In today’s increasingly competitive hospitality market, the closing timeframe of sophisticated hospitality transactions has become a significant point of negotiation between sellers and purchasers. One factor that frequently drives the closing of transactions at properties where alcohol sales make up a material portion of the operating revenues is the timing of the issuance of a liquor license to the new operator of the property, which, depending on the location of the property and the requirements of the liquor authority, can impose significant administrative requirements and take several months (or longer) to facilitate. In many such transactions, a more-timely closing may be accommodated by the use of an interim beverage agreement for the operation of the liquor facilities at the property, although the propriety of and requirements for such interim arrangements vary widely by jurisdiction.
Under an interim beverage agreement, the purchaser of the property enters into an arrangement with the holder of the existing liquor license – commonly either the seller or the seller’s manager – pursuant to which the holder of the existing liquor license either (i) continues to operate the liquor facilities on behalf of the purchaser, or (ii) permits the purchaser, or its manager, to operate the liquor facilities pursuant to the existing liquor license, in each case during the interim period between the closing of the acquisition of the property and the issuance of a liquor license to the new licensee. That interim arrangement can be documented in several ways, with the execution of either an interim lease or an interim management agreement being the most common approach, depending on the requirements of a particular jurisdiction.
It should be noted that interim arrangements are not always a viable option. Some states, including Florida, expressly prohibit such arrangements while other states either expressly permit or don’t expressly prohibit the practice. In those states where the practice is expressly permitted, state law may raise other subtle questions that the parties to a transaction must consider and resolve. For example, in certain jurisdictions, the liquor inventory must be owned by the holder of the liquor license, which will necessitate planning for the post-licensing conveyance of those assets.
For transactions in jurisdictions where such arrangements are either permitted or not expressly prohibited, the question arises of whether entering into such an arrangement is to be viewed as an accommodation to the seller or the purchaser. This is more than a philosophical question as it will drive the allocation of the liability associated with the operation of the liquor facilities at the property during the period of the interim arrangement. While such an allocation may be determined based on the relative negotiating leverage of the parties to the transaction, the most common approach is to view the interim arrangement as an accommodation to the buyer and to allocate the liability associated with the operation of the liquor facilities at the property during the period of the interim arrangement to the purchaser, which such allocation being established by way of an indemnification of the existing licensee by the purchaser for such liability.
Given the many technical, legal, and practical considerations associated with the transfer liquor licenses, questions regarding the viability and implementation of interim arrangements will require analysis on a state by state basis by a party with experience in such matters. As a common point of negotiation and a significant factor in driving the closing of a transaction, we recommend that such issues be investigated early in the underwriting process and appropriately documented in the purchase and sale agreement governing the transaction.
