Things To Consider Before Signing a Restaurant Lease: Liquor Licensing

Restaurants have a notoriously high failure rate and, for many restaurants, their fate is sealed at the time they sign their lease.  If a restaurateur is not careful, she can be saddled with lease terms that make the restaurant’s success even harder than it need be.  It is absolutely critical to identify those lease terms before signatures are affixed and keys handed over.  Moreover, with the assistance of experienced counsel, many of these lease terms are negotiable and can be adjusted to ensure that they do not present unnecessary hardships in running your business.

Over the next couple of days and weeks this blog will be highlighting some of the most important questions a tenant should ask before signing a lease.  These are not, however, intended to be an exhaustive list nor to replace the legal advice you should obtain prior to signing any lease.  But, with that said, I hope it is helpful to think about these things.

What will it take to get a liquor license?

Many restaurant concepts require alcohol sales to have any chance at succeeding.  In particular, many fast casual franchises may require that their franchisees obtain a license to sell beer and wine because such sales are inherent to the franchise concept itself. It therefore never ceases to amaze me when a would-be operator of such a concept signs a lease committing them to paying thousands of dollars a month in rent without considering whether they can obtain a liquor license for the location, or what efforts or expenditures will be necessary to do so.

In many counties in Maryland, for example, there is a restriction on the number of licenses the local authorities will issue.  In Washington, DC, moreover, there are areas of the city where there is a wholesale moratorium on the issuance of new licenses.   In addition, there could be something about the tenant operator himself — either where the operator lives, something in his background, or other business affiliations —  that will make it difficult for him to obtain a license.

Before signing a lease, therefore, it is absolutely imperative the tenant investigate whether it can obtain a liquor license for the site.  And if there is any doubt whatsoever on the matter, the tenant should be sure the lease contains a contingency that allows it to void the lease if it cannot obtain such a license.

2015 Legislative Session Will Again Target Liquor License Residency Requirements

Readers of this blog may remember efforts that our principal, Sean Morris, engaged in last year to revise Montgomery County’s requirement that all liquor license applications include at least one individual who has been a resident of the County for two years or more.  (You can read more here).  That legislation, which would have permitted residents of some neighboring jurisdictions to also hold county-issued licenses, passed the Maryland House of Delegates, did not get out of committee in the state Senate.

Now, this year, the Montgomery County delegation is taking a different — and I think far better — approach.  Based on the list of proposed legislation recently unveiled, the delegation is advocating for the legislature to pass a law empowering the County’s Board of License Commissioners (commonly known as the Liquor Board) to grant a waiver to the residency requirement.  This authority would appear to reserve to the Liquor Board’s discretion when invoking the residency requirement might not be necessary.

(As a side note here, earlier this fall we presented this idea of a residency waiver to one of the members of our County Council, who was warm to the idea.  Whether this discussion and this proposed legislation are connected is not clear, but we are glad that folks are listening to our concerns.)

This legislation of course invites the question of when it would be appropriate for the Liquor Board to exercise such discretion, and provides an opportunity for applicants to advocate before the Board as to why their case might deserve such an waiver.  Examples come to mind of an applicant who intends to work full-time at their new restaurant in the County, lives close by in a neighboring jurisdiction, and would thereby be attentive and responsive to the needs and interests of the community.  Such an applicant, it would seem, should be far preferable to a detached, disinterested individual who, while having no interest or involvement in the restaurant, happens to live in Montgomery County and be willing to appear on the application (which is common under the current regime).

Were this legislation to pass in its current form, the applicant would need 4 of the 5 members of the Liquor Board to approve the waiver request.  And it will take a few months at least to get a sense of what criteria the Board will use in assessing waiver requests.  So finding a resident agent may still be preferable, if only to eliminate this uncertainty.  But it does provide an option where a suitable resident agent cannot be identified.  And we welcome additional options.

Montgomery County Offering New Services to Aspiring Restaurateurs and Food Entrepreneurs

If you have plans to open a restaurant or dream of starting a food-related business, Montgomery County has two new resources for you.

