Canada: Cannabis, Commercial Real Estate And The Environment — Things To Consider Before You Get Into The Weeds

Cannabis legalization has been in the spotlight since Prime Minister Justin Trudeau put the issue on the agenda as part of his 2015 campaign. Details have begun emerging around how cannabis production, sale and consumption will be regulated with the recent introduction by the federal government of Bill C-45, the Cannabis Act (Bill) (for further information, please see our April 2017 Blakes Bulletin: Federal Government Introduces Cannabis Legislation). However, the Bill does not provide all the answers as it contemplates that the provinces, territories and municipalities, under their own authorities, can set additional restrictions related to production, sale and consumption.

At this time, little is known about the direction which will be taken by the various provinces, territories and municipalities across the country. What is known is that cannabis legalization will have a profound effect on commercial estate, including as it relates to the landlord/tenant relationship, and environmental and municipal matters.

COMMERCIAL LANDLORD/TENANT ISSUES

Careful thought must be given prior to leasing premises for the production, distribution or sale of cannabis. This is particularly true of multi-tenant commercial properties. Tenants in the cannabis business should not be held to a higher standard as compared to other tenants and, as such, they should assume responsibility to rectify reasonable and justifiable complaints by others (but not necessarily those that are unreasonable or ungrounded). At a minimum, tenants who intend to produce, distribute or retail cannabis from their leased premises should ensure that their leases do not afford their landlord automatic or unfettered termination rights should a neighbouring tenant take issue with odour, smoke or other issues related to the tenant's business operations. Rather, both the landlord and tenant should ensure that the lease includes a workable and realistic mechanism to address and rectify any such issues. From a landlord's point of view, some anchor-type tenants may have cannabis related restrictions in their leases and, as such, landlords should check that they are not prevented from leasing to cannabis related businesses.

Landlords should also review their insurance policies to ensure that a lease to a cannabis related business does not void any of the landlord's insurance policies. In addition, leases should expressly articulate who is to be responsible for any increases in the landlord's insurance due to the tenant's business.

Are the premises safe and secure enough? The safeguarding of cannabis is important and potentially very costly. The parties to the lease will want to think about and be clear as to who will bear the responsibility for safety, security and any related property upgrades. For example, slab-to-slab construction and steel mesh sheets attached to the underside of structural joists may be required to ensure security between interior party walls.

Finally, as a further exercise of cost and risk allocation, landlords and tenants will want to determine who will bear the responsibility for upgrading properties to comply with relevant standards in relation to fire and electrical safety, humidity and moisture control, waste management and ventilation. If fixtures and improvements are made to the premises in this regard, ownership must be designated as well as responsibility for removal upon the expiry of the lease term.

ENVIRONMENTAL ISSUES

Water Use

Cannabis is a water-intensive crop. Indoor cannabis-grow operations use huge amounts of municipal water and wastewater often carries heavy nutrient and pesticide loads. Further, studies of cannabis cultivation in California show that outdoor cannabis production can also have harmful environmental impacts. In California, water demand for outdoor cultivation is alleged to have drained waterways and damaged fish habitat. Therefore, whether for indoor or outdoor cultivation, water permitting for cannabis producers and management of wastewater will be important issues for provincial governments, especially in an era where water taking has become highly controversial as it has in Ontario.

Herbicides and Pesticides

The medical cannabis industry has experienced pesticide regulation issues — testing of medical cannabis products has disclosed the use of unauthorized pest control products. Herbicide and pesticide use will continue to be a significant concern with recreational cannabis production. Currently, there are 17 registered pesticides that are approved by the Pest Management Regulatory Agency for use on cannabis that is produced commercially indoors. If outdoor production of cannabis is permitted, this list will need to be re-evaluated and producers will need to ensure compliance with any regulatory changes.

MUNICIPAL MATTERS

In terms of the production, storage, sale and distribution of medicinal or non-medicinal cannabis, municipalities do not have the authority to regulate, but a municipality can regulate where a cannabis operation may be permitted.

While it is important to consider the permitted use provision in any lease for a cannabis related business, one also has to consider all things municipal. For example, is the business operation permitted from a land use planning perspective? In this regard, is the use permitted under the zoning bylaw? It will be different from municipality to municipality and some municipalities may regulate businesses directly associated with cannabis operations (i.e., Vancouver and Victoria regulate businesses engaged in the advocacy of medical cannabis). If permitted, what restrictions and regulations are associated with the use? Would the current zoning allow the business to expand or transform to fit a particular business plan? If the use is not permitted, or the restrictions and regulations associated with the use are not favourable to a business plan, would a rezoning or minor variance application be successful and when can such an application be made? What is the municipal political landscape? What does the neighbourhood look like in terms of public sentiment toward the use?

CONCLUSION

The recently announced legalized cannabis system is expected to be in place by the end of June 2018. As we move through the legislative process, it will be interesting to watch and see what all levels of government do, and what constituents and commercial real estate lobby groups bring to elected officials in terms of concerns and objections. While there may currently be more questions than answers, landlords, tenants and others in the commercial real estate industry should begin preparing themselves so that they are not caught off-guard and are able to adequately deal with and adapt to the unique challenges and issues brought about by the legalization of cannabis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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