Check Those OEM Releases

By Michael G. Charapp
Charapp & Weiss LLP

You are selling one of your dealerships. The franchisor wants a release of claims against it by the selling dealer before it will issue a new dealer sales and service agreement to the buyer.  Or you are closing one of your dealerships and the franchisor demands the same before it will repurchase your inventories.

Some dealers may question whether a release is even appropriate. To be effective, a release must be backed by consideration. What is the consideration for evaluating a buyer for the dealership when that is required by the dealer sales and service agreement and, often, state law? That question is even more pertinent in a dealership closing in which repurchase of inventories is required by the dealer sales and service agreement and sometimes state law.

Despite the questions, dealers may not want to delay the sale or the termination to fight with the outgoing franchisor. They will consider signing a release.  But what should they look out for?

Whether you are involved in an asset sale (most dealership sales are structured that way) or a termination, you will be left with your company. It will stay active for some time to handle delayed payments owed to the company or to pay debts of the company. Unless settled, demands for payment of F&I chargebacks can go on for years.

Since your company will continue, you will want to be paid what your former franchisor owed you.  You also face the possibility of claims against your company for which you should have indemnification under your former sales and service agreement. But can you make those claims if you have given the franchisor a general release of all claims? Perhaps the OEM may voluntarily work with you, but it is not mandated to do so. How do you address that?

Go over the franchisor release carefully. Be sure that several types of claims are excluded from the release.

  • Claims for warranty and recall work done before your termination as a franchisee.  While state laws generally require processing within a time limit, there are always open service claims upon termination of the franchise relationship. Preserve those.
  • Claims for sales incentives. You will be selling vehicles until your termination date. That may generate claims for rebates and incentives that are actually paid after your franchise termination date.
  • Open account balance. The credits or debits of the financial relationship between a dealer and its franchisor are handled through its open account (sometimes called the “parts account”). That account is likely to remain open for months following the termination of your franchise. You do not want to release your rights to any positive balance in the account at the end of that time.
  • Product claims. Your dealer agreement provides for indemnification of your dealership if you are sued because of an alleged product defect. Those suits may be for property damage, such as a legal action seeking to revoke the purchase of a new vehicle. Or they may be for personal injury or death such as a claim that a defect led to an accident.  Claims may come years after the alleged damage, as some dealers are seeing today with asbestos claims that arose decades ago. You do not want to lose your indemnification rights by giving a general release.