In this newsletter, we discuss our recent experiences when dealing with liquor licensing matters in hotel transactions. This has reinforced the importance of several key steps including detailed due diligence regarding a hotel's liquor licence, allowing sufficient time to deal with transferring matters (as conditions precedent), and building into the contract a mechanism to deal with licensing issues and the complexities of licensing regulation.
In this article, we first consider the standard hotel management structure from a liquor licensing perspective. When we are speaking of a "hotel", we mean an accommodation facility such as a four or five star hotel rather than a pub or other form of licensed premises.
We then consider a recent case study involving the sale of a hotel subject to a management agreement with a reputable hotel operating company. The relevant licensing authority required changes to the operating and ownership structure before granting its approval to transfer of the liquor licence and the management agreement for the hotel. The authority's approach and engagement in the matter reinforced the need to ensure that the transaction documents appropriately dealt with each party's obligations and the need to engage with the authority, as appropriate, after conducting due diligence.
We conclude this article by posing a number of due diligence questions for consideration when launching into the sale of a hotel.
Liquor licensing regulations and jurisdictions
Liquor licensing is regulated on a jurisdictional basis in Australia, with each State and Territory having its own legislation, regulatory authority and policies. While there are similarities between jurisdictions, each operates independently and is subject to its own processes, approvals and probity requirements.
From the perspective of a managed hotel, there is a general licensing framework that is applied by hotel owners and operators across Australia. The framework, broadly, is as follows:
- an appropriate hotel licence is held by the general manager of the hotel employed by the operator (and in some instances by the owner or the operator with the general manager appointed as the "approved manager") during the term of the management agreement;
- the "reversionary" interest in the licence remains with the owner with an obligation on the operator to transfer the licence back to the owner (or as the owner directs) at the end of the management agreement;
- if required, an approval is granted for the owner's financial interest in the licence;
- an approved manager (if applicable, who is generally the general manager of the hotel) is nominated as the person responsible for the day-to-day operations of the hotel under the licence; and
- an appropriate licensing training regime and accreditation system is put in place for staff of the hotel involved with the sale and supply of liquor.
While there are similarities between jurisdictions on transferring licences and seeking appropriate approvals, each jurisdiction has unique and independent approval processes and probity checks. We often see a divergence of approaches between jurisdictions when dealing with transfer applications, timing for the grant of an application, police clearance requirements, third party approvals (e.g. local council consents) and additional approvals (e.g. profit sharing).
While the hotel licensing framework discussed above reflects standard practice, a recent hotel transaction reinforces the importance of detailed licensing provisions to deal with foreseen and unforeseen regulatory complexities. With increasing social, media and political scrutiny on liquor sales and supplies, we are seeing a greater focus by licensing authorities on probity checks, licence ownership, training and accountability.
By way of example, let us consider a recent case study involving the sale of the freehold interest in a hotel. The hotel was (and was to be sold) subject to a management agreement with a reputable hotel operating company that had been approved by the relevant licensing authority. The standard framework existed where the liquor licence attached to the hotel was held by the operator, which appointed its general manager as the approved manager under the licence. In the licensing jurisdiction of the hotel, a change in owner of the hotel as the new party to the approved management agreement was subject to approval by the licensing authority. The licensing authority reviewed the licensing structure for the hotel, and, in particular, the employment of staff involved in the sale and supply of liquor at the hotel. These employees were ultimately employed by the owner (seller) and upon the sale of the hotel would be employed by the buyer. Notwithstanding that the operator had day-to-day responsibility of the employees and the sale and supply of liquor at the hotel, the licensing authority looked to the ultimate control of the employees, ownership of the hotel and other interests in the hotel to form the view that the owner, and not the operator, should be the licensee. It appears that the licensing authority took this view on the basis that the ultimate risk and responsibility with respect to the licence should lie with the owner of the hotel.
Rather than follow a previously well trodden path of keeping the licence with the operator on completion of the sale, and seeking appropriate approvals for the new party to the management agreement and change in ownership of the hotel, the licensing authority required the licence to be transferred to the buyer with appropriate approvals for the operator.
As you will expect, a number of practical and legal issues flowed from this reallocation. Not least of all is the greater exposure (including fines and imprisonment) for the owner and its officeholders under the applicable liquor legislation.
Fortunately, the buyer had put itself in a solid position with respect to liquor licensing by ensuring that the contract:
- required relevant licensing matters to be dealt with as conditions precedent to completion;
- allowed for an extension to completion to address licensing matters;
- included a long stop date to allow a "without fault" exit in certain circumstances; and
- articulated the responsibilities of the buyer and seller with regards to the licensing matters.
By properly addressing licensing matters, the parties were able to deal with the licensing changes imposed by the licensing authority and ultimately complete the transaction.
As most appreciate, when acting for a seller or buyer of a hotel, due diligence on the hotel is critical. This includes ensuring that the hotel has an appropriate liquor licence and that its operating and ownership structure is duly approved by the relevant licensing authority.
While often in practice, liquor licensing can be overlooked or rubber stamped as a completion item, it sometimes poses the biggest risk to timing and, sometimes, completion. After all, if you buy a hotel without an ability to sell liquor, you are most likely to have some unhappy guests.
From recent experiences, the following questions deal with some issues we have come across on the licensing front, which should be carefully considered in a transaction:
- Who is the licensee and the approved manager?
- Does the management agreement require approval of the licensing authority and is it approved?
- Does the new owner require approval of the licensing authority (e.g. profit sharing)?
- Are there any lease back arrangements with individual apartment owners and have they been approved?
- Are the relevant premises of the hotel properly included as part of the approved licensed premises for the hotel? This is particularly relevant for renovations incorporating additional rooms, meeting and convention spaces and bars.
A fundamental step in selling or buying a hotel is carrying out and understanding the liquor licensing operating and ownership structure of that hotel, overlayed on the relevant regulatory system. This understanding should then be combined with experience dealing with the relevant licensing authority and reflected in the transaction process, with appropriate timelines, allocation of responsibilities and resolution mechanisms. Failure to do so can put at risk the transaction timeline or the transaction itself, and can result in greater exposure to a seller and buyer under the applicable legislation.