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Where to Set Up Shop

Here’s what you need to know about how to find the best location for your cannabis retail store…

By Chris Lavoie, PhD | Associate Consultant | CannDelta

ABOUT THIS SERIES

CannDelta, in partnership with the Business of Cannabis, has produced a 10-article series entitled “So, you want to open a cannabis retail store?” which is aimed at preparing prospective cannabis retailers with the tools and resources needed to open their own cannabis retail store. This series covers everything from initial planning, estimated start-up costs, the licensing process, location selection, staff hiring, inventory management, and much more. The goal of the series is to empower prospective cannabis retailers with the knowledge and resources needed to change their mindset from “one day” to “day one”. Interested in accessing all 10 articles in one place? Download the CannDelta E-Book now using the sign up link at the top of this page.

OVERVIEW

British real estate tycoon Lord Harold Samuel coined the phrase “location, location, location”, which is the best piece of advice to follow when considering where to position your cannabis retail store. The location of your store will have major implications on nearly every aspect of your operation, from customer demographics and accessibility to pricing strategy and revenue. Finding the right location becomes even more of a challenge when considering Ontario private cannabis retail regulations, which place restrictions on where retail stores can be located (spoiler alert: not all municipalities in Ontario allow private retailers, looking at you Mississauga!). In this article, we will teach you how to find a great retail store location that suits your desired goals, is within a compliant region, and is strategically positioned away from competitors. You will hear from current retailers and commercial real estate agents, who have offered up tips and tricks for finding a great location and negotiating favorable leasing terms. For the purpose of this article series, we are focusing exclusively on Ontario cannabis retail, however much of the information contained within this article series can be translated to other provinces.

WHERE TO GO?

Deciding where to set-up shop will primarily depend on the region you live in, municipal zoning (more on that later), and the position of existing and prospective retailers within that region. While it is ideal to have your retail store in close proximity to your place of residence, this may not always be the best option (or possible). In this section, we discuss strategies and key considerations for finding a great location. Eligibility Requirements In January 2019, Ontario municipalities had a one-time option to opt-out of allowing private cannabis retail stores in their communities. Municipalities that opted out can opt-in at any time, however, this would prevent them from opting out in the future. The AGCO continuously updates a list of Ontario municipalities prohibiting or allowing cannabis retail stores, and there are currently 73 municipalities out of 444 total in Ontario that has opted out. Some notable municipalities  that currently prohibit private cannabis retail stores include (2016 census of the population):
  • Markham (328,966)
  • Mississauga (721,599)
  • Newmarket (84,224)
  • Oakville (193,832)
  • Pickering (91,771)
  • Richmond Hill (195,022)
  • Vaughan (306,233)
  • Whitby (128,377)
Once you have identified a municipality to set-up shop in, you will then need to find a retail space. There are no restrictions on how close you can situate your store relative to other licensed cannabis dispensaries, however, your proposed retail store cannot be located within 150 meters of the property line of a school, or private school as defined by the Education Act. To automate approvals, the AGCO has created an exclusion map using up-to-date school location data provided by the Ministry of Education. Upon request, the AGCO can conduct a review of school proximity calculations to verify the distance between a proposed cannabis retail store location and nearby schools. Do Your Research The number one goal in finding a location is to be situated in an area that is easily accessible for your intended customer demographic and is as far as possible from competitors. There are numerous resources available to help you find a good location in your chosen region:
  • AGCO Map: shows the position of current/prospective retailers
  • Real Estate Brokers: look for brokers with cannabis retail experience
  • Professional Contractors: consultants and lawyers who specialize in cannabis retail
  Figure 1. A map of prospective and current cannabis retail stores in Ontario (overlooking Toronto). Community Response Situating your retail store in a location that will upset the community can be a recipe for disaster. The registrar has established a mechanism known as the Public Notice Period (PNP) to provide constituents of a given municipality a platform to voice their concerns. The PNP is a critical 15-day period during the RSA licensing stage where you will need to post public notice placards on your storefront to notify the community of your prospective store. The placards give residents instructions for submitting objections to your store, which typically are related to proximity to schools, daycares and public parks, traffic safety and parking, and the number of other cannabis retail stores in the area. It is important to choose a retail location that the community will endorse. Situating a retail store in an area that will upset the local community (e.g., highly residential areas close to schools, parks, and playgrounds) will lead to an abundance of objections, which can take significant time to respond to, and could even result in an application being rejected (the Registrar’s decisions are final). Talk to residents, city councilors, and MPPs before finalizing a retail space so you have confidence you are setting up shop in an appropriate location.

