Category Archives: Petroleum Marketing

Bona Fide Offers to Sell Gas Station Premises On Franchisor’s Divestiture Under the Franchise Practices Act

By David White, Esq.
dwhite@pashmanstein.com

Gas station franchisees obtained rights to purchase their leased marketing premises upon a proposed sale or transfer by their franchisors under recent amendments to the Franchise Practices Act, N.J.S.A. 56:10-6.1 to 6.4. On June 10, 2011, the New Jersey legislature supplemented the Franchise Practices Act to prohibit gasoline franchisors from transferring, assigning or selling most distributor owned and franchised gas stations unless the franchisor makes a bona fide offer to convey its interests to the franchisee; or, offers the franchisee a right of first refusal for a proposed sale to a third-party buyer. Only two other jurisdictions, the District of Columbia and California, provide similar rights to gas station lessees.  As a result, there is little—and inconsistent– authority defining a “bona fide” offer in this context.  ExxonMobil’s recent divestiture of 236 company-owned stations in New Jersey marked the first real application of the bona fide offer, right of first refusal provisions of the Franchise Practices Act. The experience casts light, without definitive clarification, on the statutory language.

The Franchise Practices Act does not define “bona fide” offer.  Although the term “bona fide” is a common phrase in statutory language, its application to a broad range of topics does not necessarily provide guidance to the divestiture of franchised gas stations.  In that context the interpretations divide over whether the term refers to subjective good faith in formulating the offer or requires a more objective, quantifiable measure.

Under the D.C. statute, the bona fide offer must be based on “fair market value that is reasonably attributable” to the property. D.C.Code §36-4.12(a)(2009). California’s statute leaves the comparable bona fide offer undefined for fee interests, however in the case of leasehold interests, it provides for a “price not to exceed the fair market value of the improvements or the book value, whichever is greater.” Cal. Bus. & Prof. Code §20999.25, California courts have applied a definition derived from federal law that “approaches fair market value under an objectively reasonable analysis.” Fourty-Niner Truck Plaza v. Union Oil Co., 58 Cal. App.4th 1261, 1284-86 (Court of Appeals 1997).

The Petroleum Marketing Practices Act, 15 U.S.C. § 2801 et seq. (“PMPA”), generally controls termination and non-renewal of gasoline franchises but does not address sales of the premises and associated assignments of the franchise relationship.  It contains provisions requiring franchisors to give franchisees bona fide offers to buy or rights of first refusal in connection with market withdrawals or conversions of marketing premises to other than motor fuel uses. 15 U.S.C.A §§2802(b)(2)(E)(iii)(I); (b)(3)(D)(iii)(I)(II).  Federal courts examining these provisions have debated whether the term “bona fide” offer is subjective or objective.  Compare, LCA Corp. v. Shell Oil Co., 916 F. 2d 434, 437 (8th Cir. 1990); Slatky v. Amoco Oil Co., 830 F.2d  476, 480-485 (3d Cir. 1987);  Kesssler v. Amoco Oil Co., 670 F. Supp. 853, 860 (E.D.Mo. 1987);  Brownstein v. Arco Petroleum Products Co., 604 F. Supp. 312, 315 (E.D. Pa. 1985). While some courts have concluded that both approaches apply (Slatky, 830 F.2d 485; LCA Corp., 916 F.2d 437), the prevailing view gravitates toward fair market value. Ellis, 969 F.2d 787; Arnold, 872 F.Supp. 1500;  Sandlin v. Texaco Refining and Marketing, Inc. 900 F.2d 1470,1481 (10th Cir. 1990).

In the ExxonMobil divestiture, the company offered its franchisee-dealers what it termed a “right of first refusal and a bona fide offer to purchase” that was neither a right of first refusal nor an offer to purchase at an appraised value.  Instead, ExxonMobil derived its offering price from bids for the sites by its branded wholesalers. The company divided the State into districts and invited bids from wholesalers on all stations in each area.  It accepted the highest offers, subject to dealers’ rights, and offered the properties to franchisees at a price that eliminated the high and low bids and averaged the rest. Insiders describe the result as a reduction of as much as 25 per cent below the highest offer.  Thus, ExxonMobil’s offer appears to have satisfied the bona fide offer requirement on subjective and objective grounds with a price reflecting a good faith decision to sell and bearing an analogous relationship to market value.