Any new car dealer who has gone through the process of building facility improvements to meet a manufacturer’s requirements knows about “that letter” – the agreement letter by which the factory magnanimously lets the dealer to spend its own money to meet the factory’s mandates. Typically, “that letter” is prepared by the factory’s office of general counsel and contains a number of requirements. While there may be a number of minefields in the document, we will concentrate on just one – the construction milestones.
Typically, an agreement letter contains deadlines for submitting plans at various stages, obtaining a building permit, commencing construction and completing construction. Simple right? Not really.
Franchisors habitually provide too little time for these steps. Why? It is not for lack of knowledge. Franchisors have seen dealers experience the perils of dealing with local government approval processes. Those processes, and the difficulties that can arise, vary dramatically from state to state and county or city within states. Yet franchisors seemingly disregard the potential delays that can affect a dealer’s ability to obtain a building permit and commence construction.
So why be so stingy about the deadlines? Because unrealistic deadlines to which a dealer agrees give the factory leverage. Miss the deadlines and the factory can threaten to withhold the benefits of the program the dealer is seeking to meet. Or it can demand even more aggressively that the dealer provide further gratuitous upgrades. Or it can even contend that the failure to meet the deadlines is a material breach providing grounds for termination of the franchise since the dealer agreed that updated facilities are essential to compliance with the dealer agreement.
Many dealers will respond that manufacturers will provide extensions and be understanding. Perhaps. But why get yourself in a position where they may not be? Why get yourself into a position where you may have to negotiate some reduction in benefits or suffer some other problem?
If you are a dealer who is negotiating with your franchisor over facility improvements, be careful when the agreement letter arrives. Consult with your architect, engineer, and proposed builder. Are there zoning and planning steps that must be taken even before you begin the process? How long will it take to complete each stage of the plans? What will be required for a building permit and what delays are possible? Are there differences between the manufacturer’s requirements and local law restrictions so that additional delays are likely because of negotiations with the locality and the manufacturer’s architect? Is construction starting at a time when weather delays can affect completion? How long will construction take?
Also, you should have your attorney review your letter. What are the risks in non-compliance? What are the potential penalties if you don’t meet the deadlines?
In short, think carefully about the construction deadlines and only agree to those that you can meet.