First, the Department of Permitting Services has launched a program called “Recipes for Success” that is aimed at assisting aspiring restaurateurs to navigate the County’s permitting system.  To open a restaurant in Montgomery County, permits or inspections may be required from multiple county agencies, an this program is aimed at greater coordination and consultation between the restaurant owner and all the agencies at one time.  The County has also published a packet of materials and information to help guide the permitting process, touting the promise that “Montgomery County Welcomes Restaurant Businesses.”  For those that have found the County inhospitable to bars and restaurants in the past, this should be welcome news and, at a minimum, a step in the right direction.  (Perhaps even better would be if the County could do what New York State is trying on an experimental basis — to allow restaurant owners to submit a single “universal application” for all required permits.)

The other bit of welcome news is that the County is supporting a food industry incubator project similar to Union Kitchen and the forthcoming Mess Hall in Washington, DC.  The incubator project, which will be based at the Universities at Shady Grove, is intended to provide workspace, equipment, and training to culinary startups who may lack the necessary funding or experience.  From where we sit, anything that helps entrepreneurs — particularly food and drink entrepreneurs — get started is a great move by the County.

UPDATE: SHA Opts Not to Appeal Pre-Condemnation Ruling from Montgomery County

This is to provide an update on this story from earlier this year, where we successfully defended a property owner’s right to deny the State Highway Administration’s efforts to gain access to his property for environmental testing, and actually had the statute in question declared unconstitutional.  As matters turned out, the State Highway Administration did not appeal this ruling.  Some observers argued that SHA had no choice but to appeal, as this statute was essential to their condemnation powers.

Perhaps, however, SHA determined that it would rather lose the ability to gain access to this one piece of property than risk an unfavorable opinion from the appellate courts of Maryland, which would have effectively invalidated the statute for all prospective eminent domain actions throughout the state.

Relatedly, the California Supreme Court is reviewing a lower appeals court’s finding that California’s similar pre-condemnation exploration — or, as the Maryland court called it, “test drive” — statute was also unconstitutional.  The parties are currently in the process of submitting their briefs and oral argument likely will be held next year.  We certainly will be watching.

Can Montgomery County’s Liquor Control System Be Saved?

For the past year, the Montgomery County Department of Liquor Control’s dispensary system, which requires every keg, can, or bottle of alcohol sold within the county to be purchased from the County itself — either directly or indirectly — has been under fire.  The State Comptroller, Peter Franchot, a county native and the state’s chief regulator of alcohol, has even called for it to be abolished.

Earlier this year, the Department of Liquor Control itself commissioned a report from a Philadelphia consulting firm to determine what the DLC needed to do to modernize its operations and better serve the county’s consumers.  That 95-page report was released yesterday and it highlights multiple weaknesses in DLC operations, including an aging truck fleet, insufficient number of stores to meet the needs of either customers or retailers, high operating costs, and low profit margins.  The report also notes that the Chevy Chase location, which just happens to be a block or so from the border with DC, has been a colossal money pit — losing $278,000.00 in fiscal 2013.

The report includes recommendations to deal with this raft of challenges, but it also raises the question of whether the system is worth saving at all.

Sure to add to the pressure on DLC is that the Montgomery County Office of Legislative Oversight is due to release its own report on DLC in the coming months.  Until then, and as we embark on a new legislative session in January, the drumbeat of criticism against DLC is likely to continue and grow.

Liquor License Provisions in “Fast Casual” Restaurant Leases

The Washington Post has an article today on the proliferation of Chipotle-inspired “fast casual” restaurants that allow customers to customize their meals with a variety of fresh ingredients. The article notes that, while more traditional fast food establishments (think McDonalds or Wendy’s or Taco) are struggling to find new opportunities for growth, fast casual restaurants are booming. One of the things missing from the story’s analysis of why these restaurants are so popular is the fact that many serve alcohol. For Millennials on a budget, or Generation Xers looking for a place to get dinner with three little kids (like my wife and I, for example), the prospect of getting a beer with my burger or burrito is an attractive one. It makes the whole dining experience seem just that much more civilized.

