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How a shadow licence could help protect your biggest asset

David Inzani, partner at leading licensing solicitors, Poppleston Allen

Everyone knows that lending criteria is tougher now than it has been for some time. But we’ve noticed a rise in lenders insisting on shadow licenses existing on deals, as a condition in transactions within the hospitality sector. This certainly demonstrates that investors and lenders understand now, more than ever, the value the premises licence holds.

A shadow licence is where a premises licence is granted to one party in respect of a premises, where another party already holds a separate licence. Although they are not explicitly referred to in the Licensing Act 2003, the concept of shadow licences was approved under the modern licensing regime in a 2013 High Court case between Extreme Oyster & Star Oyster Ltd. v Guildford Borough Council.

A common situation in which a shadow licence may be applied for is when a landlord’s licensed premises is operated by a tenant and the licence is held in the name of the tenant (as was the case with Extreme Oyster). In these circumstances there are several ways in which the tenant’s actions could have a negative impact on the licence: they might become insolvent or bankrupt and the licence will lapse, or the licence might be reviewed due to poor management of the premises resulting in restrictive conditions being added, hours cut back or even revocation.

Recently, we’ve noticed a trend. What we’re seeing is investors and lenders recognising the significant value that can be added to a property with a premises licence. This increases further if the property sits within a cumulative impact zone, where councils either won’t, or are extremely reluctant to, grant new licenses. Therefore many landlords wish to protect this asset against the risk posed by potentially insolvent or irresponsible tenants. By holding a shadow licence, lenders are lowering the risk posed by irresponsible tenants, or in a situation where the tenant becomes insolvent, and the licence will lapse.

Although landlords often seek to protect themselves against such risks through provisions in the lease, these will rarely have a bearing on the licensing process. Such provisions may provide a landlord with a right of action against a tenant, but they cannot prevent a licence from lapsing or being reviewed. A shadow licence solves this problem for the landlord.

Terms of the shadow licence are likely to mirror those of the licence that the tenant operates under. But experience tells us that simply flipping to the shadow licence isn’t always that simple. In the event that something goes wrong with the tenant’s operation and a landlord needs to rely on the shadow licence, this is not necessarily a straight-forward process.

When granting a shadow licence, the council might seek to add conditions ensuring that appropriate changes are made to the operation, or a cooling-off period is put in place before trading can begin again. Indeed, some councils even have a policy of reviewing the shadow licence whenever the original licence is reviewed. So it is vital to ensure a robust application.

Despite these potential hurdles, we expect a continued rise in lenders and investors insisting on a shadow licence, as they seek to underpin the asset they have backed or lent against. In this scenario, we advise landlords take advantage and apply now to help protect and futureproof their investment.