Ontario Cannabis Retail: Just Painful

On December 13, 2018, the Government of Ontario announced that it is taking a phased approach to the licensing of brick-and-mortar retail cannabis stores. Citing cannabis product supply shortages, Ontario will now initially limit the number of retail licences to 25. Such limited number of stores are still slated to be open on April 1, 2019.

Each of the 25 retail store authorizations will be awarded to an eligible applicant following a lottery process. The lottery will be open to any business - except for federal licensed producers or their affiliates - that submits an Expression of Interest (“EOI”). Consequently, the Alcohol and Gaming Commission of Ontario (“AGCO”) has postponed the opening of its online cannabis retail licence application portal, previously set for December 17.

This new last-minute change represents a significant departure from the previous last-minute change to a hybrid private cannabis retail system that would have permitted the AGCO to issue an uncapped number retail store licences in the province - up to 75 for each eligible applicant (and its affiliates).

The initial cap is currently set to automatically expire on December 13, 2019. This new cap, and the new uncertainty about the future of cannabis retail in Ontario, is creating pain for many would-be cannabis retail store operators who must now evaluate their plans, including (for many) how to deal with premises leases that will be costly to maintain or, potentially, costly to terminate.

Background

Ontario’s private cannabis retail model is governed by the Cannabis Licence Act, 2018 (the “Licence Act”), the general regulation issued under it (the “Licence Regulation”) and the Registrar’s Standards for Cannabis Retail Stores (the “Standards”) established by the AGCO. More information on the Licence Act and Regulation can be found in our November 16, 2018 update, Ontario’s Cannabis Regulations: Rushed to Release, and further information on the licensing process in our November 29, 2018 update, AGCO Application Considerations for Cannabis Retailers.

The recently-announced changes are established in law by new Ontario Regulation 497/18 (the “Amending Regulation”), which amends the Licence Regulation. Unfortunately, the Amending Regulation – itself produced in a rush – fails to rectify the technical drafting problem identified in our November 16, 2018 update, which appears to prohibit the issuance of a Retail Operator Licence to federal licensed producers.

ACGO Lottery System

The ACGO is implementing a lottery system to determine who is eligible to apply for the initial licences to legally operate a store in Ontario. To enter this lottery system, businesses have a two-day window to submit an EOI online to the ACGO from January 7 to January 9, 2019. The EOIs will be put into a lottery pool for a draw. The draw will be conducted on January 11, 2019, with the results posted on the ACGO’s website within 24 hours.

The lottery process is to be overseen by a third-party fairness monitor to ensure equality and transparency in the treatment of EOIs.

Once lottery winners are selected, each will then have to go through the (previously announced) application process and be issued a Retail Operator Licence, Retail Store Authorization and Cannabis Retail Manager Licence before commencing operation.

It is expected that the ACGO will provide further details on the lottery process in the coming days, potentially including a further public webinar.

Regional Allocation

The Amending Regulation provides allocation rules for the 25 store authorizations as follows:

1. Five retail stores in the Toronto Region;
2. Six retail stores in the GTA Region (Durham; York; Peel; Halton; not including Toronto);
3. Five retail stores in the East Region (Stormont, Dundas and Glengarry; Prescott and Russell; Ottawa; Leeds and Grenville; Lanark; Frontenac; Lennox and Addington; Hastings; Prince Edward; Northumberland; Peterborough; Kawartha Lakes; Simcoe; Muskoka; Haliburton; Renfrew);
4. Two retail stores in the North Region (Nipissing; Parry Sound; Sudbury; Greater Sudbury; Timiskaming; Cochrane; Algoma; Thunder Bay; Rainy River; Kenora); and
5. Seven retail stores in the West Region (Dufferin; Wellington; Hamilton; Niagara; Haldimand-Norfolk; Brant; Waterloo; Perth; Oxford; Elgin; Chatham-Kent; Essex; Lambton; Middlesex; Huron; Bruce; Grey; Manitoulin).

Expressions of Interest

The Amending Regulation provides that EOIs must be submitted in the form and manner specified by the ACGO. This information has not yet been released. However, we anticipate that the ACGO will only require basic information such as the name and nature of the applicant. The Amending Regulation specifies the following rules with respect to EOIs for the 25 available store authorizations:

1. A single applicant, together with its affiliates, is permitted to submit an EOI for more than one Region. That is, an applicant and its affiliates together can submit up to 5 EOIs – one for each Region. However, such applicant and its affiliates will only ultimately be entitled to receive one store authorization between them.
2. Federal licensed producers, and affiliates of licensed producers, are not entitled to any store authorizations.
3. No store authorizations will be issued for a location in a municipality with a population of less than 50,000.

The Amending Regulation specifies that an applicant that breaks the rules by submitting (directly or through its affiliates) more than one EOI for the same Region will be barred (together with its affiliates) from applying for a Retail Operator Licence.

Municipal Opt-Outs

The AGCO is maintaining a list of municipalities that have opted-out of having cannabis retail stores. There are currently 9 such municipalities, including Markham, Mississauga, Centre Wellington, Erin, Frontenac Islands, Ingersoll, King Township, Lake of the Woods and Papineau-Cameron. The list also identifies municipalities that have expressly opted-in. Potential applicants will recall that municipalities have the right to opt-out until January 22, 2019. Municipalities that choose to opt-out can opt back into the system at any time.

For further information, please contact Jeremy Burke or another member of the Aird & Berlis Cannabis Group.