In my own law practice, I work regularly with fast casual restaurant clients lately on liquor license and leasing issues. In the latter instance, one of the critical elements of my lease review and negotiation is to ensure that the lease contains provisions related to liquor licenses, including that service of beer and wine be included in the permitted uses and, where possible, the inclusion of a liquor license contingency, i.e. a provision that allows the tenant to terminate the lease if it cannot obtain a liquor license for the establishment.

Where the lease is for a more traditional sit-down restaurant, such provisions may be included as a matter of course, but where a tenant is seeking to open a small burrito shop, that may not be the case.  Indeed, the landlord may not even be aware of the tenant’s intention to apply for a license to serve beer and wine, or the importance of such a license to the tenant’s overall business model. If not, the landlord (who generally prepares the first draft of the lease) may not include a liquor license contingency, or even include the service of alcoholic beverages among the permitted uses at the establishment. If either is not included, it can create significant problems down the road.

Of course, that is why a thorough review of any proposed lease is necessary before the tenant signs, preferably by a lawyer with a strong familiarity with the restaurant business — and who has discussed with the tenant in detail his specific business plan.

Montgomery County Judge Declares Key Maryland Eminent Domain Statute Unconstitutional

On Monday, July 14, a judge of the Montgomery County Circuit Court declared unconstitutional a long-standing law that permits the Maryland State Highway Administration (SHA) to obtain a court order allowing it to enter private property, without the landowner’s consent, and conduct intrusive drilling, soil sampling, and subsurface engineering studies.  The law has been on the books for over thirty years and appears to have never before been subject to significant judicial scrutiny.

Sean T. Morris of The Morris Law Firm, LLC, successfully argued the case on behalf of a shopping center owner who objected to SHA’s demand that the landowner allow SHA engineers to drill multiple 50-foot deep holes through the shopping center’s parking lot in an effort to determine if the property is suitable for condemnation to construct a noise barrier along Interstate 270.  Upon receiving such objection, SHA’s attorneys sought a court order requiring the shopping center owner to grant such access.  The shopping center owner opposed the petition and the matter was set for hearing this past Monday.

During oral argument, the court characterized the relevant provision of the state’s eminent domain law as a “test drive statute” and questioned why the state should be permitted to engage in such actions without providing just compensation for the intrusion as required by the Maryland and United States Constitutions.  Ultimately, the court concluded that the state should not be permitted to do so, finding that such actions amounted to a taking, even if it were only a temporary one.  The court denied SHA’s petition to enter onto the shopping center property and declared the statute “clearly unconstitutional.”

In reaching its opinion, the court engaged in a detailed review of challenges to similar statutes around the country, many of which have previously been found to be unconstitutional by appellate courts around the nation.  One such case appears headed for the California Supreme Court for resolution later this year or next year.  Whether this case is similarly destined for Maryland’s appeals courts remains to be seen.

Restaurants Now Exempt from Adams Morgan Liquor License Moratorium

For the first time in five years, the District of Columbia will begin issuing in new liquor licenses to restaurants in the Adams Morgan neighborhood of the city.  Until now, there had been a moratorium on the issuance of new such licenses, leaving aspiring restaurateurs with no choice but to identify a party willing to transfer an existing license, often at considerable expense. The moratorium was renewed for an additional three years for taverns and other facilities, and nightclub licenses will continue to be barred in the area.

The Adams Morgan Moratorium Zone is one of five such moratorium zones in the District, with the others being Georgetown, Glover Park, East Dupont, and West Dupont.

The press release announcing the change can be found here, while the rulemaking notice, which sets for the reasoning of the Board and the parties’ respective arguments, can be found here.

 

DC Regulators Shut Down Booze Delivery Startup

In a world where it seems every other startup wants to be known as the “Uber for _______,” call these companies the “Ubers for booze.”  Tap an app on your phone, and have beer, wine or liquor delivered to your door by the likes of Ultra, Klink, and new entrant BrewDrop, which just launched in Austin.

