Don't Ignore Liquor License Issues in Real Estate Transactions

We discuss the issues surrounding liquor licenses and commercial real estate transactions by looking at how these subjects are dealt with in the State of New York.

Initial Considerations

At the outset of any purchase or lease of commercial real estate, the client should be asked whether the business it intends to operate at those premises is a food and beverage establishment or a retail business that sells alcohol. If the response is yes, the next step is to determine whether the client will apply for a “retail” or a “wholesale” liquor license. The “retail” classification allows the licensee to sell or serve alcohol to the public. N.Y. Alco. Bev. Cont. Law ' 3(26) (McKinney 2016). “Wholesale” liquor licenses are issued to alcohol manufacturers or distributors. Alco. Bev. Cont. Law ' 3(34).

If the client is seeking a “retail” license, the attorney should determine if an “on-premises” or “off-premises” license is appropriate. An “on-premises” retail liquor license allows the licensee to serve alcohol to customers to be consumed on the premises. See, e.g. , Alco. Bev. Cont. Law ” 55, 55-a, 64, 64-a, 64-b, 79-b. An “off-premises” retail license only allows the licensee to sell alcohol “to-go,” with no consumption allowed on the premises. See, e.g., Alco. Bev. Cont. Law ” 54, 54-a, 63, 79, 79-a.

From a real estate perspective, the “on-premises” retail liquor license (which would generally apply to a bar, restaurant, hotel, club, catering or event hall, arena or entertainment venue) is the classification that is most likely to impact purchase or lease negotiations. If the client will be seeking this type of license and is purchasing or leasing a property to start such a business, the first step in the liquor license application process is to notify either the municipality in which the premises is located or the community board serving the premises, using the New York State Liquor Authority's approved form. Alco. Bev. Cont. Law ' 110-b; Application Notice to Local Municipality or Community Board, Liquor Authority http://on.ny.gov/2aN9PQE.

If the property is located outside New York City, the notice is sent to the clerk of the municipality in which the property is located. Id. Once the clerk receives the notice, the client must wait 30 days from delivery of the notice form before submitting a liquor license application to the Liquor Authority. Id. Some municipalities will waive the waiting period, but larger municipalities may be less willing to do so. Clients may wish to send this notice while still negotiating the contract/lease and/or working through the due diligence portion of the transaction, as it is a relatively easy and low-cost part of the application process and does not obligate the client to actually purchase or lease the property or file any liquor license application for that location.

If the property is located in New York City, the notice must be sent to the applicable Community Board. The appropriate Board is determined by searching Community Board maps available on the official website of the City of New York. See http://on.nyc.gov/2aGfBks. The client must provide information to the Community Board about the new business. See, e.g., Community Board No. 2, N.Y.C., http://on.nyc.gov/2asawzx. A hearing before the Community Board, or one of its committees, may also be required. Clients may not wish to commit the time and effort to work through the process with the Community Board until the real estate transaction is far enough along that it is reasonably certain the client will be purchasing or leasing the property at issue.

Due Diligence Considerations

The Liquor Authority generally treats the issuance of a liquor license as a privilege, not a right. Rios v. State Liquor Authority, 32 A.D.2d 995, 995 (3d Dept. 1969). Pursuant to ABC Law ' 64(6-a), the Liquor Authority may consider the following factors in reviewing a liquor license application and determining if granting the license will be for the “public convenience and advantage”:

• Number, class and character of other licensed premises in proximity and in municipality or subdivision;
• Evidence that applicant has all other necessary licenses and permits to operate from the premises;
• Effect on vehicular traffic and parking;
• Noise level; and
• History of liquor violations and criminal activity (even while the premises was operated by a different party).

Alco. Bev. Cont. Law ' 64(6-a).

In practice, however, these factors are more closely scrutinized if the “500 Foot Rule” is applicable. Alco. Bev. Cont. Law ” 64(7), 64-a(7). This rule applies if the client is seeking to serve liquor (as opposed to only beer and/or wine) for on-premises consumption in a city, town or village with a population of 20,000 people or more. The rule states that if the premises is within 500 feet of three or more other locations that serve liquor, and not just beer and wine, for on-premises consumption, a 500 Foot Rule public hearing must be held to determine whether issuance of the new license is in the public interest. Id. See also “Measuring the Distance' The 200 and 500 Foot Rules,” N.Y. State Liquor Authority available at http://on.ny.gov/2b0e9IG. Any delay in scheduling this hearing may impact the timeline for the real estate transaction.

Clients should also be aware of the “200 Foot Rule” contained in ABC law ” 64(7), 64-a(7) and 105(3). This rule requires the Liquor Authority to consider, in connection with any application for a license for the on-premises consumption of liquor (as opposed to a beer and/or wine license) or a license to sell liquor and wine for off-premises consumption (such as a package store or wine store), whether the premises is within 200 feet of any locations used “exclusively” as a school, church or place of worship. If the premises for which the application is submitted is within 200 feet and on the same street as any such school, church or place of worship, the location will be ineligible for a liquor license.

If the premises is within 200 feet but is not on the same street as the school, church or place of worship, the Authority will determine if issuing the license is appropriate, given the circumstances. The Authority measures the distance in a straight line from one entrance to the other. Id. Even though the school, church or place of worship may have other “incidental” uses, these will not, as a general matter, defeat the “exclusive” use of the property as interpreted by the Liquor Authority and courts. See id. For example, the conduct of bingo games or fundraisers, the use of the building by other groups or for social activities, the conduct of health-focused activities such as yoga or exercise classes, or the occasional rental of the building to non-congregate individuals for private social functions will not render the building's religious or educational use “non-exclusive.”

