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.

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.

New Liquor License Laws — Montgomery County

This will be the first of what I hope will be several posts on interesting new laws that came out of the 2014 Maryland legislative session.  This post concerns new alcoholic beverage licensing laws in Montgomery County, Maryland.  Many of these new laws were the product of the County’s Nighttime Economy Task Force, which was aimed at making the County a more attractive place to those seeking lively after-hours offerings.  Unless otherwise indicated, these laws go into effect on July 1, 2014:

  • Ratios of Food to Alcohol Sales:  Restaurants and taverns holding licenses to sell beer, wine and liquor have been required to keep records showing that the total sales of alcoholic beverages does not exceed those of food.  Starting July 1, however, the minimum food sales has been decreased to 40%, thus allowing for bars and taverns to provide a greater offering of high-end (and thus more expensive) beers, wines and cocktails.
  • Class D-BWL (Beer Wine & Liquor) Licenses:  The county Board of License Commissioners may now issue a Class D license for on-premise consumption of beer, wine and liquor.  This license provides for the same 60/40 alcoholic beverage, but only requires the ratios to be met during the hours before 9pm, thus allowing the establishment to cater to those more interested in beer, wine and cocktails during those later hours.
  • Later Last Call:  New Class D license holders, as well as those holding Class B-BWL, will be entitled to serve alcohol until 3am, instead of 2am.
  • Limits on Number of Licenses Lifted:  Prior restrictions on a person holding multiple alcoholic beverage licenses have been lifted such that an individual may hold up to 10 Class B licenses, which allow for on-premise sales at hotels and restaurants, in the county.  This will be significant to operators with, or seeking to establish, multiple locations in the County.
  • Beauty Salon License:  Montgomery County beauty salons will be able to apply for and obtain a beer and wine license, notwithstanding the fact that they do not serve food.  That local salons could not provide such a service to their customers has long been seen as a hindrance in their competition with similar salons in the District of Columbia.

This list is not exhaustive and some other laws were passed affecting other types of businesses or specific localities, but these appear to be the laws that will affect the widest range of bars and restaurants and have an impact on the lives of most County residents.

Next up:  Laws affecting small alcoholic beverage producers and distributors.

Legislation Moving Forward to Remove Liquor License Residency Requirements

A few weeks ago, I wrote a post here about the possibility that counties in Maryland may consider removing the requirement that liquor licenses be held by at least one resident of the county that issues it.  Shortly thereafter, the blog BethesdaNow picked up on the story and interviewed me about whether that might be a good idea for Montgomery County.

Well, it appears this issue has gotten the attention of some influential folks here in Montgomery County and there is now legislation moving forward in Annapolis, sponsored by Del. Tom Hucker, to exempt Montgomery County liquor license holders from this residency requirement.  A hearing is scheduled on the legislation for this afternoon, February 17, at 1pm.

Continue to check back here for more news as this legislation continues to move forward.

TTB Backlog for Breweries Highlights Need to Get Applications Done Right the First Time

The federal Alcohol Tobacco Tax & Trade Bureau (TTB) announced earlier this month that, as of the end of 2013, there were over 3700 active brewer’s notices on file with the TTB.  A federal brewer’s notice is required to operate a brewery and sell beer in interstate commerce.  That number represents a 12% increase over the total at the end of 2012, demonstrating the explosive growth in craft brewing in the United States.

The TTB also cited the government shutdown as contributing to the backlog of applications for both new breweries and new product or label approvals.  While TTB notes it is “work[ing] tirelessly” to process these applications in a timely manner, that this backlog exists highlights the need to ensure that all applications are in order when they are submitted so further needless delay can be avoided.

County Liquor Board Wants to Nix Residency Requirements for Liquor Licenses

The Baltimore Sun had an interesting story last week about how the liquor board of Harford County, Maryland, wants to eliminate the state requirement that every county liquor license application have on it at least one resident of the county.  As stated in the article, it can often be a challenge for a restaurant to identify a resident to serve as the resident agent and, even after one is identified, the operations of the establishment can be dependent on maintaining the relationship with that one individual.  Indeed, it was that very issue that brought the matter to fore in this instance.  [Read the full article here]

These residency requirements have presented particular challenges for my clients in Montgomery County, where many national chains and D.C.-based enterprises are often interested in adding locations.  To be issued a license, however, each of these applicants must identify a Montgomery County resident to join the application and maintain responsibility should the establishment violate local liquor laws.  That is rarely an insurmountable hurdle, but it can be a challenging one, and one that is arguably unnecessary.  Were this requirement eliminated, it could make it much easier to attract restaurants and bars to the County, something local authorities have deemed a priority.

Does Proposed Acquisition Raise Three-Tier Integration Concerns?

Generally speaking, and with some notable exceptions, the production, distribution and sale of alcoholic beverages in the United States are divided among three tiers, with ownership of producers, distributors and retailers required to remain separate.  For example, in Maryland, where my firm has its primary practice, anyone with an ownership interest in an entity with a manufacturer’s or wholesaler’s license is prohibited from holding a retail liquor license.  Although the 21st Amendment to the U.S. Constitution, which ended Prohibition, leaves it to the individual states to regulate the sale of alcoholic beverages, nearly every state has traditionally mandated this division among the three tiers.

Because the three-tier system is such an integral and widespread element of liquor regulation in the United States, it was with great interest (and some puzzlement) that I read this press release announcing the acquisition by a North Carolina craft brewery of a publicly traded beer, wine & liquor wholesaler.  (Read more here)  I was furthermore surprised to see that a substantial shareholder in the wholesaler was itself a company that owned several large, prominent restaurant chains, and that this company would remain a shareholder of the combined brewery/distributor.  Thus, it would seem that the proposed sale would lead just the sort of vertical integration between producer, wholesaler and retailer that the three-tier system was intended to thwart.  Illustrating this fact is a telling quote from the CEO of the chain restaurant company:

“We look forward to showcasing [the brewery]’s craft beers in our restaurants and assisting with its regional distribution.”

There you go:  brewery owns distributor, which will be assisted in such distribution by a restaurant chain which is a large shareholder in the combined brewery/distributor, all in an effort to promote that brewery’s beers in those same restaurants.  While not a true “tied house” situation, it could have similar effects.

Given this stated intention to use the vertical integration of the three tiers to its competitive advantage, it will be interesting to see how North Carolina liquor regulators view the combination of and cooperation between these companies.  Moreover, as the combined brewery/wholesaler company expands into other states, it will also bear watching whether it is met with resistance from other state and local alcoholic beverage licensing boards, either on applications for wholesaler’s licenses by the combined brewery/distributor, or on retail liquor license applications by new outlets of the associated restaurant chains.