And just as Uber drew government scrutiny as it moved from startup to industry upstart, it should not be surprising that some of these companies now being targeted by alcohol regulators. The first casualty is Ultra, whose operations have been shut down in Washington, DC, by the city’s Alcoholic Beverage Regulation Administration [ABRA].

The crux of the DC regulator’s argument against Ultra is that, while the booze orders are actually fulfilled by Ultra’s partners, which are licensed to sell liquor in DC, Ultra itself is also required to have a license because it is the one that processes and accepts the payments. ABRA set forth this position in an advisory opinion handed down in March in reference to another would-be competitor, BeerRightNow.com. Klink, for its part, notes that it does not actually involve itself in the transaction and remains in operation in Washington, DC.

So, for now, Ultra’s deliveries are grounded in DC, but remain ongoing in the Montgomery County suburb of Silver Spring, as well as several other cities including Chicago and New York. The company’s website indicates it also intends to expand soon to Boston and Los Angeles.  Expect regulators to pay attention when they do.

New Maryland Laws Loosen Distribution Rules for Craft Beer and Small Breweries

Several new laws were passed in the recent Maryland legislative session that affect how small brewers may sell their products to consumers in the state.  Generally speaking, sales of alcoholic beverages in the United States are funneled through a “three tier” system:  producers (i.e. brewers, winemakers, and distillers) sell to wholesalers; wholesalers sell to retailers; and retailers sell to consumers.  In Montgomery County, where I live and work, there is another tier — the county Department of Liquor Control (DLC) itself, which inserts itself between the wholesaler and the retailer, requiring all purchases by retailers to made directly from the DLC.

With the enactment of the following laws, the Maryland legislature has loosened the requirements of the three tier system when it comes to certain small producers.  Unless otherwise indicated, these laws relate to holders of Class 7 micro-brewery licenses, which permit the production of up to 22,500 barrels of beer per year.

  • Sale of Prepackaged Beer.  Starting July 1, the holder of a Class 7 micro-brewery license may sell its own beer, in prepackaged non-refillable containers (i.e. bottles and cans, but not growlers), at retail for consumption off the premises.  Think of this as allowing small producers to sell six-packs of their own beer directly to customers who come to visit their brewery, as wineries commonly do with bottles of their own wine.
  • Direct Sales to Retailers in Montgomery County.  In 2013, the Maryland legislature passed a law that permitted Class 7 micro-brewery license holders to seek a license to self-distribute (i.e sell directly to retailers, thus skipping the wholesaler tier noted above) up to 3000 barrels of their own beer to retailers in the state.  Because of Montgomery County’s “fourth tier” of the DLC, however, this law did not apply to Montgomery County retailers.  Effective July 1, however, holders of these special beer wholesaler’s licenses may bypass the DLC completely and sell directly to retailers and restaurants.  For an explanation of the significance of this change, and how it will change the landscape for consumers in Montgomery County, read this fantastic piece on DCBeer.com’s Bill DeBaun.  Montgomery County’s own Denizens Brewing Company was instrumental in getting this law passed.
  • Self-Distribution by Farm Brewers.  Maryland is one of handful of states — another is my native New York — that has a special farm brewer’s license, which is intended to promote both small brewers and Maryland farmers by requiring the beer produced to be made with Maryland agricultural products.  A new law will allow those holding these Class 8 Farm Brewer’s licenses to obtain a Class 7 limited beer wholesaler’s license to they may self-distribute their beer to retailers as well.
  • Craft Beer to Somerset County.  Though it does not relate specifically to self-distribution, the legislature also passed a bill which added Somerset County to list of Maryland counties in which a Class 7 micro-brewery license may be issued.  This is good news for aspiring brewers on the lower Eastern Shores and leaves, at last check, Caroline, Cecil, Kent, Queen Anne’s, and Saint Mary’s counties as the remaining Maryland jurisdictions thirsting for the possibility of local craft beer.

As craft beer continues to expand throughout the country, we can hope that enactment of these laws brings greater variety of beer to consumers, and promotes the growth of these important small businesses in our state.