Site Control For Automobile Dealerships in the 21st Century

This article is the first in a trilogy of Robottip articles regarding site control. Understanding site control sometimes called “point protection,” is essential concerning the Dealer’s intended use of the property and becomes extremely important if a dealership is unsuccessful. [A “point” is a location where a manufacturer or distributor (after this referred to jointly as “manufacturer” or “factory”) either has or wants a dealership.

As explained below, there are many forms of site control. However, there is a distinction between site control as it applies to non-dealership real property and site control regarding new car dealerships. Because of the many forms and the credit concerning car dealerships, it would be wrong to generalize that site control per se is either good or bad. Each case must be assessed in Mexico individually.

A right of first refusal almost always chills a landowner’s ability to sell the real estate. The theory is that a prospective third-party purchaser would not be as quickly inclined to spend the time, money, and energy required to compose an offer for real estate, knowing the tenant has the right to accept the offer and obtain the benefit of the third party’s research and bargaining when the option exercises his option.

In the case of a sale of an automobile dealership, that statement is rarely true.

BACKGROUND

While site control had been around for decades, the surge in real estate prices in the 1970s and 1980s saw many metropolitan dealers selling their facilities for what seemed then to be astronomical sums. Properties that dealers purchased or constructed for a few hundred thousand dollars in the 1940s, 50s, and 60s were selling for millions by the late 1970s. As real estate prices escalated, so did the cost of replacing the facilities, and manufacturers found it challenging to obtain dealers to invest in many of those areas.

Consequently, by the mid-1980s, site control began to appear for the first time in the factories’ sales and Service Agreements of the factories. For a short time back in the 1980s, there was a conflict between dealers and Chrysler Realty Corporation (Realty) when Chrysler sold Realty to an independent, non-automotive company, ABKO. The situation in the 1980s was an anomaly. Since Chrysler repurchased Realty from ABKO, all factory realty companies have been owned by the factories, which aim to support their dealers.

In the mid-1980s, when a few factories began to include rights of the first refusal in their service and sales agreements, most people thought the restrictions would affect dealerships’ sales prices and facilities by chilling prospects and diminishing offers. By the 1990s, every manufacturer’s sales and service agreement contained a right of first refusal, and by the turn of the Century, no one thought anything about it. By 2000, dealers discovered that the manufacturer’s right of first refusal did not affect the sales price of dealerships or their facilities.

Throughout the past 20 years, we have never seen or heard of a case where a dealership sold and the Dealer received less blue sky because of site control or the purchase price of the facility was discounted because of site control. Even in the few instances that the factories have exercised their options, we never heard of an example of a “discounted price” because of the right of first refusal. Generally, the factory exercises its right and hands the existing contract to a dealer of its choice. The new Dealer pays full commercial retail for the business and real estate. Below is an example of the wording in Mercedes-Benz USA’s Sales and Service Agreement:

IX. TRANSFERS
B. RIGHT OF FIRST REFUSAL OR OPTION TO PURCHASE

1. Rights Granted
Suppose a proposal to sell Dealer’s principal assets or transfer the majority ownership interest in Dealer is submitted by Dealer to MBUSA, or in the event of the death of the majority owner of Dealer. In that case, MBUSA has a right of first refusal or option to purchase such assets or ownership interest, including any leasehold interest or reality. MBUSA’s exercise of its right or option under this Section IX.B supersedes Dealer’s right to transfer its interest in, or ownership of, the dealership. MBUSA’s right or opportunity may be assigned by it to any third party, and MBUSA at this moment guarantees the total payment to the Dealer of the purchase price by such assignee… [Emphasis added.]
….
4. Option to Purchase
In the event of the death of the majority Owner or if the Dealer submits a proposal that MBUSA determines is not bona fide or in good faith, MBUSA has the option to purchase the principal assets of the Dealer utilized in Dealership Operations, including real estate and leasehold interest, and to cancel this Agreement and the rights granted Dealer hereunder. Good faith negotiations between the parties will determine the purchase price of the dealership assets. [Emphasis added.]

Below is an example of the wording in General Motors’ Sales and Service Agreement:

12.3 Right of First Refusal to Purchase
12.3.1 Creation and Coverage
Suppose the Dealer submits a proposal for a change of ownership under Article 12.2. In that case, General Motors will have a right of first refusal to purchase the dealership assets or stock and such other rights proposed to be transferred regardless of whether the proposed buyer is qualified to be a dealer.

12.3.2 Purchase Price and Other Terms of Sale
(a) Bona Fide Agreement
Suppose the Dealer has entered a bona fide written buy/sell Agreement. In that case, the purchase price and other sale terms will be outlined in such Agreement and any related documents unless the Dealer and General Motors agree to additional terms…..

12.3.3 Consummation
Dealer agrees to transfer the property by Warranty Deed, where possible, conveying marketable title free and clear of liens and encumbrances. The Warranty Deed will be in proper form for recording, and the Dealer will deliver complete possession of the property when the Deed is paid. The Dealer will also furnish copies of any easements, licenses, or other documents affecting the property and

assign any permits or licenses necessary for the conduct of Dealership Operations. Several factories even provide their Sales and Service Agreements for reimbursement to the prospective purchaser if the factory exercises its option. The following examples are from the Mercedes and Ford Sales and Service Agreements: