Law Offices of John P. Connell, P.C.: Ordinarily, a brewery that produces beer under its own name and at its own licensed facility. The Alcohol and Tobacco Tax and Trade Bureau (“TTB”), however, recognizes two distinct forms of brewing operations in which more than one entity is involved: contract brewing, and an alternating proprietorship. The more familiar of the two, contract brewing, is the process by which a licensed brewery produces beer for a wholesaler, retailer, or, more commonly, for another brewer. Among other things, the contract brewery files label registrations, pays taxes, and retains title to the beer throughout the brewing process.
The less familiar practice, alternating proprietorships, however, is gaining recognition as an alternative to contract brewing. Under this practice a “host” and a “tenant” share manufacturing space owned (or leased) by the “host” brewer. This alternating proprietorship practice, which is also available for wineries and cider manufacturers, is where, in the case of a brewing, there is a “host” brewer, which is the party that leases or owns the brewery premises, and a “tenant” brewer, which is the party that pays the “host” brewer for use of the brewery premises and its brewing equipment. Each brewer must obtain its own Brewer’s Permit from the TTB and a brewer manufacturer license from the Massachusetts Alcoholic Beverages Control Commission (“ABCC”).
Such an arrangement allows a “host” brewer to utilize excess production capacity and gives a new “tenant” brewer that is perhaps not ready to make a full investment in the purchase of a brewery access to otherwise difficult to obtain equipment. From a licensing perspective, any existing brewery seeking to enter into this arrangement must amend its TTB registration to indicate that its premises will be utilized by more than one brewer, and obtain similar approval at the ABCC. There will need to be a written “alternating proprietorship” agreement between the parties that the TTB and ABCC will scrutinize. Under this arrangement, each party separately reports its production and must make its own tax payments to TTB and post their own prices with the ABCC. The parties should have distinctly separate labels and trade names or could be found to have a contract brewing relationship and owe taxes at increased rates. A “tenant” brewer’s beer should be separate and identifiable from the beer of the host (or any other tenant brewer). Most importantly, the TTB requires that either a “tenant” utilize the brewery premises at times when the “host” is not utilizing the brewery premises or that the “tenant” have a clearly marked-off space within the brewery premises that is separate and distinct from the area of the brewery utilized by the “host” brewer.
Although the practice of establishing an alternating proprietorship is still relatively rare in Massachusetts, such a practice has started in the local brewing industry as more ventures seek to create a craft brew brand without having to make the heavy investment in equipment and space. Indeed, the concept is now also potentially attractive to those new ventures seeking to enter the hard cider market as the alternating proprietorship arrangement is also available for existing wineries and cideries. The TTB and ABBC allow these arrangements, however, only after close scrutiny of the proposed arrangement. For example, certain technical requirements must be found within an agreement before the TTB will recognize the alternating brewery proprietorship. The “tenant” may utilize the “host’s” employees but an agreement should specify the means by which the tenant will pay for such employees. Another issue of great concern is the relationship between the “host” and its landlord, if the brewery premises are leased, as commercial tenants in general are not allowed to “sub-lease” their space without the permission of the landlord, and allowing a “tenant” brewer into the premises with its own rights of possession may cause legal issues beyond just licensing concerns.
Submitted by Greg Birney
© 2015 Law Offices of John P. Connell, P.C.