How Will the Legalization of Cannabis Affect Commercial Landlords

The legalization of recreational cannabis on October 17, 2018 creates new legal issues that landlords must now address.

In our “Preparing Your Business for the Legalization of Cannabis” newsletter, we outlined the implications of legalization on the employer – employee relationship. Employers are not the only group affected by this new law.  Landlords must also evaluate the consequences of legalization in the context of both residential and commercial tenancies.  The best practice for landlords is to identify potentially dangerous situations, be proactive, and be prepared.

Residential Landlords

Residential landlords need to review their leases and enact rules for their properties that balance their tenants’ new freedom to consume cannabis, while protecting the right to live in a smoke-free environment.

The Smoke Free Ontario Act,[1] has been amended to include cannabis. This means tenants cannot smoke cannabis in any public place, including an indoor common area in a condominium. This only applies to common areas in a condominium and it is up to the landlord or condominium corporation to regulate smoking in private residences. Moreover, the Smoke Free Ontario Act only applies to smoke.  Therefore, landlords should decide how / if they want to restrict growing marijuana in private residences.

While landlords and condominium corporations can regulate cannabis use and cultivation on their premises, such regulations must also conform with applicable Human Rights legislations to accommodate those who use medicinal marijuana, and those who struggle with addiction. Moreover, while landlords can ban smoking in residential units and common areas, they cannot prohibit their tenants from consuming cannabis infused edibles.

Landlords should review their existing leases and consider appropriate amendments.  For current leases, the landlord and tenant must both agree to any changes. Otherwise, the landlord may have to wait until the lease expires to implement any revisions.

Commercial Landlords

Commercial landlords will now be faced with tenants that are in the business of distributing or producing cannabis.

The first thing to consider is whether to lease to tenants in the cannabis industry. As the industry grows and thrives, many landlords may find it lucrative to lease space to these well capitalized businesses.  If a landlord wants to prohibit a cannabis business from leasing its space, it must specify such restriction in the permitted use clause within the lease, as most generic use clauses permit any legal use.

If a landlord chooses to lease to a tenant in the cannabis industry, there are several  important elements to consider when drafting the lease.

  1. Valid Licence. Landlords can face liability under the Planning Act, [2]  the Civil Remedies Act [3] or the Criminal Code of Canada[4] for leasing to an illegal dispensary.  To address this, in addition to requiring the tenant to comply with all relevant laws and regulations, the lease should also require that the tenant maintains a current licence under the Cannabis Licence Act, 2018 [5] throughout the term of the lease.
  1. Termination Rights. Because of the heightened risk of liability, landlords should consider providing for specific termination rights when renting to cannabis tenants. Such termination rights would allow the landlord to terminate the lease for causes such as criminal charges, cancellation or expiry of licences, insurance cancellation etc. It is best practice to discuss such scenarios with the tenant prior to entering the lease. 
  1. Insurance Coverage. Although the use of cannabis is now legal, the existing insurance policy may not factor in risks related to such use.  Landlords should review their insurance policies to ensure cannabis use does not void coverage and whether such use increases premiums.  Based on this inquiry, the insurance provisions of the lease and the financial model upon which the lease is based should be updated. 
  1. Tenant Maintenance and Restoration Clauses. If tenants are growing cannabis, Landlords should review the restoration clause in their leases to determine if it adequately addresses the humidity and mold pressures such operations exert on a building. Landlords should obligate the tenant to both mitigate these impacts and restore the premises and building free from these impacts upon expiry or termination. Landlords should ensure the tenant complies with the relevant zoning rules and fire and building codes.
  1. Access and Distress. Commercial leases often provide the landlord with rights of access to the premises upon emergency or reasonable notice. However, the access rights in a lease with a cannabis tenant will be more restrictive to the landlord because of the regulations that restrict access to cannabis facilities. Landlords should also be cautious when exercising distress rights. In a usual lease, the landlord may exercise the self-help remedy of distress to seize property of the tenant to satisfy unpaid rent. However, a landlord who wishes to exercise distress rights against a tenant in the cannabis industry may face criminal liability for the unlawful possession of cannabis. Thus, this remedy is not readily available to a landlord who is not in the cannabis industry. 
  1. Other Tenant Restrictions. If there are multiple tenants within the building, prior to leasing to a tenant who will grow or sell cannabis, ensure such use does not violate restrictions imposed by other tenant leases.

Conclusion

 Landlords should review their leases and tailor them to the specific needs and character of the leased premises. Since each space is unique, landlords will have to consider how to apply these issues

 Please contact us to discuss how best to structure your leasing agreements.

 [1] Smoke-Free Ontario Act, 2017, S.O. 2017, c. 26, Sched. 3.

[2] Planning Act, R.S.O. 1990, c. P. 13.

[3] Civil Remedies Act, 2001, SO 2001, c. 28.

[4] RSC, 1985, c. C-46, [Criminal Code]

[5] Ontario Regulation 497/18.