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Specific Issues Related To Leases With Alcoholic Beverage Tenants

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There are issues peculiar to leases relating to a company in the business of selling alcoholic beverages, whether at wholesale or retail.  Both the landlord and the tenant must struggle with these issues.

In most instances, a tenant in the alcoholic beverage industry negotiating a commercial lease will want a contingency permitting a termination of the lease if the tenant is unable to obtain all necessary liquor licenses for the premises. Without such license or licenses, the tenant could not conduct its business legally.

On the other hand, a landlord will not want to lease the premises without assurances that the tenant has a strong likelihood of obtaining all necessary liquor licenses or that it will remain whole if the tenant exercises the contingency provision. Thus, the landlord may demand a larger security deposit than it would from a tenant in another industry. Invariably, the lease will require the tenant to use its “best efforts” to obtain a license.  As a condition precedent to assert the contingency, the lease may require the tenant to attend community board meetings, and even to appeal an adverse decision. Additionally, a landlord may seek a representation that the tenant knows of no reason why it would not be able to obtain a license. A landlord may require a tenant to submit a list of all of its principals, stockholders and or members, with representations that no such person(s) have been convicted of a felony or a disqualifying misdemeanor. The Landlord, upon demand, may require periodic updates of the composition of tenant’s principals.

Continuing the “give and take”, a landlord will attempt to limit the time in which the tenant may terminate the lease, based upon a failure to obtain a license. Language in the lease will state that the notice of termination must be delivered by a date certain. This clause is expressed in terms of “time of the essence” or “no later than” language. Should the tenant deliver the notice after the date certain, the lease will remain in full force and effect for its remaining term.

A landlord may ask for a guaranty, from a principal of the tenant or its parent company, to protect against default by a shell company tenant (a company with no asset other than the lease).  The  guaranty is an additional remedy If the tenant does not pay its rent. Usually, the tenant’s principal will try to give a limited “Good-Guy Guaranty.”  Although Good Guy Guaranties take many forms, a basic Good-Guy provides for liability of the guarantor for rent and all other lease charges (additional rent) until the surrender of the demised premises.  More often, a landlord will require that the guarantor be liable for some post-surrender rent to cover vacancy periods, costs incurred in connection with alterations to the premises made to suit the tenant and future costs in obtaining and building-out the space for another tenant including demolition, alteration, brokerage, etc.  The tenant will seek to have its principal’s guaranty terminate upon the assignment of the lease.  The landlord will want that guaranty to continue, unless the landlord has received an acceptable substitute guaranty from a principal of the assignee. Usually, the substitute guarantor will have to have a suitable net worth and experience in the business purpose permitted under the lease.

Both the landlord and the tenant should be aware that a “percentage rent” (additional rent calculated upon the tenant’s sales) in excess of 10% is considered an interest in the licensee by the Liquor Authority.  This means if the Landlord seeks a percentage rent in excess of 10%, the landlord may have to be added as a party to the tenant’s license.

                When leasing to a package store, restaurant or bar, a landlord may have concerns about the tenant’s liability under the Dram Shop Act, which imposes liability upon a server for damages caused by an intoxicated patron. Thus, the landlord’s attorney should seek enhanced insurance provisions in the lease.

                From a tenant’s perspective, no lease should be entered into before adequate due diligence is undertaken. The tenant should ascertain whether the premises complies with the State Liquor Authority’s licensing conditions.  The Liquor Law forbids the issuance of an on or off premise license within 200 feet of a school or place of worship.  Zoning regulations or the building’s certificate of occupancy may prohibit the intended use. It is more difficult to obtain an on-premise liquor license if there are three or more such licenses within 500 feet of the proposed premises.  It is more difficult to obtain an off premise license if it is not in the public convenience and advantage because of the proximity of other off premise licenses in the area. A bar or package store tenant should know whether and to what extent other package stores or bars operate in the neighborhood, or if the community has voiced previous objections.

In dealing with an on premise license, both the landlord and tenant should know the policies of the community board or local government.  Some community boards are highly antagonistic to any new on premise license.

