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Cite as: (2007) 81(12) LIJ, p. 54

The legal and practical issues involved in acquiring a licensed gaming venue business in hotel premises are both extensive and time-consuming.

By John Weir

The legal and practical issues involved in acquiring a licensed gaming venue business in hotel premises are both extensive and time-consuming.
By John Weir

The Victorian government has limited the number of gaming machines in the state (excluding Crown Casino) to 27,500. Half are available to hotels and half to licensed clubs and racing clubs.[1] Tabcorp and Tattersall’s are the only licensed operators and they equally share the supply of machines to venues.

There are about 520 approved gaming venues in Victoria, of which about 250 are licensed hotels.

The Victorian Commission for Gambling Regulation (the Commission), established under the Gambling Regulation Act 2003 (the Act), regulates the approval of the venues and the licensing of their operators. A separate application process is required for each.

A general licence under s8 of the Liquor Control Reform Act 1998 (LCR Act) is required as a prerequisite for obtaining a venue operator’s licence under the Act. Each such licence is separately administered and controlled. The Commission oversees licences issued under the Act and the Liquor Licensing Commission oversees licences issued under the LCR Act.

Due diligence

The following inquiries should be made by a purchaser’s solicitor as well as the usual inquiries undertaken for a non-gaming hotel or other business.

  • 1. Obtain a copy of the notice of approved venue issued by the Commission which details the name of the approved venue operator, the approved premises, the term of the licence and the number of machines approved.
  • 2. Obtain a copy of the gaming plan held by the Commission (the green line plan) which details the boundaries of the gaming room and the placement of machines within it. Any variation to the placement of machines and any modifications to the gaming room require Commission and local council approval.
  • 3. Read the venue operator’s agreement with the relevant gaming operator (Tattersall’s or Tabcorp). Check the terms of the agreement, the number of machines approved and the assignment provisions. Most agreements have a clause that allows some machines to be removed at the discretion of the operator.
  • 4. Obtain the liquor licence plan (the red line plan) which details the area within which liquor may be served. Many of these are out of date and care should be taken that they are checked at the premises and brought up to date by the vendor as a condition of the sale (this relates to both gaming and non-gaming venues).
  • 5. Apply to the local council for a certificate under s97N of the Planning and Environment Act 1987 confirming that the existing use of the premises as a gaming venue complies with the planning scheme. Some councils are not accustomed to issuing these or are reluctant to commit themselves. However, they are obliged to respond under the legislation and it may be necessary in some cases to bring this to their attention. If they refuse they must state the grounds for such refusal.[2]
  • 6. Obtain copies of planning permits relating to the approval of the gaming room and any modifications to it. Even though a certificate under s97 (as above) may be obtained, it is prudent to get copies of the permits and check their conditions. Under current planning schemes it is not necessary to have planning approval if the gaming room area does not exceed 25 per cent of the total area where liquor may be sold. This area, however, is hard to define because it does not mean the total area within the red line plan and excludes kitchens, storerooms and the like. If in doubt, it may be necessary to arrange a survey.
  • 7. Obtain a copy of the liquor licence and check its hours and conditions. These govern the hours within which the gaming room may remain open. They cannot be outside the hours prescribed by the liquor licence.[3] The liquor licence and the venue operator’s licence are tied and if the liquor licence is revoked, so is the venue operator’s licence.
  • 8. Read the lease of premises to check gaming-related issues – for instance, does the landlord base rental on gaming receipts?
  • 9. Inquire whether the purchaser has sufficient employees licensed under the Act to properly operate the gaming room. The Commission will specify the minimum number required at any time.

The gaming licence

The procedure for getting Commission approval of the transaction will depend on whether the purchaser holds a venue operator’s licence or whether application must be made for a new one. Venue operator’s licences are not transferable in the way general liquor licences are. If a current licence is held, it is necessary to make an application to include the relevant premises in it.

One of the principal concerns of the Commission is to ensure that funds for the purchase are coming from reputable sources and in this respect its inquiries are far-reaching. It is necessary to provide a letter from any financier confirming the amounts of its advance and the securities to be taken. It may be necessary to provide full details of any security and how it was acquired.

If the purchaser has to apply for a new venue operator’s licence, an inclusion application and a separate licence application will be required and the Commission inquiries will be far more extensive. All known associates will need to fill out detailed forms and in the case of an incorporated applicant these include directors, executive officers and others having more than a 10 per cent shareholding or unit-holding in the applicant. In the case of an individual, it includes the wife, children over 18 and siblings. These applications require the parties to get police checks and credit reports. Audited financial statements of the applicant and associated entities are also required.

In contrast to the LCR Act, it is necessary (not optional) for any body corporate applicant to appoint a nominee who will be responsible as licensee under the Act. The nominee must complete a separate application and probity checks are required.

The net effect of this is that it will usually take at least 10 weeks for the inclusion application to be approved and longer in the case of an application for a new licence. Enough time therefore has to be specified in the contract for these approvals to be obtained. The more complex the structure of the applicant and its financial arrangements, the longer it will take.

The contract

The contract must have conditions which, if not fulfilled within say six months (with a right to extend to nine months), enable the purchaser to withdraw from the contract. These include:

1. Assignment of the venue operator’s agreement with the relevant gaming operator or entry into a new agreement

Tattersall’s and Tabcorp each have their own application requirements and they too have to be satisfied as to the capacity of the applicant to finance and manage the venue.

For the purpose of the application to the Commission, Tattersall’s or Tabcorp will provide a letter of approval in principle which can be annexed to the inclusion or licence application in lieu of any more formal documentation. The vendor should therefore be asked to notify the gaming operator immediately contracts have been exchanged so this letter may be obtained as early as possible.