It is also important for the attorney to review diagrams of the premises, particularly if the business holding the liquor license will operate in a physical space that does not encompass the entire building. A liquor license will only be granted to allow service (and consumption, in the case of an on-premises license) within the area under the “exclusive dominion and control” of the applicant. N.Y. Comp. Codes R. & Regs. tit. 9, ' 48.4(b)(1). Exclusive dominion and control generally must include the power to control and oversee the service and consumption of alcohol, the employment or control of those serving the alcohol, and the ability to remove patrons who may be violating Liquor Authority rules (e.g., by being disorderly or intoxicated). This area is known, in liquor licensing parlance, as the “licensed premises.”

If the “licensed premises” is only a part of the physical structure, the client must be careful not to run afoul of the rule prohibiting interior access between the “licensed premises” and any unlicensed area in certain cases. Alco. Bev. Cont. Law ' 106(9). In addition, the licensed premises must generally have its own exterior entrance. In certain cases where these requirements cannot be met, the client may need to license the entire building, even if it only plans to serve alcohol within a limited area. If the entire facility constitutes the “licensed premises”; however, children under 16 must be accompanied by a parent or guardian while at certain licensed entertainment venues, such as skating rinks and bowling alleys. See N.Y. Comp. Codes R. & Regs. tit. 9, ' 48.2, N.Y. General Business Law ” 398-c & 399-d.

Other physical attributes of the real property to be considered during the due diligence stage include:

• Whether alcohol will be stored in an area under the client's exclusive control. If alcohol will be stored in the basement, the client will need to have exclusive control over the basement and will have to license it.
• Whether there are at least two restrooms. If not, a bathroom waiver will be required.

N.Y. Comp. Codes R. & Regs. tit. ' 48.4(d)(2).

Finally, the attorney should check whether any prior liquor licenses have been issued for the subject address. A physical location can be ineligible to be licensed for two years after certain disciplinary violations, particularly revocation. Alco. Bev. Cont. Law ' 113. This may be the case even if the new applicant is unrelated to the owner at the time of the violation. Id. A client that purchases a building to open a bar, restaurant, hotel, etc. and only learns after the closing that a liquor license cannot be obtained for two years, is unlikely to remain a client.

Liquor Licensing Contingencies

When negotiating the purchase or lease of property where alcohol will be sold as either a new venture or the continuation of an existing business, a contingency for obtaining a liquor license should be included in the purchase and sale contract or lease. Such contingency should allow the buyer to terminate the agreement before closing or lease commencement if the liquor license cannot be obtained. Clients seeking an on-premises retail license may have to wait several months for the license to be issued. However, for the payment of an additional fee, a client can often obtain a Temporary Retail Permit from the Liquor Authority much more quickly. See Temporary Retail Permit, New York State Liquor Authority, http://on.ny.gov/2aNPURP.

This permit will allow the client to serve alcohol while the full application is being reviewed by the Liquor Authority, but does not guarantee that a license will be issued. Alco. Bev. Cont. Law ' 97a. Due to the length of time it may take to obtain a liquor license, the buyer/tenant should apply for the liquor license and Temporary Retail Permit as soon as the purchase and sale contract/lease is executed. Sufficient time to satisfy the license contingency should be included in the agreement.

Considerations in Leases

When the applicant for a liquor license is leasing the “licensed premises,” there are additional factors the Liquor Authority will consider during the application process. These factors may include the following: 1) whether the term of the lease is at least as long as the term of the liquor license being sought; 2) whether the lease identifies the property by street address (as opposed to legal description only); and 3) whether the rent is designated as a set dollar amount (as opposed to a rent equal to operating costs, debt service on the property, etc.). LCO. Bev. Cont. Law ' 105(1), 106(1), 110(g).

In addition, if the tenant will pay a portion of the profits to the landlord as rent or in repayment of landlord-financed renovations, a number of additional concerns should be addressed. Liquor licensing counsel should review the lease to determine whether the profit sharing is high enough to require that the landlord act as a “co-licensee” under the liquor license. In that case, the landlord will be required to provide financial and business information, personal information on its owners, and will be subject to potential liability for alcohol-related issues.

Considerations in Property Sale

Liquor licensing considerations can be important even when representing a seller of commercial real property. If the property is currently licensed, or if the buyer will be using the premises for a business that will seek a liquor license, the timing with respect to the liquor license process can affect the transaction. The seller cannot transfer its liquor license to the buyer, and the buyer must instead apply for its own liquor license. The current liquor license will need to be surrendered or placed into “safekeeping” with the Liquor Authority to allow for the issuance of a new liquor license or permit to the buyer, which may make it difficult to coordinate a closing. State of New York Liquor Authority, Surrender and safekeeping of licenses, Advisory #2015-5 (March 10, 2015) available at http://on.ny.gov/2atqXbI.

Conclusion

Liquor licensing considerations can be important in the purchase, sale or lease of real property in any state, including, as we have seen, New York. Often overlooked, these considerations may have a significant impact on the timing of real property transactions, as well as on the client's ultimate ability to serve alcohol at the new location.

Jennifer L. Tsyn is a member and Sarah Lewis Belcher is senior counsel at Bond, Schoeneck & King. This article also appeared in the New York Law Journal, an ALM sibling publication of this newsletter.