Monday, November 30, 2009

Franchisor’s Eviction Was “Expiration” of Lease Under the Federal Gasoline Dealer Law

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

An oil company’s eviction for nonpayment of rent from the premises on which it franchised a gasoline station qualified as a "loss of the franchisor’s right to grant possession of the leased marketing premises through expiration of an underlying lease" under the meaning of the Petroleum Marketing Practices Act (PMPA), according to a federal district court in San Juan, Puerto Rico. Thus, the franchisor’s termination of the gasoline dealer’s franchise following the eviction did not violate the PMPA.

Nonpayment of Rent

The dealer’s primary argument was that an eviction for nonpayment of rent was not an "expiration of the underlying lease" for purposes of the Act. The court was unaware of any precedent in the First Circuit addressing whether a franchisor’s eviction was an appropriate "loss of the right to grant possession" of the leased premises under the PMPA, it observed. However, the First Circuit interpreted the term "expiration" broadly to encompass losses of the lease that were voluntary or involuntary.

Neither the PMPA nor the cases interpreting it placed any importance on the actual cause of the underlying lease’s expiration, the court noted. Instead, courts evaluated the nature of the lessor and lessee’s relationship and the franchisor’s intent in terminating the franchise.

There was no evidence that the relationship between the franchisor and the landlord was anything but at arm’s length. It was not a situation in which the franchisor lost the lease only to be rid of the franchisee and to take the property for itself. Indeed, the dealer never left the premises after the franchise termination and eventually bought the property from the landlord.

Strategic Breach

The franchisor’s strategic breach of its lease with the landlord was just the sort of reasonable business decision that could justify a franchise termination under the PMPA, the court decided.

The decision is Rivera v. Caribbean Petroleum Corp., CCH Business Franchise Guide ¶14,245.

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