Here at The Morris Law Firm, we are big advocates of our restaurant clients not doing things piecemeal when it comes to opening their new locations. For example, we think it is big mistake to pick a location, set up a new business entity, negotiate and sign a lease, and then think about liquor licensing. We think our clients should be thinking about all three issues – real estate, business, and liquor licensing – all in tandem. Each of these is essential to your restaurant’s success, but they do not exist in isolation.
There are multiple ways that these three issues fit together, but one of the key ways is that which the business entity you choose for your lease can have an enormous impact on how onerous the liquor licensing process will be – particularly here in Maryland. The most important reason for this, as we alluded to in our last blog post, is the residency requirements that exist in all Maryland counties. These provisions, which vary from county to county, but which exist in all our jurisdictions, require that all liquor licenses have as one of the licensees a resident of either the State of Maryland or, more commonly, the particular jurisdiction (i.e. county or Baltimore City) in which the restaurant or tavern seeking the license is located.
The residency requirement itself is enough of a burden, particularly for out-of-state chains that want to do business here in Maryland, but the burden is heightened when insufficient planning and thought is given to how the requirement effects choice of entity on a lease. While it may seem like the two are wholly unrelated, the complexity of Maryland liquor license laws cause the two issues to interlock with one another.
For example, in many counties, the resident appearing on the application (the “resident agent”) must have an actual ownership interest in the entity for which the license is sought. In some instances, the ownership requirement can be as high as 25%. In the case of a chain, if the parent company is the tenant on the lease (as opposed to a new entity formed specifically for that location – something else we advocate), then the resident agent must be afforded an interest in the entire restaurant chain, rather than simply the entity that signs the lease for that location. You can imagine that giving the Maryland or county resident a substantial interest in the parent company of a restaurant chain is simply not an option, so other alternatives must be explored – or the plan to pursue a license must be abandoned (if that is even possible given the restaurant concept). Further complicating matters, for corporations, the resident agent is required to be an actual officer (i.e. President, Vice President, Secretary or Treasurer) of the corporation, whereas that is not a requirement for limited liability companies (LLCs).
Amazingly, I have worked with chains worth tens if not hundreds of millions that have signed leases (a) in the name of their parent company, which (b) happens to be a corporation, in (c) counties that have a strict requirement that the resident agent be both an owner and officer of the corporation. I have had the difficult experience of telling these clients that they have to either (a) give the resident agent an ownership interest and officer position in their multi-million dollar enterprise, (b) change the tenant entity on their lease (which of course requires their landlord’s cooperation), or (c) abandon their liquor license application. None of these are good options, and some are much worse than others. And all could have been avoided with proper planning and sound advice.
I know this all seems complicated – and it is. Most lawyers don’t even understand how all these issues work together. Which is why we say: find a lawyer to assist with your lease who is also familiar with the local liquor licensing laws where your new restaurant will be located, and do not sign a lease until you have a handle on all these issues. If you think ahead and plan ahead, all these moving parts will fit together and allow you to move forward with your plans, full speed ahead.