Would-be cannabis retailers in Ontario are facing tough decisions over whether to terminate hard-won leases or hang on to them without the promise of near-term revenue, following a decision by Ontario’s provincial government last week to license only 25 cannabis stores by April, 2019.
For the past few months, companies have aggressively pursued real estate in the hopes of getting early retail exposure to Canada’s largest cannabis market. The Progressive Conservative government had initially said it would not cap the number of licences issued, and expected up to 1,000 stores to open. Hundreds of leases were signed, according to industry insiders, often after pricey bidding wars.
The Thursday announcement, along with regulations published Friday, make most of these properties unusable as dispensaries, at least in the short term. The initial 25 licences will be given out in a lottery, set to take place in early January. Winning companies are only allowed one location, and licensed cannabis producers and their affiliates aren’t even allowed to participate in the draw.
"Those who signed multiple leases … are really licking their wounds right now,” said Chad Finkelstein, a lawyer with Dale & Lessmann LLP who advises clients in the cannabis space.
“You’re going to see companies having to make tough choices about how many of our locations are we prepared to carry until this sorts itself out? … How much rent are we able to keep paying because we don’t want to lose these A-sites? Or how many should we offload to other people right now?” Mr. Finkelstein said.
The problem is exacerbated by the hefty premiums many companies were willing to pay to secure sites, often agreeing to multiple months of rent up-front. Some have conditional clauses allowing them to exit the lease, but not all.
"I've seen a whole bunch of leases, and they're all totally bespoke,” said Eric Foster, head of Dentons Canada LLP's cannabis practice. "If [the landlord] had what they think is a good desirable location, they've been able to effectively dictate terms… So at the end of the day it will be whatever the terms of the lease were."
Companies that want to keep leases could turn them into cannabis accessory stores to try establishing brand recognition in key neighbourhoods. But the margins will be different than what they had budgeted for, Mr. Finkelstein said.
Subletting may also be an option. However, leases often designate use or are limited by other factors. “If, for example, a strip plaza has a coffee shop already … the landlord is not going to have two competitors in the same plaza," Mr. Finkelstein said.
While companies try to figure out how many leases they can afford to carry, attention will turn to the approaching lottery for the initial 25 licences. It’s unclear at this point who will qualify to take part in the draw.
“The government has stated that the main goal of this endeavour is to effectively make sure that these stores are operational on April 1, so I think it’s fair to say in order to achieve that objective, they should probably put some parameters around the process,” Mr. Foster said.
“If you have mom and pops, or early stage entrepreneurs, who don’t have that operational experience, they may have trouble going from zero to store-opening within two months,” he said.
For all the disruption caused by the licensing cap, slowing down the process could have some upsides from a government relations standpoint. Last week, several large Ontario municipalities – including Mississauga, Markham and Pickering – decided against allowing cannabis stores, at least at first. A more measured introduction of private retail could ease concerns expressed by city councillors about their municipalities being flooded with an uncapped number of stores.
“A go-slow approach does provide some opportunity to re-engage with some of these councils … to show them, ‘look where these 25 stores have opened up, the world has not ended,’” said Omar Khan, vice-president of public affairs for Hill+Knowlton Strategies.
“Our advice to clients is keep working with your local councils, keep working with your local chambers of commerce, the rotary clubs, do all of things you need to do to educate the local community … because this thing could open up again in six months, and you don’t want to be in a position then where either your council has voted to opt-out, or you have to start at the drawing board and do all of that work again to build community support,” Mr. Khan said.