There is a pending proposal for an advisory from the Liquor Authority clarifying its interpretations and policies with respect to third-party contracts. It is likely to be adopted shortly so I’d like to summarize its contents on this subject.
When applying for a liquor license, any person who is sharing in the profits from a business holding a license to sell (or manufacture) alcoholic beverages must be disclosed to the Authority and included as a principal on the license. The Authority has allowed certain third parties to obtain a limited percentage of the licensee’s profits without the need for the third party to be included as a principal of the licensed entity. A new proposed advisory would clarify that any agreement that entitles a third party to a percentage not exceeding 10% of the licensee’s profits is permissible and will not require the third party to be· included as a principal on the license provided the third party does not have any other financial interest in, or significant control over, the licensed business.
One common situation is where there is a lease entitling the landlord to a percentage of the profits from the tenant’s licensed business. The Authority will not require the· landlord to be added as a principal of the licensed entity if the percentage does not exceed 10% of gross profits and the lease gives the landlord no other financial interest in, or control over, the licensed business. One typical clause that violates this is the inclusion of a clause that gives the landlord a lien in the tenant’s personal property or inventory. The lease may, of course, give the landlord traditional rights as the property owner over the real property where the licensed business is located such as the right of repossession in the case of default.
The Authority has also allowed leases with a percentage exceeding 10% but no more than 20% when the landlord is a not-for-profit corporation, governmental agency or public authority (airports, subways, port terminals and the like).
In general, any person who is sharing in the profits from a business holding a liquor license must be disclosed to the Authority and included as a principal on the license. The Authority does make a distinction between “flat fee” arrangements (where the third party i1s paid a pre-determined amount that is not dependent in any way on the licensee’s sales) and percentage arrangements where the third party’s compensation is a percentage of the profits and is therefore dependent on the profits generated by the licensee. For example, acceptable situations include a brand owner’s trademark license agreement that is a flat fee per period of time as opposed to a percentage of product sales or a delivery fee that is a flat rate per delivery and not based on the cost of the purchases. The type of contract arrangements that this applies to include:
- delivery services;
- e-commerce/internet platforms that provide advertising or accept or forward orders for alcoholic beverages or the licensee;
- promotion companies that offer coupons, discounts, etc. for the· licensee’s products;
- companies that host, support or otherwise maintain a licensee’s internet website, smartphone application, social media or other electronic platform; and
- fulfillment centers that store, pack, ship and/or otherwise arrange for the delivery of a licensee’s products to consumers.
If an applicant does not agree with an Examiner’s or the Licensing Board’s opinion that a third party contractor must be listed as a principal on the license, the applicant may request that the application be forwarded to the Members of the Authority for their review and a declaratory ruling. The applicant must demonstrate good cause why the third party should not have to be included as a principal of the licensed entity (good cause shall not include a situation where the third party is legally prohibited from holding the license in question).
These situations are complicated and advice of an experienced attorney will be helpful to structuring a transaction that does not run afoul of the state’s alcohol laws. Contact our team if you’d like to review your situation and strategize some options.