Your License: Reversionary or Non-Reversionary (And how it affects the value of your business)

/, Public news/Your License: Reversionary or Non-Reversionary (And how it affects the value of your business)

When I am asked to appraise liquor stores when preparing them for sale, I am regularly surprised by how many owners are not aware of whether their liquor license is reversionary or non-reversionary, at the expiry and/or determination of the lease.

Though the license is in the name of the trading entity (the lessee in the vast number of cases), it only remains so, as long as the lessee can demonstrate absolute security of tenure.

This begs the question….. who owns the license once the lease has expired or been determined ?

If you ask the licensing authority, they will tell you that the government does and they are correct.

But, the relevant question really is, who has the rights to its “beneficial ownership” (i.e. the exclusive right to use it to retail alcoholic product) at that point of time?

And the more important question is, how does this affect the value of your business?

The answer to the first question, lies within your lease. In the vast majority of cases, in liquor store leases, the lease will specify something to the effect… “ the beneficial ownership of the liquor license at the expiry or determination of the lease, shall revert to the lessor, for nil consideration and the lessee shall at no time, make application to remove said licence from the subject property”.

I still do strike the odd occasion though, where the lessee has made the original application, or moved the license to that location from another, where the lease typically says …” at the expiry or determination of the lease, the beneficial ownership of the license remains with the lessee and the lessor makes no claim in its estate”.

In this scenario, if the lessor refuses to extend the term of the lease, (or requests a non-commercial rental), I have seen lessees have the license suspended, pending its relocation. This relocation can be reasonably easy if the distance between locations is very small. At one point, RGL used a 500 metre rule for this type of application, where now they just use the term “within the precinct” – generally considered to include  a one postcode radius, but not always so. If the relocation  is outside “the precinct” an application for relocation can be as involved, and as costly, as a whole new license application.

It is curious though, that unlike liquor stores and because it is typically the lessee who makes the original application,  Small Bars (for example) are nearly all non-reversionary.

The above answer, should by now, be beginning to suggest the implications of the license status, on the value of the business.

In the case of a reversionary license, the extent of tenure, plays a large part in the value of the business, as there is a point in time where, irrespective of any conversation to the contrary, the lessee cannot be assured of tenure (you will find, by no coincidence, that bank lenders will view the business the same way).

For that reason, I believe that a liquor store must have a total tenure (lease plus options) of a minimum of 14 or 15 years, to be considered to have a full goodwill value. Once that tenure starts to look more like 10 years than 15 years, I believe that about one third of the goodwill value has been eroded and similarly two thirds eroded at, or approaching 5 years remaining (under 5 years, the business is considered unsaleable).

Whilst it is very unusual that a lessor ever wishes to be become a retailer at the end a lease, there are a couple of celebrated cases, some years back, where the lessee, while waiting for the lessor (supposedly) to prepare a new lease, have come to work to find the locks changed, a stocktaker on premise and an offer made on the plant by the lessor (in each case, well below its WDV).

In the case of a non-reversionary license though, it is generally safe to assume that, because the lessors property is worth considerably more with a liquor license attached, the lessee can enjoy relatively unlimited tenure and the existing tenure plays a far lesser role in the business value.

Interestingly, twice in the last month (having not seen one for over 2 years), I have reviewed a liquor store lease, where (usually because the lessors solicitor has no licensing experience) the lease is “silent” on this issue.  I am told by specialist licensing solicitors, that possession being considered being a great factor in any disputed ownership, the lessee has retained the ownership legally, or has negotiated its transfer over to the lessor, in exchange for a long term extension to the existing tenure (or (say) a favourable market rent review).

The above is an extremely good reason to review your lease in this area.

Disclaimer: This article is meant to offer general advice and not to be interpreted as legal opinion. In all cases which relate to your premises lease, you should seek the advice of a specialist liquor licensing solicitor.

Murray Brown
Hospitality & General Business Broker
Phone: (08) 9212 0410
Mobile: 0438 954 701