Dealers are required to seek the approval of their manufacturer in order to relocate their franchise to a more desirable location. In most states, the manufacturer has full discretion as to whether to approve or deny that request. In some states, the manufacturer may not “unreasonably” deny a relocation request. Of course, common sense suggests that a manufacturer would be happy to hear that its dealer is taking the initiative, and willing to incur the expense, of moving the franchise to a better location and into a compliant facility. However, more and more, we see manufacturers provide approval for the relocation request in the form of a relocation agreement which contains extremely onerous provisions.
In this classic case of “no good deed goes unpunished,” the manufacturer attempts to take advantage of the situation to include various requirements the dealer must comply with in order to proceed with the relocation. Even though the dealer is the one incurring the costs of acquiring land and renovating an existing facility or building a ground-up facility to manufacturer specifications, manufacturers are including very restrictive timelines in the relocation agreement within which certain phases of construction must be complete in order to proceed with the relocation. This, of course, makes no sense as the dealership would continue to operate from its currently approved location with no harm done to the manufacturer even if it takes the dealer a year longer to complete the facility than initially thought. Nonetheless, these relocation agreements require certain phases of construction to be completed by a date certain or the dealer will be in breach of the relocation agreement.
The result of being in breach of the facility milestones in the relocation agreement range from having the relocation approval withdrawn to having the franchise terminated! Yes, that’s right, even though there has been no harm done to the status quo operations of the franchise, and even though the relocation is a voluntary move on the part of the dealer to begin with, some of the relocation agreements require that you terminate the franchise if you fail to meet the facility milestones. Would a manufacturer really terminate an otherwise compliant dealership just because the dealer failed to reach a particular milestone on the facility at the relocation site? I don’t know, but we have all seen manufacturers take unbelievably heartless actions in the past. I do know that if the manufacturer is not pleased with the dealer’s current operations, there is a higher probability it would use a breach of the relocation agreement to run the dealer out of business.
Now, it is important to remember that no termination of a franchise can occur without the dealer having the opportunity to protest under state motor vehicle franchise laws. Under those laws, the manufacturer would have to demonstrate good cause in terminating the dealership. Although I would expect the manufacturer not to have success in meeting that burden, it is a risky proposition. Judges are unpredictable and, outside of the overlay of motor vehicle franchise protections, they are accustomed to enforcing the terms of a contract – no matter how harsh.
The manufacturer relocation agreements also generally fail to include any provision for a circumstance out of the dealer’s control causing a delay in meeting the facility milestones. Known as a “force majeure” clause, such a provision is critical in protecting a dealer from the consequences of missing a deadline as a result of things like a delay in local government permitting or delays caused by weather (i.e. winter storm, hurricane, etc.). Again, dealers will ask whether their manufacturer would really yank the rug out from under them when they have already spent significant capital to acquire land and are progressing with the construction only to be delayed by an occurrence completely out of the dealer’s control. Knowing who we are dealing with, I wouldn’t want to take that risk!
The good news is that we have found the relocation agreements to be negotiable. In every case, the dealer should retain experienced motor vehicle franchise legal counsel to attempt to remove or limit the most onerous terms contained in these agreements. If the manufacturer sees the relocation as a benefit to its brand, it is likely to play ball in these negotiations. Likewise, if the state motor vehicle franchise laws prohibit an unreasonable denial of the relocation request, a dealer should have success in negotiating the terms of the relocation agreement when the manufacturer is faced with the argument that the most onerous terms contained in the agreement are the equivalent of an unreasonable denial of the relocation request.