Last Call for Georgetown Liquor License Moratorium

Starting next week, for the first time in 27 years, restaurants in Georgetown will be able to apply for new liquor licenses.  The District of Columbia’s Alcoholic Beverage Control today voted not to extend its decades-old moratorium on liquor licenses for restaurants, which had been set to expire on April 8.  The moratorium was instituted in 1989 in response to the trash, noise and (some would say) mayhem that came from Georgetown being not only one of the city’s top nightlife destinations, but also home to (my alma mater) Georgetown University and its thousands of students.  In the ensuing years, however, some have blamed the license cap for Georgetown lagging behind the rest of the city in attracting new and exciting restaurants, which have proliferated in other parts of the District.

Some have questioned whether the lifting of the moratorium will make much of a difference, given the number of dormant liquor licenses that are in safekeeping with the District’s regulatory agency.  Those licenses were being held, however, because many of the holders were seeking to extract a significant (think mid-five figures) fee in exchange for a transfer.  That might have been cost prohibitive for smaller operators – particularly in the fast casual space.  Now that gatekeeping expense will be no more.

As was the case in Adams Morgan, which had its own moratorium on restaurant liquor license lifted in 2014, the moratorium on new tavern and nightclub licenses in Georgetown will remain in effect.  Next up will be the cap on new licenses in Georgetown’s neighbor, Glover Park, which is set to expire on May 3 of this year if not extended by the Board.

If you are interested in the possibility of applying for a restaurant liquor license in Georgetown, please do not hesitate to contact our office.

Is Granting Equity to Early Backers of Your Business a Good Idea?

The New York Times had a terrific story this weekend on a matter I see all the time in my practice: entrepreneurs who hand out equity in their businesses at the startup stage, then years later want to buy those equity-holders out, but lack the resources to do so. The piece opens with the story of Brad Sacks, a food entrepreneur in Akron, Ohio:

BRAD SACKS brought in two family friends who were older and wiser when he started his sauce company, More Than Gourmet, in 1993. They didn’t invest any money, Mr. Sacks said, but for their help, he gave the men half of the company.

Two decades later, the company, in Akron, Ohio, was booming, with lines of demi-glace and cooking stocks that were being used at the Capital Grille and the Hilton Hotel chain and sold at supermarkets like Wegmans. But Mr. Sacks said the two original partners were reaping the benefits of his work even though they were no longer advising the business.

The story goes on to describe how, when Mr. Sacks tried to buy his “partners” out, they (not surprisingly) resisted. And, while a deal was ultimately reached, the negotiations “got ugly,” and then Mr. Sacks had to figure out a way to come up with the cash to actually buy his partners out of what had become a highly successful business.

This situation is common in the world of small business: an entrepreneur believes he lacks something that he needs to get his business up and running – expertise, experience, relationships, financing – and in exchange for obtaining that “something” from someone else, grants that someone equity in his business. After all, money is tight in the early days of a business, and granting equity seems like it doesn’t cost anything. But then the company becomes successful, and starts making money, and then…. well, then it sure does start costing the founder money, because he has to share the profits with those other equity holders.

Now, if the company really could not have gotten off the ground without the assistance of these early backers, then perhaps no one can argue with those supporters reaping the benefits when the company really takes off. But I see quite often that such is not the case. Many times, a company’s founder could have gotten the same “something” from another source (such as a small business loan rather than investment financing), or the granting of equity was not even necessary to achieve that something (such as granting equity to a chef or bar manager who is also earning a salary in exchange for the expertise they bring). Then there is the situation where the equity is granted, but the “something” is never really provided – or is not what the founder expected it to be (such as a head of sales who doesn’t make any sales, or an industry consultant who actually doesn’t know the industry as well as he said he did).

We regularly advise our clients on ways to address these issues before they grant equity in their businesses. And if they do still decide to do so, we prepare their operational or investment documents in a way to ensure that they get what they bargained for and have maximum flexibility in the future when it comes to the management and growth of their business. After all, what helps you get off the ground at the startup stage, should not be an anchor around your neck later.

Landlords Come and Go. It’s What Your Lease Says That Matters Most.

Commercial leases, like most contracts, are subject to interpretation. Clauses and terms that may seem clear at the time they are drafted can later become ambiguous, or subject to more than one understanding, especially when words on paper become applied to real life situations. Or the terms may be unclear on their face, and such lack of clarity is simply not recognized until the lease has commenced and the tenancy begun. This reality is something that all business people and their lawyers must deal with, and must understand is part of doing business. Oftentimes landlords and tenants, given the passage of time and over the course of an extended term of dealings come to an understanding on the meaning and applicability of certain lease terms and engage with one another pursuant to that understanding. In the best circumstances, the landlord and tenant work together to ensure neither party is deprived of the benefit they believed they were obtaining at the time of the lease.  It is just good business to make it all work.

But what happens when a commercial building is sold and a new landlord takes over? While the words of that lease may stay the same, the new landlord’s understanding of what they mean (or its motivations in reviewing them) may be different – and perhaps be in conflict with that of the tenant and how it has been previously conducting its business under the lease. Or imagine where the previous landlord had tacitly (or even explicitly) agreed to disregard a lease a provision because it made good business sense to do so. What happens when the new landlord decides to adhere to – and enforce – the precise letter of the agreement?

Something like one of these scenarios appears to have happened in New York City where the high end health club Equinox had been operating its business under a lease for some fifteen years. Throughout that time it appears to have enjoyed a good relationship with its landlord and neighbors in a mixed used building in the Tribeca neighborhood of the City. Then, the building was sold and, earlier this year, the new owner served notice that Equinox was in breach of its lease due to the noise and vibrations its operations emitted. The landlord served Equinox with notice of default and sought to remove them from their long-standing home.

Equinox, not surprisingly, responded that nothing had changed in their operations and the prior landlord had never taken the position that the amount of noise and vibrations emanating from their business was in violation of the lease.  Moreover, Equinox had renewed the lease and invested a great deal in the space in reliance on that long-standing position. The owners of the gym filed suit to stop any eviction and to seek a judgment that they can remain in the premises. They have also claimed millions in damages to account for the investment made in the space based on the understanding the gym would be permitted to remain.

In our practice, we increasingly see this situation arise with our restaurant clients as various real estate investment companies purchase shopping centers and retail buildings. Often smaller local landlords, who have long standing relationships with their tenants, are replaced by out-of-state investment trusts which may not have the same level of tolerance and flexibility when it comes to lease compliance. And in other instances, it may simply be that the new landlord wants the old tenant out for some reason (to renovate, to redevelop, to seek a new tenant mix, etc.) and takes a fresh look at lease to see where a point of leverage – or an opportunity to evict – may be.

For these (as well as many other) reasons, we advocate for a thorough and detailed reading of any commercial lease before our clients commits to it. And we caution against placing too much faith in the past reasonableness or forbearance of a certain landlord. At the end of the day, it is the lease language that controls and it is only that language which is permanent. As such, the only way to ensure the lease’s terms will be read in a manner that is in keeping with your understanding, and that such interpretation will persist for the life of the lease, is to make that language as clear and unequivocal as possible at the time you sign it.