Setting up shop

The complication is that this network of shops has been operating in a legal haze and they continue to sprout in storefronts as merchants try to get ahead of legalization to tap into what is expected to be a lucrative marketplace. An October report by Deloitte projects the Canadian marijuana market to be worth $4.9 billion to $8.7 billion annually.

But until next spring, when the Liberal government hopes to see recreational marijuana become legal, and likely after that as the provinces and municipalities determine their approach, the retailers and landlords could find themselves in a quagmire, observes Andrew Fortis, a partner at Toronto’s Hummingbird Lawyers LLP, where he practises real estate and corporate and commercial law. “We don’t know what the law is going to be like,” he says. “Right now, the law is very grey.”

Reaction to the stores by municipalities across the country has ranged from ambivalence to enforcement, while several British Columbia communities have simply accepted the growing number of pot shops, imposing their own sets of rules to control marijuana distribution and exposure to it. Much of the attention of the communities that are not willing to put up with the for-now illicit shops has focused on the lease between the landlord and the retailer. In some cases, police forces have pressured landlords.

Toronto has been aggressive, issuing written warnings to 78 property owners and raiding several dispensaries, charging dozens of store owners, clerks and landlords. In the fall, city officials in Ottawa issued warnings to landlords of buildings that house dispensaries, threatening criminal and other charges. That was followed by raids at seven dispensaries and the arrest of nine people.

That legal haze results from how the law and society interact, observes Oliver Moore of Norton Rose Fulbright Canada LLP in Ottawa. And the struggle is managing between the letter of the law and social law. “We’re in a period of flux, an intermediary period, where the law is certain, but it’s not,” he says.

He sees societal acceptance of marijuana preceding legalization opposite to our approach to tobacco. The government has used the law to push cigarettes out of ordinary, casual use through taxation, labelling and control of sales. And it was those initiatives that led to societal change and diminished use. With marijuana, there has been a growing acceptance and now the law is struggling to catch up.

Task force recommendations

Canada’s cannabis legalization task force offered a series of recommendations on how the federal government should approach making recreational marijuana legal. Many storefront shops have already been established in anticipation of legalization. If the government approaches the suggestions on how marijuana can be distributed, some of the stores may well continue to exist. The task force suggested consumers should be able to access cannabis safely, minimizing potential risks and reducing an illicit market. It also suggested: • Storefront retail stores with limits on density and location and appropriate distance from schools, community centres and parks; • Stores have trained and knowledgeable staff; • Marijuana also be available through mail order.

 As a result, communities struggle with how to deal with a situation that remains illegal, adds Janet Bobechko, a Norton Rose partner in Toronto whose interest in the issue was sparked by the establishment of a pot shop in her neighbourhood. During this interim period, landlords risk walking right into a liability. The landlord’s best protection, she adds, is thorough due diligence, which extends to all those who have been involved in the rental of the property, including agents and property managers.

Being proactive in the lease “and doing some reasonable diligence at the outset” could go a long way to protect both the tenant and the landlord to avoid the disruptive and potentially expensive route of eviction, says Kathleen Robichaud, a sole practitioner in Manotick, Ont., where she practises residential and commercial real estate law.

Mitigating the risks begins with the clause prohibiting use of the property for illegal activity. She points out that leases drafted by a lawyer typically also contain a use clause that makes the tenants responsible for verifying zoning and ensuring they have all the required licences. Tenants can also require the landlord to evict another tenant whose business is not compatible with theirs. “For the tenant to be shut down can have serious consequences and the same can be said for the landlord,” she says. “If the property is seized as part of a criminal investigation, the landlord will not be able to re-rent for a potentially long period of time.”

