Lawletter No. 187

Assignment of master lease renewal options under 1994 PMPA amendments

This is the second in a series of articles covering the 1994 amendments to the Petroleum Marketing Practices Act. Lawletter No. 186 contains a summary and overview of the amendments, and a report on how they affect the California hours-of-operation law.

This month we examine the impact of the 1994 changes to the PMPA on dealers who operate stations which the franchisor leases from an independent third party. Specifically, we focus on whether a franchisor that is closing a station has a legal obligation to offer to assign any renewal options it may have to its franchisee.

Nonrenewals where the master lease expires: We should begin with a review of the basic rules. Section 2802(c)(4) of the PMPA allows franchise cancellation when the master lease expires as long as:

(1) The franchisor has lost the right to possession of the premises; and

(2) Prior to the commencement of the franchise, the franchisor advised the dealer in writing of the existence and duration of the master lease and of the fact that its expiration could result in franchise termination or nonrenewal.

Renewal options: The courts uniformly hold that a franchisor has no legal duty to exercise any renewal option. Furthermore, the franchisor may allow its master lease to expire without offering to transfer or assign any renewal option to the dealer.

1994 amendment re assignment of lease options: The 1994 changes provide that the franchisor must offer to assign any options to extend or renew its master lease when nonrenewing the franchise based on a decision to close the station, but only if each of the following requirements are met:

(1) Both the landowner and the dealer sign an unconditional release relieving the franchisor of any and all future liability for:

(a) financial obligations under the option or extension;

(b) environmental contamination; and

(c) the operation or condition of the premises; and

(2) Both the landowner and the dealer assure the franchisor in writing that it will have reasonable access to the property for the purpose of testing for and remediating any environmental condition that may be present.

Practical effect: The actual effect of this change will be minimal because:

¥ The general rule that the franchisor has no obligation to assign renewal options is still in effect.

¥ In most cases where the dealer wants to take over the franchisor's renewal options, the rent under the option is lower than the current rental value on the open market. In such a case, there would be little incentive for the landowner to sign any such release. He would prefer to terminate the master lease.

¥ Furthermore, the law generally provides that if the franchisor assigns any remaining lease term or renewal options to the dealer, the franchisor is a "guarantor" of the dealer's performance of the tenant's obligations under the lease. In other words, if the dealer defaults in the payment of rent, the oil company must pay. Very few landlords would have much reason to release an oil company from this liability.

¥ Similarly, there would not be much reason for a landlord to release the franchisor from any liability for environmental contamination or other liabilities. All the landowner would be gaining would be the substitution of a less-creditworthy dealer for the oil company as a tenant.

¥ If you can get a landlord to agree to all of the conditions specified in the 1994 PMPA amendments, then he would almost certainly be willing to rent or sell directly to you. So you would not need to rely on the PMPA.

Recommended procedures: If the franchisor leases your station from a third party, we suggest the following:

(1) Determine disclosures: Examine prior as well as current leases, supply contracts and related documents. Look for anything that indicates a specific expiration date for The franchisor's master lease.

(2) Determine property ownership: Identify the owner of record. Brokers will usually do this for no charge.

(3)Franchisor owner of record: Where there is no master lease disclosure, and where the franchisor is the owner of record, you are reasonably safe in assuming that you are not a "master lease" dealer and this article does not apply to you. But if anything makes you suspicious, see your lawyer.

(4) Franchisor not record owner: The absence of any written disclosure of the master lease expiration date where the franchisor is not the owner of record probably means that:

(a) You did receive a written disclosure but it is not in your files; (b) The franchisor holds the land under a master lease, but the expiration date of the current term is far enough away so that the franchisor has not to date considered disclosure necessary;

(b) The owner of record is a franchisor "affiliate;" or

(c) The franchisor does not own the land, but it has failed to make the disclosure for some other reason, e.g., mistake.

(5) Obtain a copy of the master lease: The PMPA does not require the franchisor to provide you with a copy of the master lease. But the determined dealer will often be able to obtain a copy with a little ingenuity. Local real estate brokers can be very helpful here, usually at no charge.

(6) Review master lease: Once you have a copy of the master lease, you can make some educated guesses about possible future developments:

(a) Determine whether anything in the lease contradicts information that The franchisor has previously provided. Review any discrepancies with your lawyer.

(b) Determine whether The franchisor has the right to assign the lease;

(c) Determine who owns the tanks and improvements; and

(e) Evaluate the possibility that you might want to buy or lease the property directly if that option becomes available. Such arrangements involve a whole additional set of questions that you will need to review with your attorney.