|
|
|
Lawletter No. 183 10 questions service station franchise buyers should ask As we have said repeatedly in these pages, it is at best unwise and at worst foolish to buy or sell a service station franchise or an automotive service business without legal advice. This is one of the areas in which a service station dealer is most likely to become embroiled in litigation. This month we take a look at ten questions that any prospective buyer of a service station franchise should ask. (1) Who owns the property? If the oil company franchisor leases the property from a third party, there is a serious risk that the franchisor may elect to close the station when the current term expires. The franchisor is under no obligation to exercise any renewal options or to offer to assign them to you. As long as the franchisor has complied with the very minimal advance written disclosure requirements of the federal Petroleum Marketing Practices Act ("PMPA"), it will generally have no further obligation to you. This is true regardless of how much you paid for the business. If the company owns the property, it can still close the station at the end of the dealer lease. The franchisor will have an obligation under the PMPA to offer to sell the property to you at market value. But even if you buy the property, the company will not have to continue to supply you. (2) Am I relying on undocumented oral promises from oil company personnel? One of the most common dealer complaints is that the oil company promised them that it would keep the station open for the foreseeable future, or that it would rebuild or remodel the station. But the terms of dealer leases almost never say anything about such promises or representations. What nearly all dealer leases do say is this: This document constitutes the entire agreement between the parties. There are no other promises or representations, express or implied. This means that you are not entitled to rely on the sales reps. promises. Before you spend $350,000 on a mediocre facility that the rep. swears will be remodeled, rebuilt or upgraded, talk to your lawyer and have him review the franchise agreement. If you can't risk your entire investment on a non-binding oral promise, rethink your position. (3) If the company closes the station, can I get my money back? As long as the franchisor complies with the requirements of the PMPA (e.g., offering to sell you the property), it can shut down the station before you have had the chance to recover your investment. Absent an express contractual provision, the seller probably won't have to return your money either. If you have given a note secured by real estate for part of the purchase price, the seller will probably foreclose if you don't pay. (4) Will the oil company raise the rent in the future? Probably. The courts have almost uniformly upheld oil company rent increases. Many franchise agreements permit the supplier to raise the rent at least once during its term. Rents usually go up again at renewal time. As long as buyers are willing to pay six-figure sums for "goodwill," the majors will probably believe that rents are too low. Refiners tend to see such goodwill payments as money they have unintentionally left "on the table." If you are banking on only small rent increases over a long period in order to recover your investment, you may want to rethink your position. Make sure your assessment of the risk is as accurate as possible. (5) How old are the underground tanks? Federal and state law require the removal of all or most of the old-style steel tanks by 1998. If the tanks have not been replaced since 1980, the company may be thinking about dumping the site. (6) Should I accept a trial franchise? The courts say you do not have to accept a "trial" franchise. The seller has a legal right to sell the existing franchise to a qualified buyer. Oil company personnel may try to get you to accept a "trial" franchise in order to avoid payment of a transfer fee or to obtain other favors. But the PMPA says that company can kick you out of the station without cause at the end of a year without cause. It doesn't matter how much you paid for goodwill. (7) Am I overlooking zoning problems? If you are contemplating that you might remodel or improve the station yourself, either because you plan to purchase the property from the franchisor or otherwise, make sure you check local zoning laws. Local zoning authorities might not give you a permit unless you spend additional substantial sums of money on increasing setbacks, adding landscaping, etc. If you have left this item out of your calculations, you need to do some more homework. (8) Am I getting all of the clearances I need? A major purpose of using an escrow company is to make sure you do not get saddled with any of the seller's unpaid debts. The escrow company will publish the legal notices necessary to cut off the claims of most unpaid private creditors. But make sure that you get sales tax and labor clearances as well. Otherwise, you could run into serious problems. If the seller seems to want to close and get his money before, for example, a sales tax clearance is obtained, that could be a serious warning signal. Don't be stampeded. (9) What if the franchisor exercises its first refusal right on my deal? By law, the oil company has a right-of-first refusal on your deal. This means that you and the seller must present the deal in writing to the franchisor. The company then can "take over" the deal by purchasing the station on the exact terms and condition set forth in the sales agreement. You are entitled to a return of your deposit. But you still will probably be liable for half of the escrow fees incurred to date unless your contract provides otherwise. Occasionally, the buyer secretly make a cash payment "under the table" to the seller. This is done to reduce transfer fees (some oil companies charge a percentage of the sales price) or for other reasons. Concealment of the true purchase price from the franchisor constitutes fraud. If the franchisor somehow later discovers the secret payment, it probably has grounds to terminate the franchise. This means the company could take the station back without paying you anything for goodwill. Another danger of such secret payments is the possibility that the franchisor might elect to exercise its first-refusal right. This means it could buy the station for the price stated in the written agreement. If this happens, you may have difficulty getting your secret payment returned by the seller. There may be no record of it. (10) If I resell the business in the future, will I have to pay a transfer fee? The California service station franchise assignment law permits the franchisor to charge a transfer fee. These fees vary from company to company, and they may change in the future. In some cases, the fee is based on the dealer's tenure at the station. Long-term dealers pay less. You might buy from a long-term dealer and have to pay a higher transfer fee if you sell out in a few years. Make sure you understand the transfer fee policy of the franchisor. |
|
|