LEASE AGREEMENTS

Once you have identified a great location in your target region, you will then need to secure a leasing agreement for the desired retail space. Negotiating a favorable lease agreement can be a major challenge for cannabis retailers, who are routinely forced into paying premiums by landlords who are skeptical of the longevity and profitability of the cannabis market. It is strongly recommended that you work with professionals such as lawyers, consultants, and real estate agents to ensure favorable lease terms that protect your short and long-term interests are secured. One of the leading Canadian law firms operating in the commercial real estate space is Blakes, who has extensive experience in the Ontario cannabis space. We caught up with Patrick Gordon, an associate from Blakes, to provide tips and tricks for negotiating favorable lease agreements for cannabis retail stores. What is the hardest part of finding a great location for a client? “One of the most critical and complicated issues in finding a great location from a legal perspective is managing the zoning and municipal approvals process. As a starting point, many jurisdictions have strict rules regarding the minimum distances between cannabis-related uses and other uses, such as liquor stores, schools and daycares. Municipalities may also have varying restrictions related to the general zoning of cannabis-related businesses; tenants should ensure that licensed cannabis retail is a “permitted use” under the specific municipality’s by-laws. The Alcohol and Gaming Commission of Ontario provided municipalities a one-time option to opt-out of sitting cannabis retail stores within the municipality, resulting in more than 75 municipalities in Ontario opting out. Tenants first need to ensure that they are not agreeing to lease space in one of those 75 municipalities – after that, it gets more complicated! Most landlords will not provide tenants with any comfort with respect to the tenant’s legal use of the property, thereby requiring the tenant to satisfy itself that such zoning is in place and all necessary approvals are in good standing. Failure to confirm such approvals may leave the tenant with an unusable lease and make it difficult to assign or sublet given the cannabis-specific use clause most likely contemplated in the lease.” Aside from location, what are other dominant factors that prospective retailers are considering? “Some additional key factors that tenants should consider when entering into a cannabis retail lease are the following: Security Measures: Tenants may need protections in the lease related to their ability to install security and surveillance features to comply with legislation including the Cannabis Licence Act, 2018 (Ontario). Tenants may also need provisions preventing the landlord from accessing areas where the tenant’s cannabis inventory will be kept in accordance with the Cannabis Act (Canada). Insurance: Prospective cannabis retail tenants should canvass their ability to obtain insurance for the property they propose to lease and the cost of such insurance as early as possible in the transaction (and quickly once the landlord’s proposed insurance obligations are under the lease). Obtaining such insurance has proved challenging for some insureds in Canada to date although this market should continue to develop. Existing Security on Title: Tenants entering into leases should consider conducting legal due diligence such as title sub searches to ensure that any existing security granted by the landlord and registered on the title to the subject property would not prohibit a cannabis-related use of the property.” Cannabis retail leases can contain provisions that are not in a typical commercial lease. What are some examples that clients should be mindful of? “To protect themselves, landlords may include additional provisions in cannabis retail leases. Below are some provisions that tenants should be aware of when reviewing a lease: Additional Covenants: Landlords can be charged for owning or operating properties whose tenants are selling cannabis without the required license under the Cannabis Control Act (Ontario). As a result, landlords may include protections in the lease beyond the tenant’s general covenant to comply with applicable law, including a right to terminate the lease immediately or with an extremely short cure period for issues such as a breach or cancellation of a tenant’s license to operate a cannabis retail store. Odours, Ventilation, and Utilities: Landlords will want to ensure that the premises have sufficient ventilation to ensure odours are not transmitted outside of the premises or to other units in a multi-tenant complex. Landlords may also be concerned about utility use beyond that of a typical retailer and may seek to include lease provisions allowing the landlord to recover all associated power and utility costs and requiring the tenant to pay for upgrades. Nuisance: Tenants will want to ensure that the permitted use of the leased premises cannot be said to be a nuisance under the lease, which is typically an event of default. This could involve deeming the permitted use to not contravene the typical “no nuisance” language. Without a provision in the lease to this effect, the tenant’s risk profile can increase in certain circumstances, such as where other tenants complain about cannabis-related activities at the leased premises. Access and Security: Landlords may include provisions that establish security measures and limit a cannabis retail tenant’s access to the premises or common areas. For instance, in a multi-tenant property, a landlord may want to grant itself additional rights to control security measures on the premises by adding security guards to the premises and limiting customers’ ability to loiter in common areas. A cannabis retail tenant’s focus should be on trying to ensure the landlord cannot treat it differently than it treats its other non-cannabis tenants and their customers in the