How Brewery Owners Can Limit Liability Via Leasing

June 11th, 2018 • by Randall Beach
Randall Beach

Randall Beach

    Randall is a Partner with Whiteman Osterman & Hanna, where he is a member of the Firm’s Alcoholic Beverages, Real Estate, and Real Estate Development, Zoning and Land Use practice groups. He concentrates his practice in the areas of commercial real estate, real estate development, and commercial transactions. Randall is experienced with regard to the acquisition, disposition, development and the re-development of commercial and corporate real property, commercial leasing, construction law, financing and land use matters, including the preparation and negotiation of all transactional documentation related thereto, and cross-border transactions.

    A new craft brewery recently asked whether or not they should have a lease in place for their brewery premises. The brewery was located on the same parcel of land as their residence. The answer – absolutely. Their next question was whether they, as owners of the residence, should lease to the brewery or whether the brewery should lease to them.  The answer – definitely lease to the brewery.

    Ideally, in such a situation, the brewery is owned by an operating company, typically a limited liability company. The operating company should enter into a lease, as tenant, for the brewery facility, with the owner. This lease may be a “friendly” lease (i.e., one without onerous terms), but should clearly delineate the liability between the brewery/tenant and owner/landlord.

    Even when the craft brewery occupies a facility is a stand-alone parcel owned by the brewery itself, and not the owners’ residence, it is wise to have such a lease in place. One of the critical drivers behind this is limiting and segregating liability. Often the underlying real property and brewery building are major assets that need to be protected. For example, if a product liability or liquor liability claim is brought against a craft brewery where such a lease is in not in place, the entire assets of the brewery, including the real property is exposed to such risk.  A lease between the operating entity (brewery) and the owner of the real property can capture that risk at the brewery/operating company  level and shield the real property asset  from liability. This type of asset protection can also apply to creditor liability.

    Other advantages of having an operating company-holding company lease in place can include: (i) tax advantages; (ii) creation of an alternative distribution pathway to owners (via rent payments) and (iii) the fact that leases are generally off-balance sheet for the operating company.

    The requirements of TTB and the New York State Liquor Authority must also be carefully considered and incorporated into all craft brewery leases, including those between an operating company and a holding company. For example, TTB requires that the landlord acknowledges and consents to the use of the leased premises as a brewery. Also, the scope of the leased premises will be of interest to both regulators and become important if the craft brewery wishes to conduct non-brewery activities (think food trucks) at or near the premises.

    Like all things in the craft brewery industry, there is no one-size fits all, canned solution to the question of leasing the brewery premises. Craft brewers should carefully review their particular circumstances and consult with their legal and accounting partners to tailor a solution that adequately meets their needs.