There is a clear chain of illicit activities that Tony Wilson of Vancouver’s Boughton Law Corporation sees related to the pot shops and so many ways landlords can ultimately be made liable. Currently, the only way that marijuana can be bought and sold in Canada is under medical marijuana legislation through authorized licensed producers and licensed cultivators. “So, if a retail marijuana outlet is receiving its inventory of marijuana from an authorized producer, then the producer is breaking the law by selling to the retailer rather than to registered individuals with prescriptions through the mail,” he says. “Additionally, the retailer is breaking the law because it’s selling to consumers in a retail store environment when the sale should be directly between the authorized producer and the patient, again by mail.”

Like many lawyers, Wilson suggests retailers resist setting up shops and landlords refuse pot retailers as tenants until the legislative framework is fully in place and the rules become clear.

But Kirk Tousaw, whose Vancouver Island practice focuses on cannabis-related issues, says the budding billion-dollar industry is waiting to fully bloom with the blessing of the federal government. He suggests the new, legal infrastructure build upon the existing one that has developed over the years and not only be immune to penalization but also be sanctioned. He points to the many B.C. communities that are selling business licences to pot dispensaries, imposing a series of restrictions within which they must operate.

“What you’ve seen over the last three years is a real coming out of shadows and into the light of the cannabis industry in this country popularized mainly by the spread of dispensaries,” says Tousaw. “The consumers are responding in a real massive way to the emergence of dispensaries. And that I think says a lot about public acceptance.”

Many of these shops, he adds, have three- to five-year leases in place and forced closure could result in an empty storefront, a breached lease and implications upon the landlord, including forfeiture of property. But Tousaw sees a solid argument to be made in defence of a landlord caught in this situation.

As the Woodstock generation ages, there should be no surprise that there’s a waiting demand for legal pot. In fact, many are simply not waiting. Health Canada reports that the number of people accessing medical marijuana legally has tripled in the past year. Nearly 100,000 Canadians armed with prescriptions registered to buy the potent weed through a licensed grower at the end of September. A year earlier, that number was just above 30,000 people.

Until full legalization is rolled out and legislation is in place, the shops can be considered illegal and the validity of the leases remains in question, adds Robert Eisenberg. “This whole regime is really in a state of flux,” says Eisenberg, whose practice at WeirFoulds LLP in Toronto focuses on commercial leasing.

While the dispensaries are not currently operating legally, it is only a matter of time that they may be above board. But the marijuana supply chain is dependent upon how the provinces, and, in turn, the municipalities decide to approach legalization. How they react may well result in the elimination of some of these shops, leaving landlords, some with leases, in the lurch.

The early indication is that many of these shops have a chance to survive legalization. The task force on legalized recreational marijuana suggested in a report released in mid-December that the selling of pot be restricted to storefront shops and by mail order and not be sold in conjunction with cigarettes and alcohol. It further suggests wholesale distribution and retail operations be regulated by provincial and territorial governments in close collaboration with municipalities.

And that may well set the stage for further restrictions. When Colorado legalized marijuana, municipalities were given the opportunity to opt out. While the Rocky Mountain state’s larger communities have allowed dispensaries, municipal councils of some of the smaller communities decided against allowing them.

“We actually had something very similar here in Colorado,” says Sam Kamin, the Vicente Sederberg Professor of Marijuana Law and Policy at the University of Denver, of the many shops that appeared in anticipation of legalization. “It sprung up without laws and then the law adapted to the situation.”

Some of the shops that pre-existed legalization were able to adapt to the transition and remained, while others relocated or simply shut down. One of the challenges, observes Kamin, is that regulation of marijuana is evolutionary, developing with time, and expensive for both the regulator and the regulated. And that’s an expense that not all retailers are willing to shoulder. The application for a permit itself includes proof of state residency, a criminal records check and a requirement that the operations must be secure and include video surveillance of the facility. So many of the shops that pre-existed legalization no longer exist. “There’s lots of minutiae that have to be taken care of,” he adds.

Although Colorado has served as a model for other jurisdictions, how legalization rolls out nationally in Canada is still murky. But if Colorado serves as an example, the process is not likely to be swift, says Kamin.