Interpreting Highs and Lows: The Impact of Varied Cannabis Regulations on Real Estate: Volume II
The Impact of Varied Cannabis Regulations on Real Estate: Volume II
The legalization of cannabis has ushered in a new landscape in the realm of commercial real estate, specifically in the leasing sector. Landlords and tenants alike are now faced with a unique set of considerations due to the newly sanctioned activities associated with cannabis. These activities range from the personal consumption of cannabis to the production of cannabis for commercial purposes, as well as the right for residential tenants to cultivate cannabis plants within their homes for personal use. Additionally, the dynamics of the retail market have been fundamentally altered with the introduction of both private and public retailers selling recreational cannabis. This article will delve into these intricacies, highlighting key considerations for landlords and tenants navigating this new terrain within the parameters of the prevailing legal regime.
Landlord Considerations Amid Cannabis Legalization
The advent of legalized cannabis presents novel considerations for landlords pertaining to both existing and prospective leases.
Existing Leases
Existing leases pose unique challenges in a post-cannabis legalization context. Although cannabis is now legal in Canada, landlords may wish to restrict tenants from using leased premises for cannabis consumption, production, or sales. This may stem from a variety of concerns including:
- Potential nuisance from cannabis odours, particularly in multi-unit buildings.
- Potential mould caused by cannabis production, damaging property structures.
- Fire hazards and excessive resource consumption are linked to cannabis production, which may escalate property insurance premiums.
- Possible illegal activities associated with cannabis usage are inconsistent with the new legislative framework.
Cannabis Legalization for existing commercial leases:
- Personal use: Most commercial leases have ‘no-smoking’ clauses which now likely need to cover cannabis use. This however wouldn’t limit other forms of consumption, such as edibles.
- Production and distribution: Besides restricting smoking, landlords may want to limit the cultivation, production and selling of cannabis.
If existing commercial leases lack the desired prohibitions against cannabis use, landlords may try to:
- Amend the lease to add prohibitions, subject to tenant agreement as unilateral amendments are generally not permissible.
- Revise existing building rules or create new ones to restrict smoking, production, or selling. The enforceability of such rules is yet to be legally tested, but they should be reasonable and non-discriminatory to a tenant’s human rights or rights under their lease.
Cannabis Legalization for existing residential leases:
In Ontario, residential leases are stringently regulated under the Residential Tenancies Act, 2006, S.O. 2006, c. 17 (RTA), which does not afford landlords the statutory right to unilaterally amend an existing lease to prohibit cannabis smoking without tenant consent. Other provinces like Quebec and Nova Scotia amended their legislation, offering landlords limited-time options to amend existing residential leases to restrict recreational cannabis use.
If restrictions cannot be applied in Ontario, landlords may resort to their statutory rights to terminate a lease for damage or substantial interference with reasonable enjoyment caused by the tenant’s cannabis use. However, this would likely be a case-specific determination and require accommodation for medicinal cannabis users.
Smoke-Free Ontario Act, 2017
Both commercial and residential landlords should also familiarize themselves with provincial or territorial smoke-free laws. For instance, Ontario’s SFOA prohibits smoking or vaping cannabis in ‘enclosed workplaces’ (section 1(2), SFOA) or indoor common areas of apartments or condominiums (section 12, SFOA), with some exceptions. Additional restrictions may be imposed via municipal by-laws (section 18, SFOA).
Setting Up New Leases Amid Cannabis Legalization
Creating new commercial leases demands a clear understanding between landlords and tenants concerning the intended use of the premises.
For landlords who wish to prohibit any cannabis-related activities, a restrictive use clause should be inserted into the lease. Considering the legalization and privatization of recreational cannabis, generic clauses permitting all legal activities no longer exclude cannabis-related operations unless explicitly stated or prohibited by local laws.
In cases where commercial premises are leased explicitly for cannabis production or sales, it’s essential that the landlord:
- Ensure tenants have obtained or are in the process of securing necessary federal, provincial/territorial and municipal licenses prior to commencing operation.
- Enforce compliance with recreational or medicinal cannabis regulations and licensing requirements.
- Verify the business aligns with municipal regulations, including building code and zoning laws.
Landlords allowing tenants to illegally produce or sell cannabis could potentially face criminal charges under the Criminal Code, R.S.C., 1985, c. C-46, or other applicable laws. In Ontario, for example, landlords knowingly enabling property use for unlicensed public cannabis sales face legal penalties under the CCA, including potential closure of the premises for up to two years.
Further, Ontario landlords allowing unlicensed cannabis operations and collecting rent may face consequences under the Civil Remedies Act, 2001,S.O. 2001, c.28. If the Crown can demonstrate the property advances illegal activities, it can be seized, with any derived proceeds (e.g., rent) forfeited.
Given these risks, landlords might stipulate that tenants present authorizing licenses before beginning any cannabis-related activities. Non-compliance by a specified date could be grounds for lease termination. Additionally, landlords may wish to maintain the right to terminate the lease if the tenant’s license is revoked during the lease term.
Even when permitting cannabis production or sales, landlords might choose to prohibit cannabis consumption on the premises, if not already restricted by local regulations.
In the case of a cannabis production facility, the lease may also need to address the division of responsibilities and costs related to waste removal, nuisance mitigation, excessive utility consumption, and insurance.
For physical cannabis retail facilities, the lease may need to consider the property’s fixturing and security provisions, as certain jurisdictions have specific regulations.
