Almost every Michigan hotel or restaurant operator has confronted the daunting process of procuring or transferring a Michigan liquor license. Buyers and sellers of these entertainment venues often enter into multimillion-dollar development or sale transactions, only after complex negotiations and the difficult procurement of commercial financing from lending institutions.
In today’s economic climate, more than a few of the transactions involve efforts to rescue prominent convention hotels facing the potential of foreclosure or bankruptcy. Once the financing is in place, the parties attempt to close the sale in an efficient and accurate manner.
However, after months of negotiation and work, the issue of transferring the Michigan liquor license will rear its ugly head — sometimes even during the closing. The unknowing buyer and seller may face a process almost as lengthy and daunting as consummating the transaction itself when they tackle the license transfer — until now.
New Michigan legislation could make it easier and faster to secure a conditional liquor license that would allow the new owners to continue to serve.
Conditional licenses on horizon
When it comes to liquor laws, Michigan is one of the most difficult states to do business in.
Our liquor laws date back to post-Prohibition days when Michigan had a totally different economy and an entirely different way of delivering alcohol. Over the past 80-plus years, we have managed to create a labyrinth of special exceptions and confusion that make things difficult for the uninitiated.
If the buyer in the above-referenced transaction is not from Michigan, it’s unlikely he will have faced the obstacles in transferring a liquor license that await him. If the buyer and seller wait until closing without a plan or the certainty that the liquor license will be transferred, they face a complex and lengthy process before being able to serve the first cocktail.
Under current Michigan law, a hotel or restaurant cannot operate under its liquor license unless the seller remains involved and receives all revenue and profits from the “licensed business,” which includes all revenues related to the business to which the license is attached. Further restrictions prohibit a licensee from operating for the benefit of another entity and require a licensee to have full control of the licensed premises.
What’s a new buyer to do? Right now, buyers and sellers often opt for a work-around in the form of an interim management agreement and lease to weather the license investigation timeframe. Despite these paper constructs, there is still a potential that the seller of the hotel will be faced with a violation claim. Although the fine can be minimal, the violation can add months to an already six-month process.
A glimmer of hope has arisen from Michigan Legislature with the passage of House Bill 4277, co-sponsored by Rep. Ken Yonker of Caledonia. Although it is tie-barred to several other pieces of liquor control legislation and does not become effective until those bills are passed, it does hold out the hope of a new process in Michigan for the issuance of a “conditional license.”
While the conditional license is not a guarantee that a permanent license will be issued or transferred, it at least alleviates the cumbersome interim arrangements put in place to comply with the Liquor Control Code while the application process unwinds.
To utilize the option of a conditional license, the applicant under the new law must: submit a separate application form requesting a conditional license; pay an additional fee of $300; and attach an acceptable proof of liquor liability responsibility, such as an insurance policy, and a real estate document demonstrating control of the licensed premises.
The Liquor Control Commission then has 20 days to approve or deny the conditional license for a single location. If multiple locations are involved, the commission has an additional 10 days.
Although passed into law, the conditional license is not currently available, since it depends on the passage of a number of other liquor control provisions that remain before the Michigan House and Senate. However, if the other provisions pass, the process will provide a more efficient alternative to the interim management agreement and lease structure currently in use.
Buyer beware, though: Procurement of a conditional license is not a substitute for the preventive medicine of addressing the liquor license issue as early as possible in a transaction involving the development or purchase of a hotel or restaurant. Identifying the issue early will make for an overall more-efficient process and offer potential protection for the buyer by making the purchase of the facility contingent upon approval of the license from the LCC.
Steve Weyhing is a senior counsel at Warner Norcross & Judd who focuses his practice in state and federal regulations, with a particular emphasis on helping clients work through licensing and compliance disputes. He can be reached at email@example.com.