The Law Blog of DiPasquale Law Group

1.  Lease Agreement.  When buying a restaurant you will either be assigned the Seller’s lease agreement, or have to execute a new lease with the landlord.  One potential benefit to an assignment might be that the Seller has a long term lease at a favorable monthly rate which you would inherit, whereas a new lease might require a significantly higher monthly rent more in-line with the prevailing market.  Conversely, an assignment rarely permits you to re-negotiate any of the Seller’s lease terms, so careful review of the existing lease is critical.  Often, lease agreements contain hidden charges, obligations and restrictions on alienation that make an otherwise favorable lease, prohibitive.  

2.  Sales Tax Issues.  If a Seller is looking to leave their business because of financial difficulties, carefully examine every aspect of their business.  Restaurant ownership is notoriously difficult and known for having a lot of unreported income.  When buying a business you have a choice between buying the business (i.e. “business structure”) or just the business assets.  Buying the assets alone, however, does not protect a Buyer from the Seller’s sales tax debits.  By law, all asset purchases must be reported to the Tax Department for review which typically takes 90 days.  After review, the Tax Department will issue to the Buyer a waiver of all sales tax debts the Seller may have.  Keep in mind that many restaurants do not report, or severely under report cash so that they have to pay less in sales tax.  As a Buyer, fail to notify the Tax Department and you could become personally liable for the Seller’s tax debts.  Audits often take place years later when the previous owners are long gone.  For that reason, consider hiring a competent small business accountant to review the restaurant’s books to ensure that you are not buying into a major sales tax liability.

3.  Seller’s Contracts.  As with sales tax obligations, a Seller’s contractual obligations can be passed on to Buyer even where Buyer only acquires Seller’s assets.  The law requires Buyers to notify all  of Seller’s creditors of the anticipated sale so as to preserve creditors’ rights, if any, in the Seller’s assets.  A Buyer which fails to issue such notices runs the risk of being sued by such a creditor.   

4.  Seller’s Liquor License.  Unlike New Jersey, you cannot sell a liquor license here in New York.  Buyers often tell me that the Seller will transfer their liquor license to them, but that is a misnomer.  All liquor license applications have to be approved by the State Liquor Authority and the review consists of an evaluation of the premises, its use and operation, the applicant’s criminal and financial history and much more.  In other words, the State Liquor Authority is extremely cautious when issuing liquor licenses and does not permit quick and easy transfers.  A transfer application is identical to any other application.  The fees are the same, as are the hoops that must be jumped through.

5.  Equipment.  Closely inspect the restaurant’s equipment to ensure that it is owned by the seller and in good shape. Restaurant equipment can be extremely expensive to replace and often restaurant equipment is under lease or collateral for a loan. If the restaurant contains a kitchen full of equipment that is nearly worn out, that will make a major difference in the value of the business.  Be sure to have your attorney perform a UCC lien check to ensure that no creditor has placed a lien on the equipment, which often is the case.  If you acquire the property and fail to check for UCC liens, you become responsible. 

When the State Liquor Authority (“SLA”) commences an investigation, they can do so in one of many ways including:  (a) on-site inspections; (b) on-site undercover investigations by SLA Investigators and other law enforcement agencies; (c) a review of reports and investigations by the police and regulatory agencies; and (d) speaking to witnesses and gathering evidence of suspected violations.

The information is then evaluated to see whether there is sufficient evidence to initiate charges against an establishment. If there is sufficient evidence, the SLA issues a Notice of Pleading that describes the violations that are being charged.  It is at this point where the license holder enters a plea of not guilty, no-contest, or conditional no-contest. 

If a plea of not guilty is entered, a hearing is scheduled at which both the establishment and the SLA can present evidence and witnesses in support of their case.  The Administrative Law Judge will make findings based on the evidence presented and then present his or her findings to the Members of the Authority which makes the final determination. 

