Lawletter No. 173

Court says first refusal offer to dealer met PMPA requirements

A Washington, DC. federal court has upheld Amoco's nonrenewal of a dealer's trial franchise agreement in the recent case of Soheil Razavi v. Amoco Oil Co. (D.C. Dist. Colum. August 4, 1993) CCH Bus. Fran. Guide, Para. 10,270.

The court ruled that the oil company could extend the expiration date of the franchise for approximately three months in order to comply with the 90-day notice requirement of the federal Petroleum Marketing Practices Act. The court also held that the franchisor complied with the first-refusal provisions of its agreement with the dealer.

Facts: Soheil Razavi occupied an Amoco station in Washington D.C., under a one-year trial franchise agreement. Before entering into the franchise agreement with Razavi in 1990, Amoco told him that it planned to sell the station property as soon as it could.

Razavi acknowledged this disclosure in writing. The parties agreed that Amoco would comply with the notice requirements contained in section 2802(b)(3)(d) of the Petroleum Marketing Practices Act. Under the agreement, Razavi would get 45 days to match any offer which Amoco received for the property.

In 1991, Amoco signed a contract with a third party to sell the station property. The agreement expressly acknowledged Razavi's right-of-first-refusal. Nine days before the expiration of the trial franchise, Amoco extended the franchise another three months and gave Razavi a 90-day nonrenewal notice and 45 days to accept the offer made by the third party.

Razavi filed suit against Amoco under the PMPA, seeking to prevent the termination.

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

(1) As a general rule, the PMPA requires the franchisor to give 90 days notice of nonrenewal. However, a franchisor may extend the franchise for a reasonable time in order to comply with the Act's notice requirement, as Amoco did here.

(2) Amoco did properly offer a first-refusal right to the dealer, as it agreed to do.

Governing law: Section 2802(b)(3)(D) of the PMPA allows a franchisor to nonrenew a franchise on the basis of a decision to abandon the location, as long as the dealer receives a bona fide offer to sell the station to him or the franchisor grants the dealer a right of first refusal on an offer to purchase its interest in the premises. The following points are particularly worth noting.

Franchisors usually take the "bona fide offer" option when seeking to meet the requirements of the PMPA. Occasionally, however, a franchisor may seek to fulfill the relevant legal requirements by going the first refusal route.

Analysis: The following points are particularly worth noting:

(1) First refusal right must be granted during 90 day period following notice: The Act says that the franchisor must grant the first refusal right during the 90-day period following issuance of the nonrenewal notice. In most cases, the PMPA requires a franchisor to furnish a minimum of 90-days notice of nonrenewal.

A franchisor is entitled to give more than 90 days notice. But even if it gives the dealer, say, 120 days notice, the franchisor should grant the first refusal right within 90 days after it serves notice.

Some franchisors have offered a first refusal right to the dealer in the middle of the lease term without first serving a nonrenewal notice. Technically, this procedure does not fulfill the requirements of the PMPA. The franchisor would violate the Act by selling the property to a third party. This requirement, along with the 45-day rule (See below) can make it difficult for a franchisor to strictly comply.

(2) 45-day requirement: Section 2802 states that the first refusal right must be of at least 45 days duration. In other words, the dealer must have at least 45 days to decide whether he wants the deal. It can be difficult for a franchisor to find a third party buyer who is willing to make a firm commitment which is subject to a 45-day first refusal right.

(3) Firm offer: The "offer" must be definite. The third party must have indicated an intent to be bound. The franchisor should provide the dealer with a signed copy of the third party's offer. Prospective third party purchasers are often unwilling to have the terms of a proposed transaction disclosed to the dealer.

(4) Property swap situations: In many cases, the franchisor wants to trade the station property to a third party in exchange for other property. Courts have held that such a transaction cannot properly be the subject of a "right of first refusal." E.g., see Lawletter No.120. . Instead, the franchisor must offer the property to the dealer at a price near its actual market value.

Recommended procedures: The foregoing illustrates some of the technical problems that franchisors have with taking the first refusal option under the PMPA when closing or selling a station. In appropriate cases, these problems may furnish the dealer with some ammunition to force the franchisor to take the "bona fide offer" option instead.