Management, Service, Concession and Sublease Agreements

Management and Service Agreement

A Management and Service Agreement authorizes the holder of a retail license or permit to contract with a third party to manage and operate the retailer’s alcoholic beverage sales and services.  In industry parlance, the holder of the retail license or permit is known as the beverage company (“BevCo”), and the managing and operating entity known as the (“OpCo”).

 

Common reasons for BevCo entering into a management agreement with OpCo include lack of own labor personnel, OpCo’s experience operating food and beverage service, tax and accounting considerations in the case of subsidiaries, lessened disclosure requirements (which is a consideration of investment groups), and continuity of operations under existing permit (OpCo purchases BevCo equity). 

 

Under this arrangement, the OpCo charges BevCO a reasonable fee in exchange for management and operation services.  This fee can be a flat fee, a percentage of gross sales, or combination of the two.

 

BevCo retains exclusive occupancy and control of the licensed premises, and pays all the taxes, licenses, permit and license fees associated with sales, service and delivery of alcoholic beverages.  BevCo has the right to hire, fire and control OpCo employees.  BevCo supplies alcohol inventory at its own cost, and bears risk of loss regarding damage or loss of the same.  OpCo maintains books as required by law.  Gross sales of alcohol revenue go directly to the BevCo, who then pays the OpCo their fee.

 

Concession and Sublease Agreements

 

A Concession or Sublease Agreements authorizes the holder of a retail license or permit to operate at a location belonging to a third party such as a hotel, stadium recreation, or event center.  In industry parlance, the third party is the Grantor and Operator.  A Concession or Sublease Agreement may also be used in tandem with a Management and Service Agreement if the hotel, stadium, or event center is providing staff and labor through a separate operating company.

While the term Concession and Sublease agreement is often used interchangeably at the agency, it should be noted that a subtle but important distinction exists between the two.  The third party owns the furniture, fixtures, and equipment in a Concession Agreement, whereas in a Sublease Agreement, the permittee owns the same instead.

 

Common reasons for retailer entering into a Concession or Sublease Agreement with a grantor includes mutually beneficial interests such as high profile location and retailer’s experience in the food and beverage industry, grantor’s desire to avoid exposure to liquor law liability, grantor’s religious objections to alcohol, lessened disclosure requirements for third party, and seamless transition between existing and new permit (retailer purchases grantor’s assets)

 

Under this arrangement, the grantor charges a reasonable fee in exchange for allowing the retailer to operate at a location.  This fee can be a flat fee, a percentage of gross sales, or combination of the two.

 

Retailer retains exclusive occupancy and control of the licensed premises, and pays all the taxes, licenses, permit and license fees associated with sales, service and delivery of alcoholic beverages.  Retailer has the right to hire, fire and control all persons involved in the sale service or delivery of alcohol, whether directly hired by the Retailer, or provided by a managing entity.  Retailer supplies alcohol inventory at its own cost, and bears risk of loss regarding damage or loss of the same.  Retailer maintains books as required by law, unless they are operating under a Management and Services Agreement.  Gross sales of alcohol revenue go directly to the Retailer, who then pays the Grantor their fee.

 

The origin of these type of agreements comes from Texas Alcoholic Beverage Commission v. Good Spirits, Inc., 616 S.W.2d 411, 415 (Tex. Civ. App.--Waco 1981, no writ).  The long and short of this case was individuals or entities who were disqualified from holding a permit in the retail tier, could still be involved in the sale, service or delivery of alcohol through a sublease agreement, as long as the permittee was otherwise qualified and maintained control of the business.  The Court ultimately upheld what we now recognize as a sublease or concession agreement.

 

At the time of the case, out of state corporations were not eligible to hold a Wine Only Package Store.  Albertsons entered into an arrangement with a Texas resident.  The resident owned 53% of the company and 100% of the voting stock.  Resident obtained loan for the business which was guaranteed by Albertsons.  Albertsons owned 43% of the company an no voting stock. Resident paid Albertsons 4.1% gross sales fee, a 1.5% service contract fee, and a flat fee to be able to use Albertson’s employees to stock shelves.  Resident purchased the alcohol with his own checking account.  Resident earned a net profit of 7%.

 

Role of Management and Service Agreements, Concession Agreements, and Sublease Agreements

 

The aforementioned agreements play an important role in ensuring permittees and licensees maintain exclusive control of the rights and privileges of their permit.  See Tex. Alco. Bev. Code §§ 11.05, 61.16, 101.76 and 109.53.  They need to be timely disclosed to the agency.  See 16 Tex. Admin. Code §§ 33.2 and 33.94(b)(5).  Failure to comply could result in serious administrative and criminal consequences.  These include refusal of an original or renewal application for a license or permit, cancellation of an existing license or permit, criminal conviction, and disqualification to hold a license or permit for five years

 

If you are an existing retailer, or plan on becoming one, and your situation involves any of the following scenarios, an agreement will likely be required –

 

  • Performance based compensation arrangements with person or entity not disclosed on the TABC application, which involves a share of gross alcohol revenue (Management Agreement)

 

  • Exploration of business opportunity by a potential buyer of an existing business.  (Management Agreement for equity purchase, Concession Agreement for asset purchase)

 

  • Seamless transition of business operations following an asset purchase, while original application is pending.  (Concession Agreement)

 

Due to the complexity of Texas Alcoholic Beverage Commission liquor licensing laws in this area, it is important to hire an experienced liquor law attorney to determine what type of agreement is best for your situation and ensure that is in compliance with the Code.