Landlords must also consider potential restrictions on their rights of entry and distress when dealing with cannabis businesses. For instance, access may be limited to specific hours or require the tenant’s presence to comply with licensing requirements. The landlord’s right to seize and sell a tenant’s property to recover unpaid rent (distress) may also be illegal without the appropriate commercial sale license for cannabis.
Residential premises generally cannot be used as retail stores. However, in Ontario, the RTA does not restrict growing up to four cannabis plants or consuming cannabis in rental units. Therefore, any prohibitions must be included in the lease. It remains to be seen if rules prohibiting cannabis use or cultivation in rental units will be enforceable, and accommodations may be necessary for medicinal cannabis users due to human rights considerations.
Tenant Considerations Amid Cannabis Legalization
The advent of cannabis legalization brings about unique considerations for tenants, both in the context of current lease agreements and while brokering new lease terms. These industry-specific concerns require careful contemplation to ensure legal and profitable operations.
Existing Leases and Cannabis Regulations
The legalization of cannabis on October 17, 2018, didn’t automatically legitimize cannabis production facilities or retail stores that were unlawfully operational before the given date. Owners of such establishments are required to obtain necessary licenses, if eligible, and ensure that their operations are compliant with the new legal framework.
In the case of residential tenants, although the consumption and personal cultivation of cannabis may be legal in their municipality, landlords may strive to restrict or ban these activities in rental units by implementing amendments to the lease or introducing new rules or regulations. Tenants who were already consuming cannabis for medical purposes before October 17, 2018, or those who must commence its use due to medical reasons, are likely to be accommodated or grandfathered to some degree in light of any new prohibitions or rules. In specific provinces, like Nova Scotia, residential tenants reserve the right to terminate their lease within a certain timeframe if the landlord decides to amend existing leases or introduce new rules restricting the cultivation and smoking of recreational (not medicinal) cannabis.
Furthermore, individuals who were cultivating or smoking cannabis under the previous medicinal cannabis regime continue to be regulated by the federal government under the medicinal cannabis framework.
New Leases and Cannabis Commercial Activities
A license for commercial cultivation, production, processing, or retail of cannabis is typically linked to a specific property. Consequently, commercial applicants often need to secure legal rights to a designated property before they can ascertain whether they will be granted the necessary licenses. In this scenario, an applicant that prefers leasing over owning the site may opt for an option to lease or a lease subject to a condition precedent, or a lease containing early termination rights in favor of the tenant. This arrangement allows the tenant to terminate the lease without defaulting if they fail to secure a license as a producer or retailer. However, depending on the agreed terms, the tenant may lose money paid for the option fee, rent until termination, or fees paid during the conditional period. Nevertheless, these costs might be less than the potential loss if the tenant were bound by a lease where the permitted use could not be implemented.
For a new lease intended for a cannabis production facility or retail store, a tenant may want to ensure the lease provisions:
- Allow the tenant, in the use clause, to carry out all activities permitted by their authorizing license from Health Canada, the province, and any municipal permits. For instance, federal licenses issued before October 17, 2019, need to be modified to allow the sale of cannabis edibles, topicals, and extracts, which became legal on October 17, 2019.
- Require the landlord to promise not to violate the legal framework for cannabis, potentially placing the tenant in default under their licenses or cannabis legislation.
- Do not compel the tenant to act against the cannabis legal framework, which could result in the tenant defaulting under their licenses or the cannabis legislation. For instance, the operating hours of a cannabis retail store are restricted by the cannabis legislation (in Ontario, see section 17, CLA).
- Allow the tenant to terminate the lease early or change the use of the leased premises if the tenant transfers the lease or sublets if they lose their authorization to operate a cannabis-related business during the lease term (or, if the tenant has a good negotiating position, if the cannabis business ceases to be profitable).
- Include similar considerations as the landlord’s in a commercial lease for cannabis production or sale, such as allocating responsibility and costs between the landlord and tenant for waste removal, utility consumption, remedying nuisances, security, and fitting out the leased premises.
Wrapping Up: Landlords and Tenants Navigating the Cannabis Industry
In conclusion, the commercial leasing landscape for cannabis-related activities continues to evolve alongside the rapidly changing legal framework surrounding cannabis use, sale, and production in various jurisdictions. Both landlords and tenants must be mindful of these changes when drafting or negotiating lease agreements, whether residential or commercial.
For landlords, understanding and addressing these changes in lease agreements can prevent potential violations of regulations and avoid severe legal consequences. They must ensure that the leases clearly define the intended use of the premises, especially when dealing with cannabis-related activities. Furthermore, landlords might want to consider implementing protective measures, such as requiring evidence of tenant licenses and authorizations and considering the potential for early termination rights.
Tenants, on the other hand, must carefully consider lease conditions and obligations to avoid any potential breach of regulations. It’s crucial for them to ensure the lease permits all activities related to their license, protects them from landlord actions that might jeopardize their compliance with the cannabis legislation, and provides them with flexibility in case of changes in their business operation.
Overall, the cannabis industry presents unique challenges for commercial and residential leasing. Therefore, landlords and tenants must navigate this landscape with caution, ideally with legal advice, to ensure they are fully compliant with the law and protected in their leasing agreements.
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Disclaimer
The content provided in this article or blog is for informational purposes only. It is not intended to constitute legal advice or to replace the advice of a qualified legal professional. While we strive to provide accurate and current information, the law is complex and constantly changing, and each person’s circumstances are unique. Therefore, you should not rely on this information as a substitute for professional legal advice. This information does not create an attorney-client relationship between you and our law firm. We strongly recommend that you consult with a qualified attorney in your jurisdiction to understand your legal rights and obligations. Always seek legal advice before making any decisions that may impact your legal rights or obligations.
