If you are in the process of opening a cannabis retail store, understanding the law that governs cannabis retail, conducting thorough due diligence on your proposed location, and engaging in effective negotiation and drafting of the terms of your commercial lease can be imperative to the success of your business. Even with an ideal location, certain provisions in your lease could limit your operational capacity, prevent your business from complying with requirements for cannabis licencing and authorization, and impact the saleability of your business in the future. This blog sets out some of the issues a cannabis retailer should consider when negotiating a commercial lease:
- Ensure that the nature of your business will not affect your insurance policies or the terms of your agreements with lenders;
- Ensure that the provision respecting the permitted use of the leased premises is as broad as possible. It should permit the sale of cannabis, edibles, and consumables and should allow you to expand on the cannabis-related services you provide, from time to time, as the law governing the industry evolves (i.e. smoking and consumption on the premises);
- You should only be required to operate your business from the leased premises during the hours within which a cannabis retail store is legally permitted to operate;
- The landlord should not have a right to distrain, seize, or sell cannabis located within the leased premises, in accordance with cannabis regulations and the law surrounding unlawful possession of controlled substances;
- Have the landlord warrant and represent that the leased premises are zoned to permit a retail cannabis store and that the landlord is not a party to any other leases in the same development that would restrict or prohibit you from operating a retail cannabis store at that location. You may also consider asking your lawyer to search title to the property to ensure that there are no agreements on title containing such restrictions;
- Request the exclusive right to operate a cannabis retail store from within the development, so that no other tenant in the immediate area will be permitted to sell cannabis or cannabis products;
- The landlord should covenant to abide by all laws, including cannabis laws, in exercising its rights and carrying out its obligations under the lease;
- Negotiate for a provision that gives you the right to terminate the lease if, at any time, you are not able to obtain all required permits, licenses, and approvals to run your business; if any of your permits or licences are revoked or cancelled for reasons outside of your control; or if laws change, and you are prohibited or significantly restricted from selling cannabis or cannabis products and can no longer legally operate a retail cannabis store from the leased premises;
- As part of the review process for licencing and authorization, the Alcohol and Gaming Commission of Ontario (“AGCO”) conducts background checks on cannabis retail licence applicants and on all parties “interested in” cannabis retail applicants. Landlords have been considered “interested parties”, under the Cannabis Licence Act, and, as such, the lease should require the landlord’s reasonable assistance and cooperation in the licence application process;
- Ensure, especially in a multi-tenant commercial property, that the landlord does not have the right to terminate the lease if a neighbouring tenant has an issue with odor or other things related to your business. The lease should include a workable and realistic mechanism to address these types of issues;
- Pay close attention to insurance provisions stating who is responsible for increases in the landlord’s insurance rates, due to the nature of the tenant’s business;
- Consider who will be responsible for the safety and security of the leased premises and of the cannabis located at the leased premises, as well as any necessary property upgrades to comply with relevant safety standards (i.e. fire, electricity, humidity, waste management, and ventilation). Consider who will own fixtures and improvements made to the leased premises and who will be responsible for their removal when the term expires;
- Agree on a procedure for the landlord to exercise its right to inspect the leased premises that will not cause your business to be in breach of any regulatory requirements/cannabis laws (i.e. the landlord may only access cannabis storage and receiving areas while accompanied by a representative of the tenant); and
- Negotiate for the right to assign or sublet the leased premises to another tenant for other uses, in the event that the retail sale of cannabis is not profitable at the location or becomes prohibited by law.
The provisions of your commercial lease can have serious implications for your cannabis retail store. Spending the necessary time and money, at the beginning, to secure a lease that protects you, can be an invaluable investment in the success and longevity of your business.