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Lawletter No. 202 20 questions to ask about a service station franchise renewal The majors have had 18 years to perfect their franchise agreements since the federal Petroleum Marketing Practices Act ("PMPA") was passed in 1978. Every year they grow more complex. Many dealers are tempted to sign these agreements without reading them carefully. This can be a serious mistake. A multi-year contract which requires you to pay $150,000 or more in rent or to purchase 3 million gallons of motor fuel warrants closer attention. As a general rule, you should review the franchise package with your attorney before you sign. We realize that many dealers do not do so. We hope that this issue will convince you to either: (1) carefully read your franchise agreements and check out each of the points we make here; or (2) review your franchise package with an attorney. You will also find the material helpful in making your use of an attorney more cost-effective. (For a detailed report on how to use legal services effectively, see Lawletter No. 200) The following discussion applies primarily to renewals. Different considerations may apply to: (a) a new dealer signing an initial franchise agreement; (b) a buyer assuming an existing agreement; or (c) disputes with franchisors over the enforcement of the provisions of existing agreements. Four important general rules To begin with, it is important to understand four general rules: (1) The franchisor may impose changes at renewal: An oil company must renew your franchise unless it has specific grounds for nonrenewal under the Act. The grounds include those you might expect, e.g., breach of a reasonable and material provision of the franchise agreement, numerous bona fide customer complaints, operating a dirty station, fraud, nonpayment, etc. In addition, the Act permits the franchisor to change the terms of the franchise at renewal. If the dealer refuses to sign, section 2802(b)(3)(A) authorizes the franchisor to nonrenew, based on "the failure of" the parties "to agree to changes or additions to the provisions of the franchise." However, the franchisor must meet two specific conditions: (a) The changes must be the result of determinations made by the franchisor in good faith and in the normal course of business; and (b) The failure to agree must be the result of the franchisor's insistence upon such changes for the purpose of preventing the renewal of the franchise relationship. (2) Clause must be reasonable: If you violate your agreement, the oil company can terminate or refuse to renew. But the relevant clause must be both "reasonable" and "materially significant." (3) You are bound by what you sign: As a general rule, the law conclusively presumes that you have read, understood and agreed to all the terms of any document you sign. There are some limits on what changes a franchisor can make to the franchise. But just because you were not legally obligated to agree does not necessarily mean that the clause won't stick once you sign. (4) Your failure to object may hurt you: In theory, a particular franchise clause is valid or it is not. The same "either/or" rule applies to the question of whether such a clause is "reasonable." However, in a number of cases, courts have cited the dealer's failure change. The first of such fees were charged for automotive service or convenience store franchises. The majors have been considering the charging of fees for service station franchises for quite a few years. We suggest you watch for provisions either imposing such fees, or reserving the right to impose them in the future. In appropriate cases, you may want to raise objections to such fees as described above in the answer to Question No. 3. |
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