If you are considering leasing your property to a cannabis retailer, understanding the law governing cannabis retail, being aware of the terms of the leases you have with other tenants in the same development, and effectively negotiating and drafting the terms of your new commercial lease are imperative pieces to managing risk. This blog sets out some of the issues a potential landlord of a cannabis retailer should consider when negotiating a commercial lease:
- Confirm whether zoning by-laws permit cannabis-related businesses to use the leased premises;
- Ensure that the new lease does not violate the terms of your leases with existing tenants. “Anchor tenants”, being stores that typically draw customers into a retail area due to their unique merchandise or popular name, may be more likely to have cannabis-related restrictions in their leases;
- Ensure that leasing space to a cannabis-related business will not void your insurance coverage. If you require additional coverage, you may wish to increase rent or negotiate for the tenant to cover the difference. The tenant should also be required to provide and maintain proof of adequate business insurance;
- Consider outlining a responsibility of the tenant for the safety and security of the leased premises and of its contents, including property upgrades to comply with safety standards, hiring security personnel, and/or installing security systems. The lease should also state who will own fixtures attached and improvements made to the leased premises and who will be responsible for their removal when the term expires;
- Be as precise as possible in describing the permitted use of the leased premises. As cannabis law is evolving, simply permitting the premises to be used for “lawful purposes related to cannabis” may open the door to activities like smoking and consumption of cannabis on the premises in the future, which you may or may not have intended. Instead, consider actually itemizing the permitted and prohibited activities in the lease;
- Consider including a clause that requires the tenant to take extra steps to address nuisances caused by its business, such as improving ventilation in response to complaints by other tenants related to cannabis odors;
- Ensure that the tenant’s covenant to comply with all laws is as broad as possible. Include, for example, federal and provincial laws and regulations, as well as municipal by-laws, to account for things like criminal activity, licensing requirements, the use of the property (i.e. zoning, noise, etc.), and the operation of the tenant’s business;
- Negotiate for the right to terminate the lease early if specific events that may negatively impact you “may” occur, are threatened to occur, or do occur (i.e. if the tenant’s insurance coverage or licences expire or if the tenant faces criminal charges). In addition, strong landlord “self-help rights”, such as being able (under certain circumstances) to monitor the premises, call the police, or hire security, can also be critical to reducing risk;
- Note that security rules surrounding the cannabis industry are heavy and may impact your right to access and inspect the leased premises. It is reasonable to agree on a procedure for inspection that does not cause the tenant to be in breach of such security rules (i.e. accessing cannabis storage and receiving areas only while accompanied by a representative of the tenant). However, the lease should permit you to take photos or videos during inspections and should hold the tenant responsible for extra costs incurred in carrying out inspections;
- Especially in an industry involving controlled substances, it is important to have the tenant agree to indemnify you against all costs, losses, and damages that you may incur, directly or indirectly, as a result of the tenant’s business and/or use of the leased premises. It is also important to include a clause that clearly allocates all responsibility and liability related to the tenant’s business to the tenant, regardless of whether the landlord has been negligent; and
- The risk of facing criminal charges for unlawful possession of cannabis may restrict your ability to seize and sell the tenant’s goods to recover unpaid rent. As a result, the lease should set out alternative remedies and thoughtful procedures for exercising your rights.
As this blog demonstrates, it is important to afford significant attention to the language of your new lease and to turn your mind to how you can work together with your tenant long-term, to minimize risk while capitalizing on the growing cannabis industry.