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Tim Kuhn is an associate in Snell & Wilmer’s business and finance group. Leeza Evensen is a partner in the firm’s real estate group.
Effective July 1, 2014, the Utah retail license laws changed to allow holders of certain retail liquor licenses to sell such licenses to qualified buyers. The change is a welcome development for businesses that operate or seek to operate in Utah’s hospitality industry. For such businesses, Utah retail liquor licenses are a necessity.
The availability of retail liquor licenses in Utah is limited by a statutory quota system. Some argue that the quota system restrains business growth and opportunity by creating a bottleneck when business entrepreneurs seek to open new establishments or purchase existing establishments only to find there are no available retail liquor licenses.
Until now, Utah laws prohibited holders of retail liquor licenses from selling such licenses to another person or business. The new law, the Transfer of Retail License Act, will help to alleviate current statutory supply restrictions by permitting the sale and transfer of existing retail liquor licenses. The Act in essence monetizes existing retail liquor licenses, thereby creating a valuable commodity for those who hold such licenses. Although the Act appears to be simplistic in concept, there is nothing simple about the transfer process, which involves a number of prohibitions, limitations and requirements.
The Approval Process
Under the Act, after an application for transfer of a retail liquor license has been submitted, the application is subject to two levels of governmental scrutiny, one by the Utah Department of Alcoholic Beverage Control and the other by the Utah Alcoholic Beverage Control Commission. The DABC has the power to fully investigate the seller, the buyer and the transfer transaction and can also hold hearings for public comment. The Commission then has the final authority to approve the transfer.
The Commission may consider various factors when making its decision, including location, the buyer’s ability to operate and manage a business, the nature and type of operations of the business and “any other factor” the Commission deems necessary. The Commission will also consider all factors that would be considered in reviewing an application for a new retail liquor license. Finally, the Commission and the DABC require that all documents related to the transaction, including all details of the transaction, be submitted for their review.
Under the transfer process required by the Act, the buyer and the transfer transaction are subject to a questionably high level of scrutiny that creates a high level of uncertainty with respect to an asset that cannot be pledged, securitized or easily transferred.
More Red Tape
Liquor license sellers and buyers are subject to multiple restrictions and disclosure requirements. One notable restriction includes the prohibition of the transfer of retail liquor licenses over county lines. In other words, one cannot purchase a retail liquor license from premises in Morgan County for use in Salt Lake County. Moreover, the Act prohibits the transfer of master full-service restaurant licenses and master limited-service restaurant licenses.
Presumably to prevent the hording of certain retail liquor licenses, the Act attaches two primary timing components to the transfer of such licenses. First, after a buyer submits a transfer application, within 30 days the buyer must provide a statement with respect to establishing an escrow account (as detailed below). Second, after the transfer of a retail license is approved, the buyer must commence operations under the newly purchased retail liquor license within 30 days at the location for which the transfer is occurring or face forfeiture of such license back to the DABC.
The escrow component of the Act creates creditor protections for those who have or may have a claim against the seller. The Act requires painful disclosures to all creditors of the details of the transfer transaction and notice of where claims may be filed. More importantly, the Act requires that an escrow account be set up for all funds received from the sale of the retail liquor license unless the buyer or the seller will post a $5 million guaranty. All of the creditors can then make claims against the escrow account for payments. Once the DABC has confirmed that all creditors have been satisfied, the seller can finally receive disbursement from the escrow account of the remaining sale proceeds.
To Purchase or Transfer?
Between the restrictions, disclosure and escrow requirements, and the regulatory and approval process, the purchase of a retail liquor license appears to be anything but expeditious. For a person looking to operate an establishment that requires a readily available retail liquor license, such as a full or limited restaurant license, tavern license, banquet license or reception license, it would make little sense to go through the complex process of purchasing an existing license rather than applying for a new license. On the other hand, for those seeking to operate under a retail liquor license that is not readily available, such as a club license, the Act provides an alternative mechanism for obtaining such a license.