To protect itself against future competition, a tenant would be well advised to request and obtain a covenant that the landlord will not lease any other space in the building for a similar purpose or any other premises which it owns or controls within a reasonably “safe” distance from the demised premises. A tenant should seek and obtain a representation in the lease that the landlord has not given another tenant a restrictive covenant prohibiting tenant’s intended use at the premises.

                Sublet/assignment provisions are important to both the tenant and the landlord. Most landlords seek a provision which prohibits an assignment without its prior written consent. Additional language may provide that a sale or transfer of any interest in the tenant would constitute such an assignment and constitute a material default under the lease unless the tenant has first obtained the express prior written consent of the landlord.  The tenant will want a provision that such consent will not be unreasonably withheld.  It may be advisable for a tenant to provide for certain “carve-outs” for estate and tax planning.

Provisions which restrict subletting the premises and assigning the lease affect the tenant’s ability to sell its business. When reviewing the assignment clause, the tenant should keep in mind the permitted uses in the lease.  Most leases restrict a tenant’s use of the premises to the use or uses enumerated in the lease.  This restriction can make it difficult to assign the lease, unless the tenant is selling its business to the assignee. This is especially true for a wholesaler or supplier renting office space.  For example, if the clause provides that the premises can be used only for the wholesale sale of alcoholic beverages, the tenant would not be able to assign its lease to a law firm.  

Thus, it is preferable to obtain a right to assign a lease for any legal purpose, subject only to the landlord’s reasonable right to restrict such assignment based upon financial  considerations. It should be noted that in the event of a sale of its business the tenant should seek permission to assign the lease and to sublet the entire premises; not just the right to assign. In this way, if the business is not sold in an “all cash” transaction, the seller will have a right to re-enter the premises if the purchaser defaults in the payment of a deferred portion of the purchase price. Then, when the sale is made, the seller signs both a sublease of the entire premises and an assignment of the lease. The assignment is held in escrow until the purchase price is paid in full.

A tenant should keep in mind that even if the lease is assigned and the purchaser assumes the tenant’s obligations under the lease, unless the seller receives a release from the landlord upon the assignment (a “Novation”), it will remain liable under the lease even though it is no longer the tenant.  

If the tenant seeks and obtains a right to sublet a portion of the premises, an accompanying right to alter it may be necessary, as there are SLA requires that the licensee’s premises be self-contained.

Leasing a warehouse to a licensee presents additional issues. As with most tenants of warehouses, the tenant will likely need to make some alterations to the demised premises. Depending upon the length of the lease term and the percentage of the warehouse leased, the landlord may demand some variation of a net lease, whereby the tenant pays some or all of the real estate taxes levied against the property, the insurance on the building and is obligated to make structural repairs to the building during the term of the lease.  A real estate tax escalation clause may be in the form of a percentage of any tax increase above the taxes levied in the first year of the lease or all or a portion of the entire real estate tax bill for the building.   In all likelihood, the landlord will demand an indemnity from the tenant against an environmental hazard or condition created or suffered by the tenant. This would be true, especially, where the tenant plans to have trucks and fuel storage tanks on the premises.  A tenant should seek a reciprocal indemnity from the landlord, if environmental conditions were caused by the landlord or third parties. These indemnities usually survive the termination of the lease.

Tax benefits given by the Industrial Development Administration or the Industrial & Commercial Abatement Program and a variety of utility incentive programs offered by the state and local governments may benefit both the landlord and the tenant.  Before signing the lease, the tenant should consider a detailed discussion of the availability of these programs with a benefits consultant.

  Most leases are taken for a significant time period.  Take the time to think about how the clauses in the lease may affect your future, before signing on the dotted line.

[1] This Article was written by Arthur J. Panoff and Keven Danow.  Arthur J. Panoff, is a third generation real estate lawyer. Keven Danow is an attorney representing members of all three tiers of the Beverage Alcohol Industry.

This article is not intended to give specific legal advice.  Before taking any action, the reader should consult with an attorney familiar with the relevant facts and circumstances.

Written by

Keven Danow

Founding and Senior Partner
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