If the establishment pleads no-contest, the case is sent directly to the Members of the Authority to determine a suitable penalty.    When a conditional no-contest plea is entered, the establishment suggests a penalty and if the Members of the Authority accept the suggestion, the penalty is imposed.  If not, the case is scheduled for an administrative hearing.

Penalties can include any of the following:  License suspension, cancellation or revocation; a monetary penalty; bond forfeiture; or proscription (revocation plus a two-year ban against the issuance of a license to any part of the building containing the revoked licensed premises).

More than 1,000 responses were received In less than two weeks following the City Council’s request that restaurateurs provide feedback on the City’s food safety inspection process and new letter grading system. 

Council Speaker Christine C. Quinn and Health Committee Chair Maria del Carmen Arroyo unveiled the questionnaire on January 10th and all responses were due by January 31^st.  The survey responses will now be analyzed in preparation for an oversight hearing to explore the inspection process and areas for reform. 

“I’m thrilled with the response so far, but we want to hear from even more restaurateurs – big and small, in every neighborhood, in every borough,” said Council Speaker Christine C. Quinn. “We’re asking restaurant owners and operators to give us as much information and real data as possible to serve as the foundation for our hearing. This survey gives an important group of New Yorkers – restaurant owners – their say in a system that regulates them.”

“So far, this online survey seems to be yielding a strong response from New York's restaurateurs, which is great. This is the kind of engagement we need from the public on issues that affect daily life in our city. Based on this early result, I think we can expect a robust oversight hearing in the near future,” said Oversight and Investigations Chair Jumaane Williams.

In July 2010, DOHMH began requiring food service establishments to post letter grades corresponding with scores reflecting sanitary inspections during which restaurants receive points for violations. An inspection score of 0-13 violation points is an A, 14-27 violation points is a B, and 28 or more violation points is a C. Grade cards are meant to be clearly visible to the public.

Most restaurant owners say that finding and retaining a qualified, service oriented staff are their most difficult tasks.  The law is very specific about what an employer can and cannot do to secure a workforce.  Before employees can be selected, managers must understand what the essential functions are for each job position (i.e. job description).  From there, managers can identify what qualifications candidates will need to perform the job.  These qualifications should be in writing in all job advertisements.  The object of this game is to protect yourself because hiring and maintaining employees is legally tricky. 

Job qualifications can include physical and mental requirements but cannot include characteristics that would unfairly prevent a class of workers from successfully competing for a position.  For example, requiring that your dishwasher be six feet tall would be inappropriate because women and certain minority groups might have difficulty meeting it.  All job qualifications must be “bonafide occupational qualifications” (BFOQ) which in the absence of, an employee would be unable to safely or adequately do that which was necessary of him/her to perform their job description. 

Your employment application can request boilerplate information such as their name, address, experience and related information, but all questions should focus exclusively on job qualifications and nothing else.  When conducting interviews, keep in mind that what you can ask is very limited and if a candidate is not hired because of an answer to – or refusal to answer – an inappropriate questions, a lawsuit may be filed.   Generally, age is considered irrelevant in most hiring decisions because the Age Discrimination in Employment Act protects employee 40 years old and older.  When age is a factor, such as when a position calls for the service of alcohol, then age can be requested. 

Questions about race, religion, and national origin are inappropriate, as is requiring that photographs be submitted with applications.  Questions about education background have been deemed inappropriate if the job description does not require any specific educational background.  Questions about home ownership potentially discriminates against those who do not own homes, and questions about military discharge are have been deemed improper because a high proportion of other-than-honorable discharges are given to minorities.  

Increasingly, managers use background checks before hiring employees but background checks can lead to litigation if the information secured is false or used in a way that violates employment law, or if the information is improperly disclosed to third-parties.  Conversely, the failure to conduct a background check for some positions can subject an employer to liability for negligent hiring.  Always obtain written permission from each candidate before conducting a background check. 

If references are provided, you may call each reference but nowadays, past employers will rarely divulge information as many employers have been sued for providing false or inappropriate comments about past employees.  Simply ask whether the company would rehire that worker and you may find the answer to be sufficiently telling.  For more information on the legal do’s and don’ts of employee hiring, click here. 

