after nine years from the date of the issuance of the final license.
- Allows the Host Community to opt out of charging a CIF for any license year.
- Includes 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 Host Community’s bylaws, laws, zoning ordinances, etc.
- for all parties to act in good faith to carry out the purpose of the HCA
In addition to the operator’s statutory right to breach of contract for a Host Community’s failure to abide by the statute, the covenants in the Model HCA allow an operator to bring a breach of contract claim 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 Host Community:
- It requires the operator to acknowledge that the HCA does not affect the authority of the Host Community 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 Host Community nor does this Agreement affect the Host Community’s ability to enforce any applicable law.
- It provides a placeholder for a list of generally occurring fees the Host Community customarily charges to non-cannabis businesses operating within the Host Community that are not subject to the restraints of a CIF.
- Non-waiver provision stating that a Host Community’s failure to assess a CIF in a particular license year doesn’t result in waiver of the CIF 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 requirement of local residents while operators typically favor having the freedom to hire as the market dictates.
- Allows the Host Community 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 that many operators advocated for over the years, it still arguably leaves some gaps, such as lacking or failing 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 to rely on the CCC’s review of such CIF certification proposed by the Host Community.
- A 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 Host Community wishes to deliver a notice of discontinuance with respect to the underlying license. 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 term limit on CIFs applies to successors or assigns of the business, or if the clock starts over if, for example, an operator sells to a third party.
Over the coming months, licensees and Host Communities will have to work together with the Commission as proposals of compliant HCAs are submitted in connection with final license and annual license renewals and the CCC provides their first direct commentary on what passes muster against the newly proposed regulations on the subject.
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