Canada: 10 Legal Risks In Design, Construction And Operation Of A Cannabis Production Facility

Last Updated: March 14 2018
Article by Chad Eggerman

As the Canadian federal government continues the process of legalizing cannabis across the country, we are witnessing the early consolidation of a new industry involving cannabis giants as well as smaller retailers and producers. This article will focus on those smaller producers by examining the key legal risks in the design, construction and operations of a cannabis production facility.

  1. Real estate. Growing cannabis requires a significant amount of space. An early project consideration is whether space will be newly constructed, purchased and renovated, or leased and used as is. This article assumes that a new greenfield facility would be constructed. Lawyers can assist with the construction contracts, renovation agreements and real estate transaction. If an existing facility is being rented, then the lease should be specific to, and allow for, a cannabis growing operation. Generally the most expensive and least risky option is a new custom build, and the cheapest and most risky option is to rent out an existing facility.
  2. Project structure. The owner will have many options in structuring the project, ranging from retaining a specialized contractor to build a facility on a turnkey basis for a fixed price (expensive but less risk) to, on the other end of the spectrum, doing the build on their own (cheap but more risk). A projects lawyer can assist in structuring the project in a way most likely to result in successful completion on budget and on time.
  3. Design. There will not be many architects and engineers with direct experience designing a cannabis production facility. However, as an owner of the facility you will want an architect and engineer qualified in the jurisdiction you are building in to stamp and seal the design for the facility. Specialist consultants may also be required to provide for such things as automation or CO2 injection and monitoring in the facility. Accordingly, contracts between the owner and architect, engineer and consultants should identify and allocate risks and roles appropriately, and these agreements should be particular to a cannabis production facility.
  4. Financing. As this is a new industry, if a construction mortgage is required, conventional lenders may be less likely to provide financing. Conventional lenders may also undertake a much more rigorous due diligence process in determining whether to participate in the financing or not. If the lender decides after the due diligence process to finance, the lender may require more security than they otherwise would with a non-cannabis construction project.
  5. Insurance. The lender will likely require the owner to obtain insurance during the construction and operation phases of the facility. Obtaining appropriate insurance may be challenging, as not all insurers yet have detailed policies for construction and operation of cannabis production facilities. Where a producer does find an insurer, additional time may be required to explain the facility and business to the insurer and for the insurer to tailor a policy.
  6. Municipal approvals and building code. The municipal authority where the facility is located will have to approve this development and they may not yet have any bylaws in place for cannabis production facilities. Additional time may therefore be required to secure municipal approvals. The facility will also have to comply with building code – the National Building Code of Canada 2015 in most jurisdictions.
  7. Building materials. If specialized plastic panels are required in the design, pay particular attention to the ability of the panels to be fire-rated, as compliance will be required for building codes and bylaws. Any specialized plastic panels that may be used should be approved by CSA Group for use in Canada. The panels used in the grow room must also be able to resist mould and moisture and provide for easy cleaning. Therefore the purchase agreement with the specialized panel supplier should specifically address the use of the panels. Additionally, the interior construction and grow lights integral to the facility work together and both agreements should be drafted at the same time. If the owner retains a contractor with experience in constructing cannabis production facilities, the contractor should ensure that all equipment and material supply contracts are consistent with each other.
  8. Electricity and gas. The facility will use electricity and it is important to have a reliable, cheap and preferably clean supply. This may be from a utility or the facility may incorporate solar, wind, biomass, gas or cogeneration power production. Electricity source is an early design consideration based on the business plan. In light deprivation facilities with growing lights, electricity is a key expense and so it should be evaluated and decided on early in the project development process. Moreover, the facility will likely use natural gas for heat and it is important to secure a cheap and reliable supply. Supply contracts for gas should be long term. Purchase agreements for equipment using gas should align with the gas supply contracts.
  9. Irrigation. The facility will use significant amounts of water to feed the plants and it is important to secure a clean, cheap and reliable supply. Any waste-water must also be contained or reprocessed in accordance with local environmental regulation. The irrigation system in the facility will likely be controlled electronically and so risks surrounding IT systems should be addressed in a contract with the IT service provider.
  10. Ventilation. Due to the presence of plant matter and water, mould is always a concern and appropriate ventilation will be provided for in the design. A key risk is inadequate ventilation, which can hinder the growth of the plants, pose a health risk to workers and may prevent the facility from operating, depending on the extent of the problem. Therefore particular attention should be paid to supply contracts and warranties for ventilation equipment.

This list is not exhaustive as this article is only intended to be general information and not specific to your particular project. Furthermore, as in many other industries, aspiring cannabis producers and retailers must be licenced to do so by the appropriate government authorities. The reader is advised to talk to a projects lawyer if they have questions.

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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Chad Eggerman
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