Found the problem. Zfs by default does not allow acl. At least the setfacl part.
Upon researching some more I came across this post by @stgraber on github. The post is back from 2016 but there could still be potential problems with acl + zfs and the solution I am posting should not be used for data-sensitive situations until @stgraber clears it.
on your server to list all container names.
You should see something like this :
To allow acl in zfs file system of one of your containers one can use :
zfs set acltype=posixacl lxd/containers/X
where X is the name of your container.
Restart your container.
Check acl presence using :
mount | grep acl
Mine showed :
lxd/containers/dev0 on / type zfs (rw,relatime,xattr,posixacl)
This can also be set to default using the following command.
sudo zfs set acltype=posixacl lxd/containers