same complex. Alternative Forms of Financial Security: Commercial leases commonly grant landlords the right to exercise distress, a common-law remedy that allows the landlord to hold as security and sell the tenant’s goods and chattels found on the leased property to satisfy rent arrears. However, provincial and federal legislation prohibits unauthorized and unlicensed parties from handling, seizing, or distributing cannabis products. Tenants should ensure their leases recognize this tension, and landlords may look for security in other ways, such as holding security deposits and/or letters of credit.” What has been your experience dealing with landlords when they find out your client wants to open a cannabis retail store? “For the most part, once a lease or offer to lease retail premises for a cannabis retail use lands on the desk of the lawyer for the prospective tenant, the location has been chosen and the landlord already understands the desired use of the premises. However, many smaller landlords will be engaging with the legal points inherent in entering into a cannabis retail lease (many of which are described in this article) for the first time, and having experienced tenant counsel can be invaluable in helping the landlord understand and work through certain points in the legal landscape for this type of use smoothly and on an expedient timeline.” What strategies do you find effective for negotiating a more favourable lease agreement for cannabis retail tenants? “Prospective tenants should pay close attention to the wording of offers to lease entered into prior to the execution of a final lease agreement. If offers to lease are drafted carelessly or omit terms that are material to the tenant, it will likely limit the ability to subsequently introduce such material provisions. Tenants should consider the material terms most critical to them before engaging in direct negotiations with a prospective landlord and ensure as many of those terms as possible are addressed or negotiated at the offer to lease stage to ensure that these terms remain enforceable in a future executed lease agreement. For example, tenants should give thought to legislative requirements and try to negotiate for them in the offer to lease to import those necessary details in the transaction as early as possible. In addition, offers to lease are frequently binding on the parties and have more in common with the formal lease agreement than with a non-binding letter of intent. Landlords and tenants need to work together to strike a balance between ensuring the landlord’s comfort with the use of the premises and the tenant’s ability to operate its business according to its normal practices.” How important is it to negotiate and include a favourable termination clause in a lease agreement? What do those clauses look like? “Tenants should prioritize negotiating a termination option or other rights of mitigation when committing to a long-term obligation where they lack sufficient insight into their ability to operate for retail cannabis use. For example, the Expression of Interest Lottery implemented by the Alcohol and Gaming Commission of Ontario with respect to Ontario retail licenses that was amended, litigated against and ultimately dismantled made it extremely difficult for a tenant to ascertain its ability to obtain a retail operating license if it did not already have one at the time it was negotiating a retail lease. The overall regulatory uncertainty, including previous changes of directions, demonstrates the need to draft leases to allow for a termination option if a prospective tenant does not obtain a cannabis retail license or otherwise cannot commit to opening for business. Tenants without these clauses may be required to pay significant financial penalties for breaching the lease agreement if they cannot operate a cannabis retail store for lack of a government license, and will have difficulty assigning their lease or subleasing their leased premises given the cannabis-specific use clause most likely contemplated in their lease. These clauses typically are time-limited and frequently include the payment of a termination fee or permit the landlord to retain an often-significant security deposit if the tenant exercises the option. These options can seem very expensive when they are being negotiated but can be worth their weight in gold if tenants need to make a clean break from an otherwise long-term lease commitment.” The cannabis industry rules and regulations are fast changing. How are landlords adapting? “In my experience over the past couple of years, landlords ranging from major institutional investors to one-off property owners have invested time and money in trying to understand and learn the issues and complexities involved in leasing space to cannabis-related tenants including prospective cannabis retailers. Although many landlords’ initial approach to the issues and complexities is to identify them and subsequently try and push the risk onto the tenant, I’ve been really encouraged by the number of landlords willing to engage in a constructive dialogue over these novel provisions and to come to the table to try and strike deals that make sense for both landlord and tenant.”

BOTTOM LINE

Finding the right location for your retail store is one of the biggest decisions you will make. For this article, we covered what to consider when looking for a location, what resources are available, and how to negotiate favorable lease agreement terms. You are now well equipped to put this information into action and begin your search for the perfect retail store location.

CANNDELTA IS HERE TO HELP

Prospective and current cannabis retailers needing support should reach out to CannDelta for a free consultation. CannDelta is a based regulatory and scientific cannabis consulting firm supporting companies across Canada. We can be reached at info@canndeltav2:8890 or toll-free at 1 (877) 274-6777.

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