2. Approval of an inclusion application or the grant of a new venue operator’s licence

Usually such conditions stipulate a certain time for lodgment of the inclusion or new licence application and it is the writer’s opinion that about 42 days are needed to obtain all necessary material for lodgment with the application.

An application for removal of the premises from the vendor’s venue operator’s licence should also be lodged at the Commission with the purchaser’s application. It is prudent to have a clause inserted in the contract to the effect that the vendor will sign and return the removal application and any other required consents within seven days of delivery.

Mortgage of lease

It is common practice in the acquisition of gaming venues for the purchaser to finance the transaction by way of mortgage of lease.

It is prudent to have a condition precedent inserted in the contract to the effect that it is conditional on the freehold owner and any freehold mortgagee executing such consents and other documents as may be reasonably required by the leasehold mortgagee. Usually the freehold owner and its mortgagee have some objection to the form of the leasehold mortgagee’s consent documentation and it is therefore imperative that ample time is allowed to acquire such documentation from the mortgagee so negotiations can take place as to its terminology.

Warranties

It is desirable to have warranties inserted in the contract to the effect that all necessary approvals, including planning approvals, have been obtained to lawfully operate gaming machines at the venue and that the terms of all such approvals have been and will to the date of settlement be complied with.

Other warranties in relation to veracity of financial statements, liquor licence, building approvals and so on should also be sought.

Your ability to negotiate warranties will often depend on whether the purchaser has signed an agent’s heads of agreement. These are usually restrictive in relation to purchasers’ rights and limit the warranties in the contract to those of the Law Institute of Victoria sale of business agreement, which are not sufficient for transactions of this nature.

The lease

Leases of gaming venues usually include covenants that the tenant comply with the Act and maintain the licence at all times. There is no simple process of transferral of the venue operator’s licence on default. These licences are not tied to the premises in the manner which operates in relation to the liquor licence and where a purchaser/tenant normally gives the landlord power of attorney to execute a transfer of licence at the appropriate time.

Some leases specify rental based on gaming turnover. These may present a problem to the Commission depending on the extent of the landlord’s takings from gaming. It is open to the Commission to treat them as an associate and require them to complete an associated entity or associated individual form as part of the purchaser’s approval process. As mentioned above, the term associate is widely defined and includes anyone having a relevant financial interest or power.[4]

Pre-settlement issues

It is important to obtain Tattersall’s documentation as soon as possible after exchange of contracts. Its venue operator’s agreement (as distinct from Tabcorp’s) requires execution by the landlords, any leasehold mortgagee and any freehold mortgagee. It is therefore prudent to get these to the respective parties at the earliest possible date, together with any consents required by your financier.

Tattersall’s will provide irrevocable orders signed by the vendor authorising the withholding of money from the settlement proceeds to cover its final commission and so on. Usually the purchaser will provide a cheque for this amount direct to Tattersall’s at least seven days before settlement and deduct this from the vendor’s cheque at settlement. Tattersall’s and Tabcorp each have specific insurance requirements and require a certificate of currency of insurance showing their interest in the gaming machines.

Once the matter is listed for hearing on the Commission’s website, it can be taken that it will, in most cases, be approved by the Commission and preliminary steps in relation to settlement can be taken.

Post settlement

The Commission requires a letter confirming that settlement has taken place and it will then issue a new notice of approved venue showing the purchaser as the new venue operator. This must be displayed at the gaming room in accordance with Commission guidelines.

An applicant will usually name the nominee as part of the initial approval process, but if it has not, then it has 60 days from the date of Commission approval of the application to have a nominee approved.[5] This time limit is strictly enforced and it is imperative that the nominee complete their application form together with police and credit check as soon as possible. If any delay is foreseen, apply for an extension well before the expiration of the 60-day period.

Any changes to the liquor licence must be notified to the Commission within 14 days and if the liquor licence is transferred, cancelled or released, the premises are automatically removed from the venue operator’s licence.[6]

Any proposed changes in the associates of the venue operator must be notified to the Commission and approved before their appointment. This obviously includes appointment of directors, but also includes any shareholder whose holding may exceed 10 per cent of total share capital. Completion and lodgment of the necessary associated individual or associated entity forms[7] is required. Similar conditions apply in relation to change of directors of the liquor licensee.[8]

Many other matters related to the finance and management structure of the applicant must be notified within 14 days, including details of any litigation, insolvency etc.[9]

Failure to notify any changes carries substantial penalties and a possible loss of licence.

Conclusion

The acquisition process is not complex, but the requirements are extensive and time-consuming. Acquisition prices of gaming hotels are normally substantially higher than for equivalent non-gaming venues. Specialist accounting advice is therefore recommended to check and verify gaming turnover and returns.

These matters need to be considered when fixing time limits for due diligence and performance of obligations under the purchase contract.


JOHN WEIR is former inhouse legal counsel for the Taverner Hotel Group and now practises as a commercial lawyer.


[1] Ministerial directive 18.10.2006.

[2] Planning & Environment Act 1987, s97O(1)(b).

[3] Gaming Authority Rules, para 3(1).

[4] Gambling Regulation Act 2003, s1.4.

[5] Gambling Regulation Act 2003, s3.4.14.

[6] Gambling Regulation Act 2003, s3.4.22.

[7] Gambling Regulation Act 2003, s3.8.2.

[8] Liquor Control Reform Act 1998, s104.

[9] Commission guidelines under s3.8.1.

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