L. Michael Hankes  |  ATTORNEY AT LAW
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The Right of First Refusal - The Existing Dealer's Right to Choose an Alternate Location

In some franchise systems a franchisor may achieve expansion in a particular market by sitting down with existing franchisees and telling them that one or more of them needs to step up and build another store. Often, there is no territorial protection in the franchise agreement, much less a Right of First Refusal.

Meineke Dealers not only have the strong territorial protections discussed in our previous articles, but the Meineke FTA also includes a Right of First Refusal which is triggered once an actual location for a proposed new Meineke Center is identified. In other words, when Meineke wants to expand a market, it can’t just sit existing Dealers down and tell them to get it done. Under the terms of the Meineke FTA, Meineke must first propose the establishment of a new Meineke Center at an actual location. Then, the existing Meineke Dealers’ Rights of First Refusal under Section 2.3 of the Meineke FTA come into play.

Section 2.3 of the Meineke FTA, states in relevant part:

If, during the Term, we want to operate, or to grant someone else the right to operate a Meineke Center outside the Protected Area, but at a proposed location within a 3-mile radius from the Premises, we will first offer a franchise to you on our then-standard terms and conditions for new Meineke Car Care Centers, provided you are Option Eligible (as defined below).1 If you do not accept our offer within 30 days, we will be entitled to operate, and to grant someone else the right to operate, a Meineke Center at the proposed location. Notwithstanding anything to the contrary contained in this Section 2.3, if there is more than one then-existing Meineke Center located within a 3-mile radius from the proposed location of the new Meineke Center, then you will be entitled to the right of first refusal contained in this Section 2.3 only if (a) your center is closest to the proposed location of the new Meineke Center, or (b) the owners of all Meineke Centers that are closer to the proposed location of the new Meineke Center fail to accept any similar right of first refusal contained in their franchise agreements.

(Emphasis added). (Meineke FTA § 2.3).

Thus, the structure of the Meineke FTA contemplates that the new franchise location first be identified. As noted above, before Meineke can offer the Right of First Refusal to an existing Dealer, it must first specify where the new Center will be located. Otherwise, the language highlighted in Section 2.3 quoted above would not make any sense.

Moreover, Section 2.2 of the Meineke FTA was intended to provide both a new Dealer and an existing Dealer who might want to exercise the Right of First Refusal with the opportunity to find their own suitable location for the new Meineke Center. Section 2.2 of the Meineke FTA states:

2.2 Selection of Location for New Center

If this Agreement is for a new Center, you agree to propose a location for your Center in the Market Area within 270 days after the Agreement Date. Your proposed location must conform to our site selection guidelines and requirements and is subject to our approval. You agree to submit to us all information about the proposed location that we request, including a complete site analysis report. We have no obligation to consider a proposed location until we receive all requested information. You agree not to execute any lease or purchase agreement for, nor commit to any other binding obligation to purchase, occupy or improve, any proposed location until we have approved the location in accordance with our standard procedures. In approving or disapproving any proposed location, we will consider the factors we deem relevant, including general location, neighborhood and the distance to any other Meineke Center operating in the Market Area. We will have no liability whatsoever to you or anyone else for disapproving a proposed location. Upon approval of a proposed location, the location will be identified in Schedule B and Schedule B will be signed by both parties and attached to this Agreement. Once Schedule B has been completed and signed, the location identified in Schedule B will be deemed the “Premises.” …

Our approval of the Premises merely signifies that we authorize you to operate a Meineke Center at that site. You are solely responsible for the selection of an appropriate site for your Center. …

Therefore, the way that the process for placing a new Meineke center in an existing market area should work is the following: (a) Meineke must first propose the location so that the existing Dealers in the market can determine which existing Meineke Center is closest to the proposed new location; (b) once the Meineke Dealer closest to the new location decides to exercise the right of first refusal, that Dealer then has 270 days under Section 2.2 of the Meineke FTA to find an alternative location; (c) if the Dealer closest to Meineke’s proposed new location does not exercise his right of first refusal, the offer must then be made to the next closest Dealer in the market; and, (d) then that Dealer would have 270 days under Section 2.2 to find an alternative location.

The financial impact on an exiting Meineke Center from the placement of an encroaching new Meineke Center can be substantial. It, therefore, will behoove existing Meineke Dealers to monitor and immediately investigate any events which may occur in their individual markets relating to the placement of a new Meineke Center.

  1. To be option eligible, the franchisee must not be in arrears more than 30 days, have no default notices in the preceding 12 months and have no outstanding customer complaints more than 30 days old.

This article is intended for informational purposes only and is not to be relied upon as legal advice, as individual facts and circumstances may vary.