June 28, 2023
By Barrie Charapp Beaty
Despite years of preaching on the subject, we still have dealers tell us they must sign their franchise renewal agreements before expiration of the existing agreements (known as franchise agreements or dealer sales and service agreements – DSSA) or they will lose their rights. That is not the case.
Refusing to Sign Your Renewal does not End Your Franchise Rights
That a franchise agreement expires is one of the great myths of the car business. Franchisors rely on this myth to pressure dealers to sign agreements that do not benefit them. The fact: your DSSA does not expire.
Under the law of every state, regardless of a listed expiration date, a DSSA may be terminated only against the wishes of the dealer if the franchisor goes through a termination process. In a termination proceeding, a franchisor must prove there is good cause for a decision maker to conclude that a dealer’s lack of performance or failure to comply with its obligations is so severe that its right to continue in business should be ended.
If there are terms in the replacement DSSA tendered to you with which you do not agree, do not sign it under the belief that your existing agreement is expiring. It is not. You can simply continue under your existing agreement terms until it is replaced with a document to which you do agree. You will get unrelenting pressure to sign a new agreement because factory reps are judged by their ability to check off the tasks they are assigned regarding each dealer. But your refusal to sign will give you leverage to work out terms with which you can live.
Full or Term Agreement
A term agreement is one for a limited duration so a dealer can meet conditions imposed. Some dealers become upset when they receive term renewals, but the fact of a term renewal should not distress you. As we discussed, a franchisor cannot terminate a dealer’s DSSA unless it goes through a full termination process even if the artificial expiration date of the term agreement passes.
The problem with a term agreement is the conditions imposed. Evaluate the conditions specific to your dealership in a term agreement as you would any other agreement tendered to you by the factory. If it works for you, there is no detriment to simply having a term agreement. But if the conditions of the term agreement do not work for you, engage your franchisor to negotiate the terms specific to your dealership.
What Are The Problems With The Conditions Imposed?
You must identify the condition or conditions to which you object. Here are examples.
Capitalization
Is your manufacturer saying you are undercapitalized? You must give serious attention. Undercapitalization can be a problem for a dealer in a termination proceeding. The franchisor’s position will be that a dealer’s failure to properly capitalize the business shows continuing weakness and poor representation of the brand. Work to meet the proper capitalization goals in your DSSA.
Facilities Improvement
Your tendered term agreement may require that you make facilities changes. Perhaps they are improvements to your showroom. Or an increase in service capacity. Or separation of service or sales from another brand with which you are dualed. Or even a new building. Do not commit to undertake facility improvements lightly. Do the improvements work for you? A franchisor can incentivize you to make facility improvements through a program. However, under state franchise law, it may not require you to make facility improvements as a condition to your continuing as a franchisee.
Even if you agree that you will make some or all the improvements, are the terms imposed appropriate? Franchisors are notorious for imposing time restraints that are both unreasonable and unnecessary. Factories seldom have reasons for requiring facility improvements by a date certain, except to meet their internal targets. Often, the real reason for unreasonable and unnecessary targets is leverage on a dealer. When you do not make your targets, the factory can make demands, sometimes greater than the original requirements. Review the terms and milestones imposed on you for improvements. Can you make those? Is there time for delays outside of your control such as zoning and permitting? Is there allowance for delays by the franchisor’s own architect if there is a review process? Is there a commitment to factory leeway for a delay outside your control? Even if you will undertake the improvements the franchisor wants, are the time constraints appropriate?
Performance
If the condition on your renewal concerns your sales performance or CSI, refer to the franchisor critical response checklist included with this newsletter. Respond. Let the factory know that you are giving attention to the issue, and any attempt to use it affect the dealership’s franchise rights will be met with swift, knowledgeable, and effective opposition. Negotiate terms of the condition. Remember, you are never in default on your dealer agreement obligations unless a decision maker with jurisdiction over you says so.
Do not be Afraid to Negotiate the Terms of the Renewal Document
While the form of a manufacturer’s agreement is not negotiable, the specific terms applicable to your dealership are. If unfavorable, be prepared to raise the issues with the factory and negotiate them as part of your renewal. If your factory representative labels you as a difficult dealer, point out the factory is changing your relationship, not you.