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Lawletter No. 152 The 'highest and best use' issue in PMPA land sale cases The federal Petroleum Marketing Practices Act provides generally that an oil company or a jobber may not terminate or refuse to renew a dealer's "franchise," i.e., the lease and supply contract without specific grounds for such action. The Act allows a franchisor to nonrenew a franchise based on its decision to sell the station property. However, the section of the PMPA authorizing nonrenewal on this grounds contains several requirements which the franchisor must satisfy. We have discussed some of these requirements in previous issues, e.g., see Lawletter Nos. 134, 136, 144, 146 and 150. The most important requirement is that the franchisor must make a bona offer to sell the property to the dealer, or offer him a right a first refusal on an offer made by a third party. As we reported in Lawletter No. 146, franchisors usually do not try to offer dealers a first-refusal right, because of the technical problems involved. Therefore, in most cases where an oil company or a jobber bases a franchise nonrenewal on a decision to sell the property, it will have to comply with the PMPA by making a "bona fide offer" to sell the property to the dealer. Determining value: The PMPA does not define the term "bona fide offer." However, the courts have repeatedly held that the Act requires the supplier to offer the property to the dealer at a price which approximates its market value. About the only way to determine "fair market value" under these circumstances is to have the property valued by a professional appraiser. Appraisal practices usually vary from state to state. But it is almost universally recognized that an appraisal of the property should be based on its "highest and best use." For example, a given service station property may have more economic value if it is used as a restaurant, office building or a parking lot. Highest and best use: Appraisals must be based on the most valuable use. However. the practices of appraisers often leave something to be desired. Most states, cities and counties regulate the use of land. The laws regulating land use are usually called "zoning" laws or ordinances. Appraisers who are hired by large companies are usually willing to overlook technical issues which might affect the value of the property. Example: The following example illustrates the problem. An appraiser values a service station property at $600,000. He bases that value on the assumption that the property could be used for a 5-story office building. The city's zoning ordinance says that property in the area may be used for either a service station or an office building. However, the zoning ordinance also says that if an office building is to be more than two stories, a special vote of the city council is required. The term that is often used for such a special vote requirement is "conditional use permit." In our example, suppose that the city council has already decided that it will not permit any more office buildings in the area more than two stories high. As a two story office building, the property is only worth $300,000. However, the appraiser in his report cites only the fact that the city zoning ordinance lists a 5-story office building as a "permissible use" of the property, and values it at $600,000. The true fact is that the property is only worth $300,000 at most. But the city's unwillingness to allow the construction of a 5-story building does not show up in the zoning ordinance. In an ordinary commercial transaction, a buyer who wants to construct a 5-story building on the property could protect himself by inserting a requirement in the escrow agreement that the city would have to issue a conditional use permit before the deal closed. But the property sales required by the PMPA take place in an artificial setting. The franchisor is not in the usual position of a seller, i.e., able to bargain freely and legally entitled to refuse to sell. Major oil companies in particular usually want to prevent the property from being used as a service station in the future. Therefore, franchisors will often try any possible method to place the property beyond the dealer's reach. Recommended procedures: We suggest the following in this area: (1) Analyze the situation with care: PMPA-required land sales can raise some complicated issues. But the dealer who simply throws up his hands and walks away can be making a serious mistake. As noted above, the dealer is in a unique situation in these cases, i.e., the property owner has a legal obligation to offer him the property at a price at or near fair market value. Franchisors realize that many dealers will not want to devote the time, attention and resources which may be necessary to take maximum advantage of the situation. Your supplier may therefore attempt to avoid its legal obligations through subtle technical violations of the PMPA. It may be well worth your while to obtain whatever technical assistance you need to carefully examine its actions. You will definitely need an attorney. On the other hand, do not underestimate the effort that challenging the offer may require. (2) Keep the time frame in mind: The PMPA requires the franchisor to make the offer to sell during the 90-day period following the issuance of the notice of nonrenewal. The Act does not specifically say how long the company must keep the offer open. It is the usual practice of franchisors to give the dealer 30 to 45 days to accept. Therefore, you will need to do some advance preparation. Find out as much as you can about the potential value of the property, zoning, etc. Local real estate brokers can be very helpful here, and usually will not charge you anything for helping you. In particular, you will want to find out what local laws or regulations say about what the property can be used for. An important point here is to determine whether a special vote of the local city council or planning commission is required for certain use. Make every effort to find out whether obtaining any such special permit is a realistic possibility. (3) Check with your lender: A good place to start is to find out what your bank or other financial institution might be prepared to lend on the property. The amount it is willing to loan will have to be based on its own appraisal of the property. Usually, the borrower must pay for the appraisal, and it is not done until he completes the loan application and pays any applicable fees. However, some lenders may be willing to help you in advance. Your goal is to determine whether the franchisor's appraisal could be successfully challenged in court. (4) Environmental issues: Do not overlook the possibility that the presence of soil contamination or other environmental problems may affect what the property could be used for. If appropriate, you may want to hire an environmental consultant to help you. |
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