Publications

01 Aug 2012

Hospitality, Tourism and Gaming: Transfers of interests in partnerships

Transfers of interests in partnerships can have many unseen pitfalls especially for businesses as complex as hotels, motels, restaurants, wineries and other licensed premises. Expert legal advice can help you avoid problems and Piper Alderman's team can help navigate through each step of the transaction.

Many licensed premises are run by partnerships which often include a number of individual persons and companies. In the event that partners leave the partnership or new partners join, licensees need to be aware of a number of legal requirements which apply. There are a number of matters that need to be considered when there is a change in circumstances like these.

Taxation Issues

The outgoing partner needs advice as to any capital gains tax which is payable on the sale.
The incoming partner needs to take professional advice as to the best entity to use for the purchase, both from a taxation point of view and also for other purposes including limitation of liability (often referred to as “asset protection”).

GST

Usually, there will be no GST liability on the transfer of a partnership interest to a new or continuing partner. However, this is dependant on the outgoing partner’s individual circumstances and it is therefore important that professional advice is sought in that regard.

Consent of Landlord

The vast majority of South Australian licensed premises are leased. In the case of leased premises, care needs to be taken to ensure that the transfer (or “assignment”) provisions of the lease are checked and complied with in all respects.

Most leases stipulate that a partner exiting amounts to an assignment of the lease which requires landlord’s consent. The landlord needs to be given full details of the incoming partner so that the landlord can itself satisfy that the incoming partner is acceptable. In short, landlord’s approval is generally required. At the same time, it is generally the case that the landlord cannot unreasonably withhold its consent to the transaction.

Assuming that the landlord consents, certain documents need to be prepared to record the transaction.

Transfer of Lease

A “Memorandum of Transfer of Lease” has to be prepared and registered at the Lands Titles Office to put the lease in the name of the new partnership. This is normally handled by the incoming partner’s solicitor in conjunction with the outgoing partner’s solicitor.

Lease Guarantees

The outgoing partner needs to consider their liability to the landlord under any personal guarantees which have been given to the landlord (such guarantees are usual). Conversely, the landlord will normally require fresh guarantees from the incoming partner.

Guarantees to Banks

Care needs to be taken to ensure that the outgoing partner is released from any liability to the bank which finances the business. This includes release from any mortgages or other securities which have been given to the bank. The bank will need to prepare paperwork to record the transaction.

Trade Creditors and Suppliers

The outgoing partner needs to consider any guarantee documents which may have been signed in favour of trade creditors and suppliers. Releases from liability should be sought.

Licensing – Liquor and Gaming

The Office of the Liquor and Gambling Commissioner treats a partnership transaction in the same way as an outright sale of the business. Extensive paperwork is required to record the transaction, which results in a new liquor licence and, if applicable, gaming machine licence, being issued in the name of the new partnership.

Stamp Duty

Stamp duty is payable to Revenue SA.
This is the case even if no contract is prepared recording the terms of the sale of the partnership interest. Failure to disclose the transaction to Revenue SA may result in significant interest and penalties. Note also that Revenue SA can audit transactions up to five years after the date of the transaction.

Commercially, it is common for the incoming partner to be responsible for the payment of the stamp duty but legally, both the outgoing and the incoming partners are “jointly and severally liable” for the stamp duty. This means that both the incoming and outgoing partners are liable to Revenue SA so any outgoing partner who chooses to ignore the legal requirements does so at its own peril.

Gaming Machine Surcharge

If the business is a hotel which has gaming machines, the Gaming Machine Surcharge or “Levy” is payable to Revenue SA. This is often overlooked in the context of changes in partnerships and again, the transaction must be notified to Revenue SA. The amount of the Levy is 5% of the Net Gambling Revenue for the previous 12 months. The ultimate liability depends on the interest in the partnership being transferred. If, for example, a 20% interest in the partnership is changing hands, 20% of the Levy is payable.

Settlement Statements

It is usual for settlement statements to be prepared to record the precise financial effect of the transaction. This is the responsibility of the respective solicitors.

“Walk In/Walk Out”

It is quite common for a new partner to be introduced to the partnership on a “walk in/walk out” basis which means that there is no adjustment for rent, rates, taxes and other liabilities of the partnership. In other words, a “net price” is agreed.

Whilst not a precise method, this approach is often used, particularly where an existing partner is taking over the interest of the outgoing partner. Even on that basis, all of the issues above must be considered and dealt with.

Freeholds
Similar principles also apply to sales of interests in partnerships which own properties (“freeholds”). Again, advice needs to be obtained in relation to all legal requirements.

In short, it is easy to underestimate the legal requirements which need to be observed when a partner joins or exits a partnership. Any failure to comply with all necessary formalities exposes incoming, outgoing and any continuing partners to substantial risks and penalties. These risks are manageable by the parties by seeking appropriate professional assistance from both solicitors and accountants who are experienced in the field.

Should you have any queries or concerns regarding the issues raised above, please contact Geoff Forbes, Partner.
 


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