Lawletter No. 169

Mobil dealers cautioned on property deals

As we go to press, stories are circulating that Mobil plans to divest an undisclosed number of its southern California service stations. We remain uncertain as to the scope of any such action by Mobil.

However, we have encountered several situations that give the impression that something may be brewing. The company has already offered some dealers a chance to purchase their station properties, even though a substantial amount of time remains on the dealer's lease.

Space limitations forbid a detailed analysis of the documents. But

we urge any Mobil dealer to proceed with caution. The following discussion touches on a few of the more important issues raised by the terms that Mobil is offering.

Continued supply agreements: Under one set of contracts, titled "Contract of Sale of Improved Real Estate (OG&L to N Dealer Conversion)," Mobil ties a 10-year supply contract to the purchase of the property. The dealer must meet specified minimum purchase requirements. Mobil makes no guarantees on wholesale price breaks.

If the dealer breaches the supply contract, Mobil reserves the right to terminate the agreement and buy back the real estate at the lower of fair market value or what the dealer originally paid for it.

The contract says that Mobil will determine whether the property is contaminated. If it is, Mobil can back out of the deal or proceed with cleanup.

The agreements don't say what happens if the company backs out. If Mobil makes the dealer sign a mutual termination of his present lease and supply contract, the dealer could wind up with nothing. He would lose his business without compensation.

If the Mobil does the cleanup, the dealer may have to pay the entire cost. The company also requires the dealer to indemnify it against all environmental claims.

Straight sale: Where the company does not want to continue to supply the location, it uses a form titled "Contract of Sale." Mobil will test for contamination, and reserves the right to back out when it gets the results.

After it starts cleanup, Mobil can still cancel the deal if it believes that the cost will exceed 50% of the purchase price. If the dealer has signed a mutual termination of his existing lease and supply contract, he could wind up losing both his business and the property as well.

If the Mobil does the cleanup, the dealer may have to pay the entire cost. The company also requires the dealer to indemnify it against all environmental claims.

Analysis and recommended procedures: We suggest that you note the following in particular:

Keep in mind that if Mobil wants to close the station or sell its real estate interest, the federal Petroleum Marketing Practices Act requires it to either: (i) make a "bona fide offer" to sell its interest in the property to the dealer; or (ii) grant the dealer a 45-day right of first refusal on an offer by any third party.

The "bona fide offer" required by the PMPA must be made after the company issues a written nonrenewal notice. In other words, if you do not accept an offer from Mobil at this time, Mobil still has the obligation to offer to sell you the property if it decides to sell or close the station at the end of your current lease.

It does not appear that either of the two offers described above meets the PMPA's requirement of a "bona fide offer." The odds are pretty good that Mobil would have to offer better non-price terms if it decides to close or sell your station at the end of your current lease.

If you sign a mutual termination agreement with Mobil now, you give up all rights except those granted you under the agreement you sign.

None of the agreements described above protects the dealer from or limits his liability for cleanup costs and environmental claims.

The buyback provisions of the continued supply agreement are particularly troublesome. You could in the future find yourself forced to choose between selling the property back to Mobil for less than it is worth or getting involved in a costly legal battle over termination of the franchise.

As the foregoing demonstrates, it would be a real mistake to sign any of the agreements described in this article without legal advice.