Management Agreements – Use Caution

 Law Offices of John P. Connell, P.C.: A restaurant, bar or hotel holding a liquor license may seek to delegate management responsibilities to another individual or entity through a contractual relationship, known as a management or operating agreement. This agreement requires approval from the local licensing authorities and Alcoholic Beverages Control Commission (the “ABCC”), typically drawing substantial scrutiny from such administrative boards as they are not favored by regulators. Failure to have a management agreement disclosed and approved by both the local licensing authority and the ABCC can cause the licensee severe sanctions, including revocation of the license, should the regulators become aware of such an undisclosed arrangement.

 Drafting A Management Agreement

Management agreements in the liquor industry allow a licensee to retain ownership of the license in its own name while delegating rights and responsibilities to a “manager,” provided ultimate control of the enterprise remains with the licensee. Improperly drafted management agreements will not survive the scrutiny licensing boards apply to such arrangements and therefore will not be approved.

A properly drafted management agreement, for instance, provides that the licensee will retain actual control of the licensed premises while positioning the managing entity in a subservient role. A poorly drafted agreement secedes too much control over the license to the managing entity and will not be approved by the regulatory agencies. Although the licensee may be subservient to the managing entity in some respects, major decision-making must vest in the licensee with the managing entity operating in such a way that ultimately positions its interests for the licensee.

The following provisions are indicative, but not determinative, of a successful management agreement pursuant to the ABCC’s 2009 decision in the case known as In Re WCM, LLC Boston (ABCC Decision dated June 9th, 2009):

  • The manager will protect and promote the licensee’s interests in all respects;
  • The manager shall conduct its operations to the greatest advantage of the licensee and keep the licensee informed as to all matters concerning the business;
  • The licensee orders and pays for alcoholic beverages from its own business account;
  • The manager must consult with the licensee on a regular basis regarding overall management and operations;
  • Only the licensee can increase the amenities, services or expand the scope of the licensed business;
  • Employees are employed by the licensee and not the manager;
  • The payroll account is funded by an operating account established by the licensee, not the manager;
  • The licensee is responsible for paying employee wages, state and federal payroll taxes, social security, unemployment taxes, workman’s compensation and other taxes;
  • All money received by the manager in the conduct of business is deposited in an operating account that is the “property” of the licensee;
  • The manager is mandated by specific designation of expenses to be paid from operating account including lease payments, insurance policies, repairs, equipment, furniture, kitchen ware, compliance fees, attorney’s fees, etc.;
  • The manager may not have exclusive possession over the premises and the licensee shall have full access to premises at all times;
  • The manager cannot pledge the credit of the licensee nor commit the license in its own name; and
  • The manager shall not borrow money, sign any promissory note or give any financial guarantee on behalf of licensee.

Licensees are required to submit executed management agreements for approval by the local licensing authorities and ABCC before the manager starts operating the licensed premises, not afterwards. The regulatory agencies will carefully analyze the proposed agreement for language evidencing inclusion and adherence to the above-referenced principles. Failure to disclose a management agreement for approval, or what would constitute a transfer of management responsibilities, can render stiff violations for the licensee.

Transferring Management Without Approval

The delegation of licensee duties to a manager or managing entity for the operation of the licensed premises for their own account, with or without a formal agreement, can result in what the regulators deem an unauthorized “transfer of the liquor business.” See Griffin’s Brant Rock Package Store, Inc. v. Alcoholic Beverages Control Commission, 12 Mass. App. Ct. 768, 771 (1981). More specifically, G.L. c. 138, § 23 prohibits transference of an interest in a liquor license without proper approval from the local licensing authority and the ABCC. The Appeals Court has held the “concept of an ownership interest can vary from an absolute proprietary interest to a mere possessory right.” Number Three Lounge, Inc. vs. ABCC, 7 Mass. App. Ct. 301, 310 (1979).

Each licensee is required to renew its license every year by submitting forms attesting under the pains and penalties of perjury to its current interest holders. G.L. c. 138, § 16A provides that liquor licenses “shall be automatically renewed for the next annual license period upon application by the holder thereof . . .provided that said license is of the same type as the expiring license and covers the same licensed premises.” If new or additional individuals have acquired an interest in the liquor license or if an individual or entity has acquired a possessory interest over the licensed premises, license renewals shall be treated as a new license application pursuant to G.L. c. 138, § 15A.   Accordingly, failure to disclose new owners or individuals who now have an interest in the license will cause the licensee to submit a false renewal form under oath. Under such circumstances, the ABCC has regularly revoked such licenses. “Where license was renewed ‘in clear violation of the plain language of G.L. c. 138, s. 16A, the ABCC was obligated to revoke the license pursuant to G.L. c. 138, s. 64. As in these prior cases, we have decided no other sanction is available for the [ABCC] to consider given the express language of the statute.”   In Re: Jin Restaurant Group, LLC, ABCC Decision dated October 28, 2009 (emphasis added). Accordingly, when a licensed establishment is considering hiring someone or some business to run its establishment and that person or business will have a substantial degree of control and/or interest in the profits of the licensed establishment, careful consideration should be given to properly draft and disclose the management agreement for approval by the regulators.

-Robert J. McGovern, Esq.

Written by

No Comments Yet.

Leave a reply