Landlords and Franchisors as Backers, or Not…

John Stuart Mills, the political economist, once wrote that ''landlords grow rich in their sleep without working, risking, or economizing. Not so fast Mr. Mills.

Recently, the Connecticut legislature passed and the governor signed legislation that, in part, impacts the relationship between landlords/franchisors and liquor permit holders.

Under Public Act 24-142, which is effective now, a franchisor or landlord may, without obtaining approval as an owner (or backer), receive profits from the sale of alcoholic liquor from a franchisee or tenant provided the franchisor does not:

(1) Control the operations of the permit premises;

(2) Direct sales of alcoholic liquor from the permit premises; or

(3) Otherwise engage in activities indicating ownership or proprietorship of the franchisee or tenant.

The Department of Consumer Protection (the Department), through its Liquor Control Division and the Liquor Control Commission, may require a franchisor or landlord to obtain approval as a backer (owner) for the franchisor or landlord to receive profits from the sale of alcoholic liquor.

In determining, whether to require a franchisor or landlord to receive such profits, the department now:

(1) Considers the percentage of such profits that the franchisor or landlord receives;

(2) Evaluates whether the franchisor or landlord may (A) supervise, hire, retain or discharge persons employed on the premises, (B) set menu sections or prices for the premises, (C) establish hours or days of operation for the premises, (D) decide whether or when a patio (outdoor service) may be used in connection with the operations of the premises, ( E) order or accept alcoholic liquor deliveries (F) arrange advertising for the premises, (G) dictate decorations for premises, (H) access banking accounts related to the premises, (I) incur debt, and (J) enter into agreements/contracts with other entities on behalf of backer for the permit.

Most landlords and franchisors do not want to be considered owners or backers of liquor permits. They don't want to incur the liability associated with the sale of alcoholic beverages.

At this time, the Department has not established guidelines as to what percentage of profits triggers a franchisors being considered as a backer. Going forward, when liquor entities set up their corporate structures, like a limited liability company (LLC), their operating agreement should clearly establish the duties of the LLC, to incorporate the operational duties as noted above.

If you would like additional information and best practices, feel free to contact The JJS Consulting Group. LLC.