Cannabis and Commercial Leasing: Issues to Consider

September 24th, 2018

After months of discussion, the Cannabis Act was assented to on June 21, 2018 and, in anticipation, the Act to constitute the Société québécoise du cannabis, to enact the Cannabis Regulation Act and to amend various highway safety-related provisions (the "Act") was adopted by the National Assembly on June 12, 2018.

At this time, only the Société québécoise du cannabis (the "SQDC") is authorized for the retail sale of cannabis. It also plans to open 20 branches by October 17, 2018. The Act also stipulates that only a qualified cannabis producer who meets the conditions established by government regulation (a "Qualified Producer") may produce cannabis in Québec, while acknowledging that this activity includes the cultivation, processing, packaging and labelling for commercial purposes.

As a real estate stakeholder, you could be confronted with one of the following three scenarios:

  1. you own commercial real estate and the SQDC contacts you to rent one or more properties for the retail sale of cannabis;

  2. you own land suitable for building structures or greenhouses fit for the production of cannabis and, as a Qualified Producer, you wish to set up a legal structure of landowner and operator; or

  3. a Qualified Producer approaches you to rent your land in order to build the aforementioned structures for the purpose of producing cannabis.

Before making any decision, make sure you have thought of everything, including, but not limited to, the following key points.

Zoning

In the case of the rental for retail purposes, the SQDC must comply with the current planning and zoning laws in any local municipal territory where it sets up its stores. Respecting the zoning laws is also peremptory in scenarios 2 and 3 mentioned above. Therefore, if the zoning has to be modified and the agreement (with the SQDC, or with a Qualified Producer or acting as one) is conditional on the sale of cannabis being permitted, do not take anything for granted; zoning modification is a long, painful, expensive and uncertain process.

Trade restrictions impacting a shopping centre

Existing leases need to be reviewed to ensure that you will not be violating them. Final regulation of where cannabis use will be permitted is not yet determined. By ratifying an agreement with the SQDC or a Qualified Producer, could your existing tenants object to it or claim you have failed to comply with your obligation to provide them with peaceful enjoyment of the leased premises? Do not forget to verify the conventional restrictions arising, for example, from the by-law adopted as part of a divided declaration of ownership, which increasingly governs multi-use buildings.

Insurance Protections

Some companies already have special coverage for selling or producing cannabis. Ask your consultant to review your insurance policies and, if necessary, update them in anticipation of this new commercial operation.

Restoring leased premises

Whether you deliver the leased premises as a "shell" and the SQDC is responsible for the leasehold improvements required by the Act, or you are responsible for it on a "turnkey" basis, make sure that the tenant restores the leased premises in the same condition as they were received upon delivery. You should also plan a regular inspection to assess the impact of odours and other effects of the SQDC’s operation. If you lease your land as well as the structures or greenhouses being built on it to a Qualified Producer, or if you have granted surface rights to a Qualified Producer who will build the structures or greenhouses, plan to have them and their accessory equipment removed at the end of the lease. The structures or greenhouses may be useless to a new operator. Do not forget to require a guarantee for this removal.

Mortgage lender

Submit your project to your mortgage lender and have your credit agreement checked to make sure this new project does not conflict with the content of your financing documents.

Default

Anticipate what may happen if the tenant or Qualified Producer to whom you leased your land defaults on their obligations. Could you seize their inventory, and if so, what could you do with it if you are not a Qualified Producer yourself?

We are not trying to reinvent the wheel with regard to commercial leasing or granting surface rights, but instead limit certain issues likely to arise from the legalization of cannabis, its production and its sale. The foregoing is not exhaustive, but these are matters or issues that a cautious and diligent owner or tenant must address with their legal counsel before making legally binding commitments.