Illegal Drug Manufacturing Operations: Growing Liability For Property Owners/Managers

Originally published in Blakes Bulletin on Real Estate Leasing, November 2007

As the threat of clandestine drug operations continues to escalate across Canada, property owners and managers face significant challenges in the form of property damage as well as liability imposed from provincial legislatures and local governments. The lure of a highly lucrative enterprise means that unscrupulous tenants will continue to destroy your property in order to profit.

Occurring both in residential and commercial rental properties, illegal drug manufacturing operations pose serious risk of property damage, safety hazards and decreased property values. Structural damage, severe fire risks from altered hydro connections, HVAC contamination and health risks from toxic mould and noxious chemicals create a dangerous and costly problem. While the rate of cultivation incidents in British Columbia is nearly three times the national rates, provinces such as Ontario are heavily affected.

Vancouver police have located numerous amateur and sophisticated operations in a wide range of industrial, commercial and residential sites, from high class condos in Coal Harbour, to industrial warehouses filled with thousands of marijuana plants, and a methamphetamine dump site recently on an empty lot in Surrey.

Toronto police shut down 655 grow operations between January 1, 2005 and April 30, 2007 and more than 40% were located in high-rise residential buildings or commercial buildings.

Landlords cannot escape responsibility by turning a blind eye to tenant’s activities and pleading ignorance. Nor can they expect to rely solely on insurance policies to counter their risks. Mounting insurance claims regarding drug manufacturing operations is an evolving area in terms of practice and jurisprudence. Insurance companies have denied claims on the basis that drug operations are deliberate undertakings set up for a purpose rather than mere "vandalism and malicious acts", resulting in property owners heading to court over insurance coverage. As well, much of the liability imposed on property owners is now coming from legislative sources.

The Ontario Provincial Legislature has delegated new responsibilities to local governments through recent amendments to s. 447.2 of the Municipal Act (Ontario), along with the authority to order a wide range of remediation measures. Municipalities in Ontario are required to inspect and ensure public safety after receiving police notification that a property has been used as a marijuana grow operation. Buildings can be subject to unsafe building orders, environmental assessments and/or demolition while property owners, regardless of whether they knew of the illegal activity, face hefty clean up bills on top of other penalties.

In 2006, the B.C. government approved a controversial amendment to the Safety Standards Act (B.C.), which empowers municipalities to require B.C. Hydro to disclose customer electrical consumption information. Where such disclosure of excess hydro use establishes reasonable grounds that a drug operation is present, a mandatory inspection notice is served and executed on the residence.

Local governments are fed up with footing the bill for clean-up, policing and other costs associated with drug manufacturing operations and are increasingly looking to property owners to tackle the problem. In Niagara Falls, Ontario, in instances where the police discover a drug manufacturing operation, the Building Department issues an order prohibiting occupancy and an unsafe building order which may be registered against title to the property. A slate of corrective actions is then required before an unsafe order can be lifted, including air quality testing, environmental assessment and electrical and gas inspection. Overall clean-up costs typically range from CAD 75,000 to CAD 100,000. Ultimately a property may be demolished at the owner’s expense if the municipal building orders are not complied with within 90 days.

In B.C., almost every municipality in the Lower Mainland has passed by-laws which hold landlords in part culpable for grow-ops or methamphetamine labs discovered in their rental properties. Examples of these by-laws include:

Richmond. Property owners/managers must inspect rental properties at least once every three months under the Property Maintenance and Repair (Grow-op) By-law No. 897. If illegal drug activity is discovered and the owners cannot establish the requisite inspection pattern, they will be liable for associated costs including investigations, dismantling, inspections and cleaning. Following remediation, all prospective tenants must be notified in writing of the prior drug operation.

Port Coquitlam. Under the Controlled Substance Nuisance By-law (2005), remediation fines could reach as high as CAD 10,000 per day. Such costs can be collected as property taxes and, if unpaid, can result in the tax sale of the property. Any future occupants must be notified of the prior use of the property as a drug operation.

On the transactional front, the Property Disclosure Statement issued by the B.C. Real Estate Association and used in residential purchases requires a seller to disclose if a property has ever been used as a marijuana grow operation or illegal drug manufacturing operation, thus leaving an indelible fingerprint on the site even after remediation is complete. These types of disclosures or representations may find their way into commercial property transactions.

Drafting Solutions vs. Due Diligence The difficulty with crafting a lease to prevent the installation of an illegal drug operation is that a tenant who is intent on criminal activity will have little compunction with breaking a lease covenant.

There are additional challenges with detecting drug operations in a commercial context. The logistics of regular inspections can be more difficult for large portfolios or in buildings in distant locations. As industrial tenants typically pay their own hydro, industrial landlords are less likely to see evidence of spikes in electricity consumption that are a sign of grow operations. Commercial/industrial landlords have also tended to place more emphasis on the tenant’s right to quiet enjoyment of the lease than have residential landlords, creating increased vulnerability for warehouse or other commercial sites.

Despite these challenges, proactive diligence and inspection, coupled with enabling lease language, remain the best defences of a property owner or manager, both through rigorous pre-tenancy screening and inspection, as well as thorough knowledge of the powers and responsibilities under both provincial and municipal legislation.

Landlords should:

• Incorporate strong inspection powers under standard form industrial and commercial leases which enable effective monitoring for drug operations if actively employed.
• Educate your team on the indicators of a drug operation so you can recognise one
• Remember that residential tenancy acts in both B.C. and Ontario empower owners to inspect residential properties regularly
• Consider requiring that the landlord manage all hydro accounts and charge back the cost
• Be wary of offers of pre-paid rent, unusual tenant behaviour or requests
• Leverage legal counsel and insurance consultants as invaluable parts of a risk management team

While requiring additional cost and effort, paying deliberate and strategic attention to the risk of drug manufacturing operations will assist a landlord in protecting their investment, and reduce liability under the evolving legislation.