The State Liquor Authority has granted an extension of credit for retail licensees in order to ensure that restaurants and bars have the ability to maintain and replenish their inventories throughout the holiday season.  Restaurant and Bars will be able to place orders for alcohol up until December 30, 2011 and will be charged posted December prices as long as delivery of the alcohol is made on or before January 4, 2012.  Wholesales are not permitted to accept new orders for December’s prices after December 30, 2011. 

As New Year’s Day (January 1, 2012) falls on a Sunday, All Night Permits allowing establishments to stay open until 8:00 a.m. are not being issued by the State Liquor Authority. Section 106(5)(a) prohibits alcoholic beverages to be sold, offered for sale or given away upon any premises licensed to sell alcoholic beverages at retail for on premises consumption on Sunday between 4:00 a.m. and 12:00 noon on Sunday.  The State Liquor Authority has clearly stated that restaurants and bars will be required to adhere to the approved closing hour in the County in which they are located, unless such establishments submitted an application for a New Year’s Eve Permit on or before November 15, 2011 and been notified by the SLA that their permit was approved. 

James DiPasquale

DiPasquale Law Group

Just before Christmas, Community Board 10 in Harlem, considered and then ultimately tabled for further discussion, a proposal by their Economic Development Committee which recommended that new restaurants and bars be required to stop serving alcohol by 2:00 a.m. 

Notably, Community Boards cannot change the hours of operation for existing businesses nor can they require new restaurants and bars to close earlier than 4:00 a.m.  Those decisions aare left to the legislature and the New York State Liquor Authority. 

As noted by Joseph Tepper of the New York Daily News, “As more bars and restaurants continue to pop up in bustling Central Harlem, CB 10 aims to limit the late night crowds that have appeared in other bar-ridden areas of Manhattan, like Murray Hill and the Meatpacking District.”  "They're nervous that Harlem will become like the Lower East Side or Meatpacking District with lots of people in the streets, but we are still very far away from that," said Susannah Koteen, the proprietor of the Italian restaurant Lido on Frederick Douglass Blvd. and W.117th “We're keeping people in the community, hiring people from the community and bringing money into the community, so it seems strange that would want to hinder business," she added.

Attorney James DiPasquale

DiPasquale Law Group

How long will it be until the Federal Government starts to crack down on New York City restaurant owners for employing illegal aliens?  It may happen soon. 

This past week, the owner of French Gourmet, a restaurant in San Diego, was sentenced in Federal Court and ordered to serve 5 years of probation and pay $396,575 in fines.  The manager was ordered to serve 3 years of probation and pay $2,500 in fines for his role in hiring illegal immigrants. 

“When employers do not comply, we will take vigorous enforcement action to ensure they do not profit from this illegal tactic," said U.S. Attorney Laura Duffy.   This case reflects a new approach by federal authorities as they crack down on the hiring of illegal immigrants. After years of conducting sweeps of undocumented laborers, the federal government is now focusing more on the employers who knowingly hire them.

As noted in my October 2011 newsletter, The New York City Department of Health proposed a significant amendment to the New York City Health Code in an effort to clarify what is required of restaurant owners.  That amendment was opened for public comment on October 27, 2011 and on December 13, 2011 was voted on and approved by the Department of Health.  Three people testified and 12 comments were submitted on October 27^th, and in response several changes were made to the earlier proposal.  Considerable testimony came from Andrew Rigie of the New York State Restaurant Association. 

The new rules will be effective on January 20, 2012.  However, there is no indication within the Amendment as to how previously charged violations will be handled.  In other words, if you were cited for a violation(s) in December or into January 2012, it is unclear as to whether OATH will be permitted to uphold violations where the section cited, has been repealed or heavily modified. 

If you would like a copy of the complete Amendment please send me an email and I will forward you a PDF version of same. 

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