In a recent Ontario Court of Appeal decision, the court dismissed a sublessee’s appeal after the landlord repossessed the premises in which he was operating an unlicensed cannabis store.
Cannabis Store Owner Subleases Commercial Property
The sublessee began occupying the commercial premises in January 2019, under an oral sublease granted to him by the original tenant, who had operated a restaurant.
The tenant’s lease required business conducted on the premises to comply with federal, provincial, and municipal law. As such, the sublessee was bound to comply with that obligation.
The sublessee operated a cannabis store on the premises. He did so without either a licence or any valid exemption from the licensing requirements under the Cannabis Control Act, 2017 and the Cannabis Licence Act, 2018.
In July 2019, a company purchased the property and became the head landlord.
In August 2019, the new landlord gave notice that the tenant was in breach of its lease because the premises were being used for the sale and distribution of cannabis without a licence. The notice gave 10 days to rectify the breach, failing which the landlord would repossess the premises. Doing so would terminate the tenant’s lease and, as a consequence, the sublease.
Landlord Repurposes Premises Following Police Raid
However, despite the fact that the cannabis store had continued to operate, the landlord did not act on the notice until April 21, 2020, when there was a police raid of the premises. During the raid, the police seized several kilograms of marijuana and charged four of the sublessee’s employees, though neither the sublessee nor his business were charged.
Following the raid, the landlord changed the locks and retook possession, purportedly terminating the lease. The landlord did not issue a fresh notice of default before doing so. The landlord had continued to accept rent payments between the August 2019 notice and the April 2020 retaking of possession.
The sublessee went to court seeking an order granting him relief from forfeiture and re‑entry into his business. He argued that the landlord knew he was running a cannabis retail business and consented to him subletting the unit from the tenant for that purpose. He also argued that his cannabis store was a legal operation and he had not breached the lease. Finally, he argued that even if he had breached his lease, the forfeiture was unlawful because he was not given notice of the landlord’s intention to terminate the lease or an opportunity to cure any breach. In the end, the sublessee argued that it would be unjust to deny him relief from forfeiture in this case.
In response, the landlord submitted that the sublessee did not have a valid sublease with the tenant for the premises and, therefore, had no standing to seek relief from forfeiture. In the alternative, it submitted that by carrying on an illegal cannabis business, the sublessee had breached the terms of its lease with the tenant. The landlord also argued that it was not required to give the tenant or sublessee notice of intention to terminate the lease in April 2020 because notice was given under the Commercial Tenancies Act in August 2019 that the tenant was in breach of its lease because the premises were being used for an unlicensed cannabis store.
Lower Court Rules Against Sublessee
The application judge rejected the sublessee’s argument that the landlord was not entitled to terminate the lease (and thus the sublease) and retake possession in April 2020 without issuing a fresh notice and giving further time to cure the default. She found that, following the August 2019 notice, the landlord had been misled by information provided by the sublessee that he had a valid exemption from licensing requirements and thus could lawfully run a cannabis store on the premises. She found that the landlord had not acted earlier to terminate the lease in reliance on that misleading information.
The application judge concluded that it was only when the police advised the landlord in April 2020 that no licence or exemption existed for the premises that it came to understand that it had been misled. The application judge held that the landlord was entitled at that point to act on the original notice, which had clearly indicated that it was not prepared to continue the lease if the cannabis store was operating illegally.
In dismissing the sublessee’s application, the application judge stated:
“I find that the breach of the lease was very serious. [The sublessee] was operating an illegal cannabis store for more than 15 months. When [the landlord] confronted him about the status of his business, [the sublessee] misled [the landlord] into thinking that he had a lawful exemption to run the business without a license. There is nothing inequitable or unjust about prohibiting an illegal business from continuing its operations.”
The sublessee appealed to the Ontario Court of Appeal. He argued that the application judge’s conclusion that the landlord was entitled to act on the August 2019 notice was unjustified. He submitted that the decision rested on the premise that he had intentionally misled the landlord. While the sublessee conceded that he had no licence or exemption, he argued that at the relevant time he believed he was entitled to an exemption and therefore had not intentionally mislead the landlord when he provided information that he had a lawful exemption.
Court of Appeal Dismisses Appeal
The court rejected the sublessee’s argument, stating that the application judge’s conclusion was not premised on a finding that he had intentionally misled the landlord, nor was it necessary for her to so find. On the same basis, the court rejected the sublessee’s argument that the application judge had erred in not granting relief from forfeiture.
The court stated that the actual underlying issue before the application judge was whether, by reason of the delay in proceeding under the August 2019 notice and the acceptance of rent, the landlord had waived the breach of lease referred to in that notice, thus requiring a fresh notice in April 2020.
The court held that the requirements for a waiver had not been established and the waiver argument could not succeed.
As a result, the sublessee’s appeal was dismissed.
Get Help
Running a business involves an infinite number of both daily and long-term decisions, all of which will impact your venture. Choosing the appropriate legal structure will influence your success as it will affect your business from start-up options and share capital, to providing for future investment and profit-sharing. The way in which a business is structured will also have a significant effect on risk and liability.
Deciding how to structure your business is a task best undertaken with the guidance of an experienced corporate lawyer with noteworthy experience advising business owners on risk and liability. At Bader Law, our business services lawyers have been advising clients who are looking to make the best choices about how to organize their business venture for several years. We work hard to protect your financial and legal interests while ensuring your company operates successfully.
The business services our team offers include experience advising and assisting cannabis start-ups with business structure and licensing matters.
The business law team at Bader Law has decades of experience in establishing new legal identities for businesses throughout Mississauga and the Greater Toronto Area, be it as a private corporation, a limited liability partnership, a sole proprietorship, or a corporation needing to make a private placement of securities. Contact us online or at (289) 652-9092.