In recent years, there has been a significant upward trend in the demand for service station businesses and fuel re-selling operations across New South Wales. This demand by investors has, amongst a host of reasons, been driven by attractive yields and long-term lease covenants.
However, those looking to invest in service station and fuel re-selling operations in New South Wales must not overlook the complex legal considerations involved in this niche and intricate area.
In addition to the usual considerations involved in the purchase of any business, there exist a number of matters which must be taken into account when investing in service stations or fuel re-selling businesses, including:
Environmental Site Assessment and Tank / Line Testing
Whilst landowners and lessors of service station sites are generally responsible for site contamination, lessees are usually required to remediate any contamination beyond that which existed at the commencement of a lease.
Given that there are significant costs associated which the remediation of contamination, an Environmental Site Assessment (‘ESA’) Report should be obtained prior to any acquisition to ascertain the extent of contamination (if any) in the soil and groundwater of a service station freehold. An ESA Report will not only provide a baseline for any future remediation but will also ensure investors are not forced to remediate contamination they have not themselves caused.
Whilst an ESA Report will indicate the extent of any contamination, it will not pinpoint a cause. As such, the integrity of the fuel tanks, pumps and lines at or under a service station site should also be investigated prior to any acquisition, either with a vendor directly or by obtaining an independent tank and line test.
Potential for development within proximity of the Business
Traffic flow, visibility and site accessibility are key components of the profitability of a service station business. Accordingly, investors should make enquiries with local council and particularly Roads and Maritime Services to ascertain whether there are any road or development proposals in the vicinity of a site which may affect these components and profitability as a result.
Notwithstanding that such enquiries may not reveal any proposals for development, careful consideration must be given to the terms and provisions of leases to protect investors against future developments and ensure adequate rent abatement rights are available.
Lease responsibilities
Those looking to acquire a service station business or fuel re-selling operation should ensure the terms and provisions of any lease are carefully reviewed by a legal professional with a solid understanding of service station leases. A matter of particular significance for such businesses are the maintenance and repair responsibilities for above and below ground equipment and property, as this will include fuel tanks, pumps and lines and accordingly carry a heavy financial burden in terms of ongoing maintenance, upkeep and even replacement.
Operational Considerations
Some of the key operational considerations for service station and fuel re-selling operations include:
Branding / Supply / Fuel Re-Selling Agreements
In order to assist with competition, brand exposure, and know-how, many service station operators elect to enter into contractual arrangements with larger and notable independent and nationally branded oil companies as part of their business operations. Having the benefit of this brand exposure is intended to assist the operator with marketing of their business generally. However, as part of these contractual arrangements, careful consideration must be given to the terms and conditions of such branding / supply / fuel re-selling agreements, as often operators will be imposed with various key performance indicators, restraints in terms of trade as well as for supply of stock, as well as potentially royalty style payments dependent upon the oil company contracted with.
Licences and permits
In many cases, service station and fuel re-selling businesses do not operate in isolation, and it is not uncommon for a restaurant or café to run in conjunction with a fuel re-selling operation. As such, investors should make enquiries as to what, if any, licenses affect a business premises which is the subject of a proposed acquisition that will require transfer or assignment, such liquor, food, cigarette and dangerous goods licences.
Rostron Carlyle Rojas Lawyers are experts in service station and fuel re-selling transactions, including fuel re-selling franchise and commission agency arrangements. For further information or assistance in this regard, please contact Commercial and Property Partner James Hatzopoulos on (02) 9307 8900 or by email at [email protected].
