Fire & Flower's (FAF.TO) plan to legally sell pot in one of Canada's poshest shopping districts has erupted into a courtroom battle.
The Edmonton-based cannabis retail chain's landlord is demanding millions in damages over a location that has yet to sell a single joint, more than two years after the lease was signed.
Fire & Flower claims it should be excused from the contract, and has brought a third-party claim against its realtor for missing a critical flaw at 95 Bloor Street W. that prevented the location from being licensed for cannabis sales by the province.
The company, which operates a network of about 80 pot shops in Canada, saw the premium multi-storey retail space as a way to introduce legal cannabis to the well-heeled shoppers who frequent the nearby Hermes and Prada boutiques. Now, the property's landlord claims Fire & Flower should pay $3 million in damages for breaching its lease contract, after the company failed to obtain a licence from the Alcohol and Gaming Commission of Ontario (AGCO).
According to court documents obtained by Yahoo Finance Canada, Fire & Flower hired commercial real estate giant CBRE in August 2018 to find legally compliant locations for a cannabis retail store. CBRE is said to have identified 95 Bloor Street W. as a site that met Fire & Flower's criteria, including the legal provision that cannabis stores be located at least 150 metres from the closest school. Fire & Flower is said to have signed a five-year lease agreement with the property's owner, Laronde Investments, on Jan. 21, 2019.
A spokesperson for Fire & Flower contacted by Yahoo Finance Canada did not provide a comment in time for publication. A lawyer representing Laronde declined to discuss a matter before the courts. A CBRE spokesperson did not respond to a request for comment.
Toronto's Bloor Street is home to the most expensive rent rates for retail space in Canada, at US$206 per square foot annually, according to the most recent figures from real estate firm Cushman & Wakefield.
Standing in front of the unopened store the Spring of 2019, Fire & Flower chief executive officer Trevor Fencott spoke to Yahoo Finance Canada about plans to elevate the cannabis retail experience, and the risk of paying pricey rent before opening for business.
"There was going to be regulatory challenges, and I think you have to accept that level of risk being in this space," he said at the time. "Our investors, and the capital that we have raised, are very patient. And it's risk capital. Sometimes you are going to win. Sometimes you are going to lose. But you have to believe that on some time horizon this is going to open up."
According to the court documents, when Fire & Flower applied for its cannabis retail store licence, it was told by the AGCO that its proposed store on Bloor Street is within 150 metres of The Rosedale Day School, located at 131 Bloor Street W. The AGCO is said to have told Fire & Flower in March 2020 that 95 Bloor Street W. therefore cannot be licensed as a cannabis retail store.
A spokesperson for the agency told Yahoo Finance Canada that there have been "a number of automated attempts to apply at this address, most recently in March 2021," adding in an email that "all retail cannabis store applications are 'hard stopped' when proposed addresses fall within a 150-metre radius of a school."
The landlord, Laronde Investments, claims it received a letter from Fire & Flower dated March 31, 2020, informing the company of the pot retailer's decision to surrender the lease effective immediately.
"The inability of 95 Bloor to be licensed as a cannabis retail store is a fundamental and permanent change in the circumstances from the time the lease was entered into," read court documents submitted on behalf of Fire & Flower. "Fire & Flower is no longer able to carry out its intended business on the premises, through no fault of its own, and therefore is unable to fulfill its obligations under the lease. The lease therefore is frustrated."
The company also cites "changes in the commercial landscape caused by the COVID-19 pandemic" as a reason why the court should consider the lease frustrated.
Laronde has filed a motion to strike off Fire & Flower's defence that was scheduled to be heard by the Ontario Superior Court on May 13. Laronde contends that frustration is not a tenable defence because the lease accounts for the risk that Fire & Flower would not obtain a retail store licence, as well as "force majeure" events, such as the COVID-19 pandemic.
According to a copy of the lease agreement submitted to the court, the premises could be used for retail sales of cannabis accessories and general merchandise, or to provide health information related to the business. Fire & Flower had the option to terminate the lease by providing notice to the landlord during a one-time 30-day window on the third anniversary of the location opening for business, according to the copy.
Laronde claims Fire & Flower has not paid rent since March 2020, and has advised that it does not intend to pay for the balance of the term.
"Even assuming the tenant properly exercised its early termination right as a result of its failure to obtain the necessary permits for cannabis retail sales, it would still have been required to pay rent pursuant to the lease agreement until Oct. 31, 2022. In other words, the tenant has failed or refused to pay, at a minimum, 31 months' worth of rent," read a statement of claim filed on behalf of Laronde.
It's seeking $3 million in damages, plus court costs and other expenses.
On April 14, Fire & Flower filed a third-party claim against CBRE. It claims an agreement between the two companies stated CBRE would present Fire & Flower with a research report on properties for a new cannabis store, including compliance and per-qualification criteria. CBRE is said to have identified 95 Bloor Street W. as a suitable location.
"CBRE breached its duties to Fire & Flower when it failed to recognize that 95 Bloor is located within 150 metres of a school site, and/or failed to advise Fire & Flower that 95 Bloor is located within 150 metres of a school site," court documents filed on behalf of Fire & Flower stated.
Fire & Flower wants the third-party claim tried together with the main action between itself and Laronde, and seeks to hold CBRE liable for any potential damages.
David Goldberg, a partner at Toronto-based law firm Goldberg, Lamba & Ghannoum, which is not involved in the case, said the situation underscores the importance of each party drafting clear expectations into lease agreements. In the fast-moving world of cannabis retail, he said the risks are heightened for both landlords and tenants.
While cannabis stores in Ontario have continued to open up for business despite challenges related to COVID-19, Goldberg, Lamba & Ghannoum partner Elie Ghannoum says the pandemic is leaving a lasting mark on commercial real estate contracts.
"We're putting in COVID clauses, where we will say in the event of a medical outbreak... the landlord agrees to scale back minimum rent," he told Yahoo Finance Canada. "What this pandemic has done is shed a light on things that weren't really perceivable in the past. Lawyers haven't seen things like this in their lifetime."
More data, less glamour
Fire & Flower booked $3.3 million in impairment charges for the year ended Jan. 30. After a review if its stores, "a few locations were determined to not be in alignment with management’s ongoing focus of enhancing performance of the network," the company said in a regulatory filing. Fire & Flower also incurred $1.5 million in restructuring charges in the same period.
"The restructuring charges primarily had to do with rationalization of the Ontario portfolio. There were a few locations that we decided not to proceed with," chief financial officer Nadia Vattovaz told analysts on a post-earnings conference call on April 27.
Fencott said a data-driven approach informed by convenience store giant Alimentation Couche-Tard (ATD-B.TO), the company's largest investor, will help determine locations for new stores in competitive markets like Toronto.
"They're not always these, I'm going to call them glamour locations. There are locations that are kind of for show, and they're good for marketing. But they don't deliver bottom line," he said on the call. "We've certainly pivoted, and are maniacally focused on four wall store metrics."
Toronto-listed shares have climbed 16.87 per cent year-to-date.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.