Ontario's cannabis retail gold rush part 2


peter murphy headshot

In the final instalment of a two-part series, Toronto business lawyer Peter Murphy discusses the unique issues facing landlords of cannabis stores.

Landlords should seek legal advice when negotiating leases with prospective cannabis retailers, Toronto business lawyer Peter Murphy tells

Murphy, partner with Shibley Righton LLP, explains that prospective cannabis retailers in Ontario are rushing to secure leases long before they are licensed due to the timing of the provincial government’s framework for selling the drug in shops across the province.

“We’re in a new gold rush,” Murphy says, adding the Cannabis Licence Act (CLA) opened up opportunities for a multitude of players in the bricks-and-mortar retail market after Premier Doug Ford's new administration abandoned the former Liberal government’s plans for a provincial monopoly over recreational cannabis sales.

“Prospective cannabis retailers want to secure leases to lock up the best locations in Ontario now so that they’re in a good position when retail licensing begins,” he says.

However, Murphy says landlords are at risk of leasing their space to a prospective cannabis retailer who might not have a viable business by the time the market finally starts in 2019.

For example, municipalities still have until Jan. 22 to opt out of cannabis retail sales.

Meanwhile, the Alcohol and Gaming Commission of Ontario (AGCO), which will oversee the licensing regime for private retailers, has not started accepting licence applications.

"Landlords should be aware that the viability of a cannabis retailer's business remains uncertain — at least until all the necessary licences are granted and zoning is confirmed," says Murphy.

He says landlords will be opening themselves up to the AGCO's scrutiny by agreeing to lease their premises to a prospective retailer of recreational cannabis. He explains that the CLA allows AGCO officers to investigate the “character, financial history and competence” of persons, including landlords, as part of their licensing decisions. The law also makes it an offence to “hinder, obstruct or interfere” with an investigation under certain circumstances.

Murphy says some landlords may find their tenants selling cannabis without a licence, pointing to the recent spate of illegal dispensary closures, which were swiftly followed by re-openings.

“The regulations under the CLA provide that anyone who sells cannabis illegally after Oct. 17, 2018 will be denied a licence. However, the potential profits of selling before the licensed market starts are so lucrative, that many dispensaries are open for business anyway,” he says.

Murphy says landlords could be on the hook if their tenants are caught operating illegally because Ontario's recreational cannabis laws create specific offences for landlords who “knowingly permit” their premises to be used for unlicensed sales of marijuana. The resulting penalties for landlords include large fines and up to two years in jail.

“To defend this charge, landlords would have to show they took reasonable actions to prevent such activity, and that starts with carefully addressing the issue in leases,” he says.

"Landlords will not be able to rely on a technique known as 'distraint' that allows them to seize other types of inventory and sell it to cover rent arrears," says Murphy.

“The remedy of distraint will not be possible here, because the sale of this particular inventory would be illegal without the proper licences. As a result, landlords should expect to have more limited remedies for defaults on the lease," he explains.

"When entering into leases or offers to lease with prospective cannabis retailers, landlords should carefully consider the new cannabis laws and regulations and ensure appropriate protections are obtained," says Murphy.

For part one, where Murphy discussed the issues facing cannabis store retailers, click here.