When buying a business as complex as a petrol station, it can be easy to lose track of the legal requirements and obligations involved in the business sale. In this article, we guide you through four key legal considerations involved in buying a petrol station.
1. Heads of Agreement
A heads of agreement establishes the key commercial terms for your sale contract. It is generally non-binding, which means that neither party is legally bound by the agreement until the formal sale contract is signed.
Despite this, it can be very useful to have a heads of agreement in place. It provides a framework for the parties to negotiate the final sale contract and often includes mechanisms for dealing with pre-contractual issues such as confidentiality. It is also a good indicator of each party’s probable commitment to the deal.
A heads of agreement typically covers a range of topics including:
- the purchase price;
- whether there will be a new lease or whether the existing lease will be assigned;
- due diligence requirements; and/or
- the settlement date.
Having a heads of agreement in place will streamline the process of buying a petrol station. When it comes time to drafting the formal sale contract, you can focus on negotiating the legal clauses rather than spending a lot of time on commercial negotiation.
2. Due Diligence
A crucial step in buying a petrol station is to conduct due diligence. This will let you determine whether the vendor (seller) has been complying with the relevant regulatory requirements while operating the business.
Your due diligence should include the following research components:
- determining whether the petrol station equipment is owned outright or on loan;
- thoroughly searching the premises;
- reviewing any employment or supply contracts;
- checking the equipment is in good working order; and
- reviewing lease documents (e.g. the lease or licence to the service station).
Due Diligence on Equipment
You can check whether any of the equipment is on loan by searching for the model number on the Personal Property Security Register (PPSR). Generally, the vendor must arrange for the release of liabilities and loans in respect of the equipment, before settlement. This is to ensure that the equipment is sold to you free from encumbrances. An encumbrance is a registered claim in property by a person who is not the property owner, such as a lease.
However, if the vendor is planning on transferring any existing equipment lease or hire contracts to you, be aware that the liabilities under those contracts could also be transferred. Therefore, it is important to review these contracts before you sign the sale contract to ensure you can comply with them from settlement.
Due Diligence on Environmental Effects
You should search the Contaminated Land Record (governed by the Environmental Protection Authority in New South Wales (NSW)) in your state to see whether the petrol station premises is listed on the register. The Record will list any instances of contamination that have occurred on the site. Additionally, you may want to conduct a soil test for contamination.
You should also familiarise yourself with the environmental legislation and check that the service station is operating legally and safely. For example, you will want to ensure that the fuel lines and tanks are in good working order and free of any leaks.
3. Sale of Business Contract
If you are happy with the due diligence you have conducted and are ready to proceed, it is time to prepare the sale of business agreement. The vendor’s lawyer will usually draft this contract. If you have agreed upon any special conditions with the vendor, make sure they draft these into the agreement.
Usually, anything that is not included in the sale contract will not form part of your business purchase. If you had previously had a heads of agreement in place, be aware that it will be superseded by the formal contract.
A standard business sale contract will generally include:
- the purchase price and details about payment;
- any warranties or promises that the vendor is making to you;
- what (if any) liability is to pass from the vendor to you and when;
- details about which contracts are transferring or terminating;
- whether there is any intellectual property (IP) the vendor needs to transfer;
- the settlement date; and
- if there is a lease or franchise agreement, whether the vendor will transfer that agreement to you.
Transfer of Lease
A petrol station lease often covers the whole land and includes the petrol tanks kept underground and the petrol pumps. Your leasing agreement will also have specific clauses relating to your environmental obligations, specifying:
- who will be responsible for specific contamination;
- who will be responsible for remediation works; and
- what damages (if any) parties are entitled to.
You may also receive a disclosure statement before you get a copy of the lease agreement, depending on:
- what state you are based in; and
- whether retail leasing legislation covers your lease.
Transfer of Franchise Agreement
If the petrol station you want to buy is a franchise, make sure the seller provides you with a disclosure document prior to receiving the franchise agreement. The disclosure document provides you with information about the commercial details and history of the franchise network to help you to make an informed purchase decision.
You should also ensure that the:
- franchisor agrees to provide you with the franchise agreement; and
- landlord agrees to transfer the lease to you.
Make sure you allow enough time for getting these consents. The franchisor will want to evaluate how suitable your skills and attributes are for their franchise before giving their approval. Your landlord may request documentation about your business experience, assets and background. The steps needed to receive consent vary depending on your state or territory, but you will always need to have obtained consent before the settlement date.
Tip: The franchise agreement will usually specify that the tanks, pumps and lines are the responsibility of the franchisor.
4. Environmental Obligations
Once you have completed buying a petrol station, you should be mindful of any state-based environmental laws that apply to your operations. These laws will impact how you report, test, or manage any remedial work needed for contaminated land.
For example, if you are operating a petrol station in NSW, you will need to comply with the Biofuels Act 2007 (NSW) when purchasing:
- a volume fuel retailer; or
- a primary wholesaler (e.g. oil refinery or shipping facility).
A volume fuel retailer is a petrol station which:
- sells more than three types of petrol or diesel;
- sells more than 900,000 litres of petrol or diesel per quarter; or
- operates or controls more than 20 petrol stations.
Volume fuel retailers and primary wholesalers must comply with the biofuel mandates and ensure they sell the appropriate blend of petrol. If you are purchasing a major fuel retail company, the volume fuel retailer is usually the company’s head office.
Tip: For more information about compliance with the rules, you can contact the Service Station Association in NSW or the relevant body in your State.
Buying a petrol station is an intricate process that involves many rules and obligations. Some of these responsibilities will continue after settlement. It is essential that you conduct thorough due diligence and carefully review any contracts before signing any agreements.
If you want guidance through the purchase process, or need help reviewing legal agreements, contact LegalVision’s business purchase lawyers on 1300 544 755 or fill out the form on this page.
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