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Know The Law: Focus on Leases

Posted on  | November 10, 2012   Bookmark and Share
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Contracts deserve careful inspection, as many issues require detailed give and take

by Keven Danow and Arthur J. Panoff

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.

Questions Right Out of the Gate

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. 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.

Good-Guy Guaranty

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.

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 the Landlord seeks a percentage rent in excess of 10%, it may have to be added as a party to the tenant’s license.

Due Diligence

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. Other zoning specifications may apply. A bar or package store tenant should know the extent of other package stores or bars in the neighborhood, or if the community has voiced previous objections.

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.


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