Canada: The Ontario Cannabis Control Act And Implications For Commercial Landlords

Last Updated: May 9 2019
Article by David S. Reiter and Brian Chung

With the legalization of recreational cannabis, there has been a flurry of activity relating to the enforcement of non-licensed or illegal cannabis storefronts or “dispensaries.” The enforcement is being effected under the authority of the Cannabis Control Act, 2017, S.O. 2017, c. 26, Sched. 1 (CCA), with municipalities as the enforcer(s) using delegated authority from the province of Ontario.1

This article discusses the CCA and the broad enforcement powers it contains. It also discusses a range of other potential impacts that commercial landlords can face under the new regime, and it offers insight into some steps that landlords can take to protect themselves.

BACKGROUND

It is illegal to sell cannabis in Ontario without a licence. The CCA has equipped authorities with enforcement tools to address that illegality. These tools include the ability to charge not only those who sell cannabis without a licence, but also those that own and or operate properties whose tenants are selling cannabis without a licence. In addition, where charges have been laid, authorities can also shut down the property, and prohibit access to it, until there has been a final disposition of any charges. It goes without saying that the impact of such an order can be devastating to the owner or operator of a property.

Our firm recently succeeded in representing a property owner whose dispensary tenant and its employees had been charged with selling cannabis without a licence. The landlord was also charged with permitting the premises to be used for that activity, and closure orders were issued to shutter the property.2 To our knowledge, this is the first case that has proceeded through the courts to completion with respect to a charge against a landlord under the CCA.

Ultimately, we were successful in getting the charges withdrawn against the landlord. However, there were a number of complicating factors that presented significant challenges, and a lot was learned along the way. We have written this article to alert readers to some of those challenges, and to provide insight into how landlords might begin to address them, and even avoid them.

CHARGES & PENALTIES UNDER THE CCA

As we indicated above, the CCA equips authorities to lay charges against those who sell cannabis without a licence. Charges can also be laid against corporations and individuals that own and or operate properties whose tenants are selling cannabis without a licence. With respect to those charges, the actual offence serves to prohibit landlords from knowingly allowing premises to be used in relation to the sale of cannabis.

The consequences of violating either of these prohibitions are significant.

First, individuals, including directors or officers of a corporation, face fines of up to $250,000 on a first conviction, and/or to imprisonment for a term of not more than two years. Subsequent convictions expose individuals to fines of up to $100,000 for each day on which the offence occurs or continues, and/or imprisonment for a term of not more than two years.

Corporations face different penalties. On a first conviction, a corporation will face a minimum fine of $25,000, but not more than $1,000,000. On subsequent convictions, corporations face fines of at least $10,000, but not more than $500,000 for each day or part of a day on which the offence occurs or continues. There is no maximum cumulative fine.

All fines will be automatically subject to an additional 25% Victim Fine Surcharge. On a $25,000 minimum fine, the surcharge takes the actual fine amount that has to be paid to $31,250.

Finally, where a conviction is issued, the court can also order that the subject premises be closed to any use for a period not exceeding two years.

While these potential fines and two-year closure orders can be catastrophic to a business, it is unlikely, at least at first, that fines will significantly exceed the minimum penalties, if at all.

CLOSURE ORDERS UNDER THE CCA

The penalties we have described above will only be imposed if and when an accused individual or corporation has been convicted. That at least leaves one with a fighting chance.

However, one should not take too much comfort. There are immediate consequences to charges being laid. What has been happening right from the start, even before trials are held, is that when charges are laid, they have been accompanied by interim closure orders. These can be devastating. They shut the property down, which in turn can cut off any income stream. If properties are financed, the order can have a cascading effect and result in mortgage default and foreclosure.

Just as important, the laying of charges can also engage insurance default provisions. Where properties are alleged to have been used, knowingly, for unlawful purposes, policy terminations tend to follow. The resulting damage and liability exposure cannot be overstated.

OTHER DANGERS AND PITFALLS

In addition to the above, there are several other serious potential consequences which landlords need to be aware of.

Under the Civil Remedies Act, 2001, S.O. 2001, c.28, if the Crown can show, on the civil standard of the balance of probabilities, that a property was being used as an instrument of unlawful activity (i.e. that cannabis was being sold from a property), the Attorney General can seek an order to forfeit the property to the Crown. To be clear – the Government can seize the property. Similarly, an order can be sought for the forfeiture of any proceeds of unlawful activity, including rental payments that were received from tenants if they can be traced to the unlawful activity. Notably, like the interim closure order, there doesn’t have to be a conviction before the Crown can use this enforcement tool. The Crown can still turn to this remedy even if there was a trial and an acquittal. The standards that a court will apply to this type of application are different than what the court will apply to a prosecution.

Finally, while the CCA is a provincially-enacted statute, individuals can also be charged with a criminal offence. Even with legalization, it is still illegal to sell marijuana without a licence. The penalties for contravening this prohibition can include fines and/or jail.

MOVING FORWARD, IN COMPLIANCE

Last fall’s legalization did not open up a free market. Much like alcohol, marijuana can only be sold with a licence. Landlords and property management companies have to take care to ensure that their properties are not being used for illegal activity. If they don’t, there are consequences. We therefore recommend that landlords and property management companies take the following three steps to protect themselves:

  1. Always check with a lawyer before entering into a new form or type of lease agreement. Many illegal operations have been giving landlords “standard” lease forms that use broad language that arguably permit dispensaries and related contraventions. If a landlord enters into such a lease, there could be challenges with termination, and the lease itself could be used by a prosecutor as evidence against the landlord. Imagine if a landlord is charged, and the prosecution points to a lease that not only allows, but arguably alludes to the illegal activity. To a court, this may suggest that the landlord permitted the activity, and it could leave the landlord exposed.
  2. Always know what is happening at your property and enforce all applicable rules. The CCA provides a defence to landlords that take reasonable steps to prevent unlawful activity. A landlord or property management company can protect themselves by conducting periodic inspections/attendances in accordance with the lease, and by responding promptly to complaints. We appreciate that inspections may be onerous on landlords and we are not suggesting that they happen weekly or even monthly. We are suggesting that a policy be put in place, and that it be followed. Even a bi-annual inspection can go a long way in demonstrating responsibility. It all depends on context and industry standards.
  3. Landlords and property management companies should be documenting the steps that they take to ensure that the property is not being used for unlawful activity. Attendances, responses to complaints, inquiries made, etc. should all be kept in a file. If an allegation is ever made, if a charge is ever laid, and/or if an interim order is ever issued, having the documented steps readily available to present to a court or to the authorities, a lender or insurer can really make all the difference.

Footnote

1 https://www.cbc.ca/news/canada/toronto/illegal-cannabis-stores-toronto-mark-sraga-1.5101325

2 The tenant and its employees were charged under s. 6(1) CCA, and the landlord under s.13(1) CCA.

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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