Lawletter No. 209

Station closures where the oil company owns the land

The majors continue to close stations as market conditions evolve. The law governing a dealerÕs rights in a closure situation remains widely misunderstood. The dealer has key legal rights which may enable him to stay in business.

But oil companies routinely scare dealers off with practices that are highly questionable under the federal Petroleum Marketing Practices Act (ÒPMPAÓ.)

General rule: The PMPA provides generally that an oil company may not terminate or refuse to renew a dealer's franchise unless the supplier has specific grounds as specified in the Act. Section 2802(b)(3)(D) allows a supplier to base a nonrenewal on a decision to close the station, but only if certain conditions are met.

The franchisor must either:

(a) Make a bona fide offer to sell the property to the dealer; or

(b) Grant the dealer a right-of-first-refusal on any sale of the property to a third party.

Price: Where the franchisor takes the "bona fide" offer option, it is entitled to ask the dealer to pay the fair market value of the property. The value can be based on the property's highest and best use. E.g., see Lawletter No. 152.

Tanks and improvements: The PMPA requires the franchisor to offer to sell the dealer its "interest" in the premises. Usually franchisors want to remove underground tanks from the property when it is sold. The courts have ruled that:

(a) As a general rule, the franchisor must include the tanks and underground piping in its offer. Roberts v. Amoco Oil Co., (8th Cir. 1984) 740 F.2d 602.

(b) However, where the tanks pose an environmental hazard, the franchisor may insist on removing them. This means that the company can probably remove obsolete single wall steel tanks.

Soil contamination: The soil contamination present at many stations raises some difficult legal questions. For example, it is open to question what the "fair market value" of contaminated property is. If potential cleanup costs exceed the what the property would be worth after the cleanup, the station arguably has a market value of zero.

The dealer would therefore be able to ask the refiner to sell it to him for nothing, or ask the company to clean it up first. Refiners undoubtedly would like to recover the cost of cleaning up these sites. Some majors have threatened a few dealers with a legal action to recover damages. But the law may not be on the oil companyÕs side on this issue. We do not know of any cases in which an oil company has actually brought suit.

A franchisor's right to sue the dealer should not affect its PMPA obligations. Dealers who occupy contaminated property should also assess their chances of recovering cleanup costs from the state superfund.

When the oil company must make the offer: The PMPA says that the franchisor must make its offer to sell or grant the right of first refusal during the 90-day period following the notice of nonrenewal.

Three year lease requirement: The relevant section of the PMPA appears to state that the franchisor can only nonrenew a three year franchise agreement on the basis of an intent to close the station. Some oil companies have argued that this part of the Act only requires that the dealer have had at least one three-year franchise or that he occupy the station for a total of at least three years.

There are no controlling officially reported court decisions on the point, but the wording of the law seems relatively clear.

Special notes about first refusal rights: In most cases, oil companies have not tried to use the first refusal procedure. It involves too many legal pitfalls for the franchisor. But we do see the occasional first-refusal situation.

Space precludes a full discussion of all of the issues that can arise. It is particularly important that you obtain legal advice if a franchisor offers you a first refusal right. For example, we have seen cases in which major oil companies put together package station swaps. In some cases, the selling company has arbitrarily assigned a value to a station rather than having it separately appraised. The dealer is then offered a "first refusal right" at the assigned value. Such a practice has been held to violate the PMPA (See Lawletter No. 158.)

Recommended procedures: We suggest the following in nonrenewal closure situations:

(1) Determine value: If you want to challenge your franchisor's offer to sell, you will need to get a formal appraisal right away once you know the company's offering price.

(2) Contamination: You can probably find out whether there is soil contamination at the site by checking with the appropriate local agency in your city or county. These agencies have lists of sites scheduled for "remediation." If the property is contaminated, you will want to take that into account in determining its value.

(3) First refusal rights: If the franchisor offers you a first refusal right on any sale of the property to a third party, do not assume it is valid. As noted above, the first refusal procedure can raise many legal issues, and space forbids a discussion of all of them here. Carefully review the situation with your lawyer.