How to avoid cannabis retail pitfalls

I have been fortunate to work with a lot of clients over the past three years on cannabis sales license applications from quite literally coast to coast. From request to proposal responses in Newfoundland to private retail applications in British Columbia, the details of the application process does vary from province to province.  That said, there are a number of pitfalls from a legal perspective that can trip up retailers in any province and that ought to be avoided. Thankfully with a bit of foresight and advanced planning, many of these potential hiccups can be avoided.

Get Your Application in As Early as Possible 

This sounds obvious, but you would be surprised how many retailers delay submitting part or all of their application despite the fact that they know with certainty that they will be applying for a license. If you are uncertain whether or not you will be applying at all, then of course it makes sense to wait until you have a level of certainty that gives you comfort. However, if you know that you will definitely be applying but perhaps you are not yet certain of the location, then it usually makes sense to submit a portion of your application as early as possible.

For example, in Ontario retailers can submit their application for a Retail Operator License (“ROL”), prior to submitting a Retail Store Authorization (“RSA”) application, which is tied to the specific location.  Many applicants hold off applying for the ROL while they wait to determine their location, despite the fact they know with certainty they will be applying for an RSA once they determine a suitable location.  Applying for the ROL early on allows the Alcohol and Gaming Commission (“AGCO”) to begin its review and due diligence process on the applicant instead of having to conduct that analysis concurrently with the RSA application, potentially saving the applicant weeks or months of waiting time down the road in the licensing process.

Get Your Corporate House in Order

A surprising number of retail applicants apply for a license in their personal names only to later change paths and determine to hold their license in a corporation. There are almost no instances where it makes sense for a retailer to hold the license personally as opposed to in a corporation. Even in instances where it may make sense on some level to do so, the liability and tax reasons for incorporating almost always outweigh the justification for applying for a license in your personal capacity. Additionally, a subsequent change of heart in this regard will hit retailers in the pocket book as well. In Ontario for example, if a retailer wishes to move their ROL and RSA into a corporation they will have to re-apply to the AGCO which will cost them an additional $10,000 in application fees alone.

The vast majority of applicants do in fact incorporate before they apply, but many still do not give careful thought to their corporate structure.  

On one hand, every officer, director and shareholder of the corporation is another potential due diligence touch point for the regulator and therefore a potential source of delay in the licensing process and therefore a delay in revenue generation. Keeping the corporate structure as clean as possible at the outset leads to a more streamlined application review process and in most instances a faster path to licensing. 

On the other hand, consideration needs to be given to if future investors will be added to the corporate structure and, if so, the timing and nature of their involvement. If an investor’s capital is required for the buildout or initial inventory purchase, adding them prior to, or during, the licensing phase may be unavoidable. However, if the primary applicant has the means to get the store open and operational themselves, retailers may want to consider formally bringing in the investor after the license has been granted. In all instances where investors or partners will be involved, having a discussion with your advisors, legal and tax in particular, and having a plan in place at the outset is invaluable so that operations are not unnecessarily delayed. In many instances it often makes sense to have the necessary paperwork prepared in advance of the investor formally coming on board so that it can be signed and submitted to the regulator at the appropriate time without any delay.

Lastly, retailers should also consider at the outset what tax structures may make the most sense for them in the future, even if other partners or investors may not be involved in the business. Many retailers determine after being operational for a period of time that the creation of tax structures, such as a family trust, may be significantly advantageous in the long term. Depending on the circumstances, some foresight and planning can save the applicant tens of thousands of dollars in application and other fees.

Scout Your Location from a Regulatory Perspective

Location, location, location.  Almost every retailer gives careful business consideration to potential locations, but many are not as diligent when it comes to assessing regulatory considerations. In Ontario for example, the AGCO cannot license a retail location if it is within 150m of a “school” as defined in the Education Act. Just because it may look like a school does not mean that it is, and vice-versa. In other provinces there are restrictions in place regarding how close a new store can be to an existing cannabis store as well as how close a new store can be to certain cultural facilities.  

Do not forget about zoning and by-laws as well. Just because a location is zoned retail does not necessarily end the equation. Historical designations and other zoning and by-law quirks may permit the store to be licensed, but may result in logistical nightmares when it comes time to building out the store in accordance with the retailer’s vision.

Even if your store’s potential location meets the technical regulatory requirements in your province and/or municipality, prudent retailers still give careful consideration as to how the store will integrate with the local community. In Ontario, the public notice process gives the local community a chance to register objections to the licensing of the store.  While it is exceptionally rare to have a license application denied as a result of the public notice process, the press that community backlash can generate is not helpful, nor is it overly desirable to set up a location in a community that has no  interest in you being there. Some community outreach before the application gets submitted can pay dividends later on.

Lease Considerations

It is frankly astonishing how many retailers do not want to pay advisors’ fees for negotiating a lease. While I appreciate that no one likes paying advisors’ fees in the first instance, retailers need to be cognizant of the fact that their lease will be the document that governs their entire relationship with their landlord for the next 5 – 25 years.  Additionally, the lease is one of the first documents, after financial records, that potential buyers will want to see if purchasing your store down the road. Investing the time and money into securing a lease that protects the retailer is therefore invaluable.

My partner Ken Beallor wrote an article nearly two years ago about considerations for retailers to consider when negotiating their lease which can be found here https://www.cannabis-law.ca/post/cannabis-blog/tenant-lease-considerations-for-cannabis-retail-stores. All of those points remain true today. Additionally, in provinces like Ontario where the landlord is deemed to be an “interested party” under the legislation, and therefore subject to due diligence by the AGCO, retailers should insist on a clause requiring the landlord’s reasonable assistance in the license application process when requested by the regulator.

Conclusion

Anyone who has spent any time in the cannabis industry knows that it moves at a breakneck speed. The retail sub-sector of the industry is no different. Every day that operations are delayed is another day of foregone revenue.  However, careful thought and planning at the outset invariably results in a faster path to operations as it helps to avoid more significant time and expense that arises when hiccups occur during the licensing process itself.

This article was originally published on Business of Cannabis.

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