Liquor License Considerations in Commercial Real Estate Transactions

Co-Author: Richard L. Levy

Most restaurants and all bars require a liquor license to survive. Much of the value of a property can depend upon a liquor license. A successful sale or lease of commercial real estate may depend upon the new occupant’s ability to obtain a new or transferred liquor license. This article outlines some of the basic liquor laws relevant to commercial real estate transactions.

REGULATION OF LIQUOR LICENSES

The Colorado Department of Revenue and the local licensing authority share responsibility for regulating the retail sale and service of alcoholic beverages. The local authority (for example, a city) applies standards which are generally established by state statutes and regulations, but the local licensing authority may exercise considerable discretion in reaching its decisions.

Recent neighborhood activism compounds the uncertainty caused by the discretion historically afforded to local authorities. Even if a bar obtains a license, the local licensing authority may call for a public hearing to determine whether the license should be renewed. The law is currently still evolving as to what constitutes “good cause” for the non-renewal of a license.

If there are problems with the conduct of either the licensee or its patrons, the local licensing authority may investigate the matter, hold hearings, and decide upon an appropriate punishment. The potential adverse impact of a suspension or revocation of a liquor license should be of great concern to not only the licensee, but to its landlord or lender (including a seller carry lender). It is necessary for these parties to have a basic understanding of Colorado liquor laws to protect themselves against behavior by the licensee that may jeopardize the license.

SECURING A LICENSE

  1. Existing Licenses.   Liquor licenses are specific to a location and licensee. If a business is either relocated or sold, appropriate application must be made to both the State and local licensing authorities for a change in location or ownership of the license.
    1. Changes of Ownership.   The law governing changes in ownership acknowledges that the location of the licensed premises has already been approved by the licensing authorities. For a voluntary transfer of ownership, the authorities may only consider the proposed transferee’s character, record, and reputation. Upon successful transfer of an existing liquor license, the new owner may operate for the unexpired term of the transferred license. He or she will then need to make application for renewal. The licensing authorities may then consider factors in addition to the licensee’s character and reputation.
    2. Changes in Location.   A change in location does not involve an inquiry into the character of the licensee. Instead, the authorities will consider: the reasonable requirements of the neighborhood; the desires of the adult inhabitants as evidenced by petitions, testimony, or otherwise; and all reasonable restrictions which are, or may be placed upon, the new location by the licensing authority.
    3. Alteration of Licensed Premises.   A licensee may not make any physical change, alteration, or modification of the licensed premises which “materially or substantially alters” the premises or the use of the premises without first obtaining approval. Whether a proposed renovation constitutes a material alteration may involve interpretation of the regulations. It is wise to check with the local authorities before beginning work. If the license is a hotel/restaurant type and the renovations will disrupt meal service, alcoholic beverage service may also need to be temporarily halted.
  2. New Licenses.   Before approving a new license, the local authority will make a preliminary investigation into the qualifications of the applicant and the appropriateness of the premises for the sale of alcoholic beverages. Once the initial investigation has been completed and the application deemed complete, a public hearing before the local authority must be scheduled.The infill of Colorado’s urban areas has caused residential and commercial neighborhoods to encroach upon one another, enhancing the likelihood of a contested application. While an application for the issuance of a new license may be fought by attacking any of the factors considered when issuing a new license, the “needs and desires” standard is almost always an issue in a contested hearing. The potential new licensee and its attorney should take care to demonstrate that all of the prerequisites for the issuance of the license have been satisfied, and to whatever extent possible, address the concerns of the neighborhood.Because most tenants and buyers will want to make their acquisition of a property contingent upon their ability to either acquire a new license or transfer an existing one, the timing of the licensing authorities’ decision is crucial. The local licensing authorities need not hold hearings on applications for transfers of ownership, requests for approval of a change, alteration or modification of the licensed premises, or renewals, but they may do so as a general rule or on a case by case basis. Applications for a change in location or the issuance of a new license always require a consideration of the needs and desires of the neighborhood, mandating public hearings. It is important to become familiar with the procedural rules of the licensing authorities. Make sure that any liquor license related contingencies in a lease or sale contract allow for a sufficient time period to secure a license.

CONCLUSION

Landlords (in their leases) and lenders (in their deeds of trust) must include provisions allowing them not only to monitor the tenant/buyer’s compliance with existing liquor laws, but also to declare a default under the instrument if the tenant engages in any behavior which jeopardizes the liquor license. Many commercial leases already provide that a failure to comply with applicable law is a breach of the lease. However, few landlords actively monitor their tenants’ compliance with the law. It is important for landlords to monitor compliance and to act when a default occurs.

 

Jon Goodman is a shareholder with Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm. His practice areas include Real Estate,Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance. Contact Jon Goodman.

Disclaimer — Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.

JONATHAN A. GOODMAN