Lawletter No. 171

Court says dealer should have asked for rent break sooner

A recent ruling by a Minnesota federal court in the case of Murphy Oil USA, Inc. v. Hauser, DC Minn., No 3-92-791, 2/17/93, 64 BNA Antitrust & Trade Reg. Rptr. 614 illustrates that you should never withhold rental or other payments from your franchisor without first obtaining legal advice.

Facts: Brooks Hauser bought the lease and franchise for a Spur station in Spring Park, Minn. from the Labatts--the parties who had entered into the lease and franchise agreement with Murphy Oil USA, Inc. for operation of the gasoline station. The lease and franchise agreement were assigned to Hauser as part of the purchase agreement.

When the Labatts operated the station, Murphy Oil rented a portion of the building--about 24%--to a retail dry-cleaning operation. Three months after Hauser took over, Murphy rented the 24% portion of the building to a watercraft rental business.

Hauser did not ask for a reduction in rent; from April 1991 when the watercraft lease was signed until July 1992, he continued to make full monthly rental payments of $8,200 a month.

On October 20, 1992, Murphy notified Hauser that three months rental payments, totaling $24,600 were overdue and demanded payment by October 27, 1992. Hauser failed to pay. Hauser also failed to pay $8,576 for September gasoline deliveries.

Murphy Oil sent a letter terminating the franchise as of January 29, 1993. When Hauser continued to fail to pay rent, the franchisor then sent another letter moving the termination date up to December 15, 1992.

Murphy Oil then filed a lawsuit on December 2, 1992 seeking: (a) A declaration that its termination of Hauser's franchise was lawful; and (b) An order requiring Hauser to give up possession of the station.

Hauser filed a counter suit asserting that the franchisor had breached its contract by not providing him with 100% of the space described in the lease.

Ruling: The court ruled in favor of the franchisor and against the dealer, holding that:

(1) If the dealer believed that Murphy Oil had violated the contract, he should have said so earlier;

(2) By continuing to pay the rent, he in effect "waived" or gave up his right to claim that the franchisor violated the contract. The proper way to assert such a claim would have been to file a lawsuit.

(3) Therefore, Murphy Oil is entitled to the full rental payments for August through December, 1992.

(4) Murphy Oil was entitled to move the termination date up from January 29, 1993 to December 15, 1992. Between the time it gave these two notices, Hauser's debt increased by over $9,000.

(5) The PMPA requires the franchisor, as a general rule, to give the dealer 90 days notice of termination. However, the Act makes an exception for cases in which it would not be reasonable to require the franchisor to give the full 90 days notice. This is such a case.

Recommended procedures: We suggest the following in this area:

(1) Rent: Never withhold rental payments without first obtaining legal advice. Even if you have a valid claim against an oil company for damages, you must still pay rent in most situations. Otherwise, you risk franchise termination.

(2) Effect of past practices: As we have repeatedly stated in these pages, the fact that a franchisor has tolerated violation of the franchise agreement in the past does not necessarily mean it has given up its right to enforce it in the future. The contrary is true only in exceptional cases.

If you believe that you have a legal right to continue violating your franchise, do not persist in the violation in the face of franchisor demands for compliance without first obtaining legal advice.