Lawletter No. 189

1994 PMPA amendments require sale of improvements to dealers on leased land

This is the third in a series of reports on the 1994 Amendments to the federal Petroleum Marketing Practices Act. This month we look at the effect of the Amendment on the dealer who is terminated or nonrenewed because the franchisor's master lease on service station property expires. You will find the first two reports, including a summary of all of the Amendments in Lawletter Nos. 186 and 187.

Existing law: Section 2802(c)(4) of the original Act allows an oil company to terminate or refuse to renew a dealer's lease on the ground that it has lost the right to possession of the station property through the expiration of its underlying lease. The oil company's only obligation is to notify the dealer in writing of the existence and duration of the master lease prior to the commencement date of the franchise which is so terminated or nonrenewed. The notice must also state that as a result of the termination or expiration of the master lease, the dealer's franchise might be terminated or not renewed.

In most circumstances, the franchisor has no obligation to assign any purchase or renewal option to the dealer (For a detailed report on this subject, see Lawletter No. 187).

1994 Amendments: The 1994 Amendments add a new subsection (C) to section 2802(c)(4). The new amendment provides that if the dealer acquires possession of the station effective immediately after the date that the franchisor loses its right to possession (e.g., by signing a new lease with the landowner or buying the property), the franchisor must give the dealer a reasonable chance to purchase its entire interest in any improvements (e.g., tanks, building, etc.).

More specifically, if the dealer makes a written request within 30 days after the date of the nonrenewal notice, the franchisor must, during the 90-day period after the nonrenewal notice was sent, the franchisor must either:

(1) make a bona fide offer to sell, transfer, or assign to the franchisee

the interest of the franchisor in any improvements or equipment located on the premises; or

(2) if applicable, offer the franchisee a right of first refusal (for at

least 45 days) of an offer, made by another person, to purchase the interest of

the franchisor in the improvements and equipment.

California law: A 1981 state law, California Business & Professions Code section 20999.25(b), already required an oil company to sell its station improvements to the dealer if the dealer obtains a right to continue to occupy the station following the expiration of the master lease. The state law provides that the company may charge the dealer the greater of fair market or book value.

Preemption issue: Oil company attorneys claimed that the original PMPA preempted the California law, because the state law imposed an additional legal burden on a franchisor that terminated or non-renewed a dealer's franchise. Therefore, they asserted, the dealer had no legal right to purchase the improvements under these circumstances.

Dealer attorneys argued that since the state law did not dictate when or under what circumstances the franchisor could terminate or nonrenew, it was not preempted. No court has definitively resolved the issue.

In some cases, dealers have successfully negotiated a purchase of the improvements.

Probable effects: The 1994 Amendments now clearly establish that the dealer has a right to buy the improvements in a master lease expiration situation. Courts may be more likely to hold that the PMPA does preempt the state law, because the federal Act expressly covers the very same subject.

Practical aspects: Assuming that the dealer can obtain a right to continue to occupy the station, the oil company has several problems. The dealer now has possession of the land and the improvements, and the company may not dig up the tanks without a court order.

However, dated steel tanks will have to replaced sooner or later. In several PMPA cases involving situations where the company owned the land, franchisors have successfully argued that they should be able to replace the tanks at cost in closure situations.

Recommended procedures: We suggest the following:

(1) Determine property ownership and prior disclosures: Examine prior as well as current leases, supply contracts and related documents for any indication of a specific expiration date for the franchisor 's master lease. Identify the property's owner of record. Often a local real estate broker will do this for you for free.

(2) Obtain a copy of the master lease: The determined dealer will usually be able to obtain a copy with a little ingenuity. Local real estate brokers can be very helpful here, usually at no charge. This will enable you to make some educated guesses about possible future developments based on the master lease rent, sales volume, competitive conditions, etc. Determine who owns the tanks and other improvements.

If they belong to the landowner rather than the oil company, then the federal and state laws discussed in this article probably do not apply.

(3) Comply with the timely demand requirement: Note that the PMPA now requires that the dealer to send a written demand to buy the improvements within thirty days after receiving the non-renewal notice. Do not expect your franchisor to be too happy about selling you the tanks, since it will be losing control of a location which you mean to use to market its competitors' products. So act promptly to protect your legal rights.

You probably have nothing to lose by making your written demand as soon as you receive the termination or nonrenewal notice, regardless of the circumstances. You do not obligate yourself to buy the improvements by making the demand, since all you are doing is making a demand that the company offer the improvement to you.

(4) Right to possession must commence immediately upon expiration of the lease: Note that the PMPA requires the dealer to obtain a right to possession of the property which takes effect immediately upon the expiration of the oil company's lease. This means that you will probably need to finalize your deal with the landowner before the termination or nonrenewal notice takes effect.

In the past, landowners have in some cases shown a reluctance to enter into serious negotiations or to sign a lease with the dealer until after the oil company's lease expires. You may need to persuade the landowner that if he waits too long, you may lose your legal right to buy the improvements from the franchisor.

(5) Cleanup situations: In an increasing number of cases, oil companies are seeking to evict the dealer 6 months or more before the master lease expires. Their justification is that they need the time to cleanup the property. As a general rule, any oil company will claim that it must remove the tanks, new or not, in order to complete the cleanup.

In such cases, the dealer may have to file suit under the PMPA. To obtain an injunction, he will need to present evidence indicating that removal of the tanks is not necessary to complete the cleanup. In these situations, legal representation is a must.