decided: November 22, 1978.
ROBERT G. WITMER, APPELLANT, WALTER B. SLINGERLAND, APPELLANT, LARRY MILLER, APPELLANT, ALEXANDER LAUER, APPELLANT, JOHN W. RINTZ, APPELLANT, FRANCIS J. FRITZ, APPELLANT, JOHN J. KUNKEL, APPELLANT,
EXXON CORPORATION, APPELLEE
No. 729 October Term, 1978, No. 730 October Term, 1978, No. 731 October Term, 1978, No. 732 October Term, 1978, No. 733 October Term, 1978, No. 734 October Term, 1978, No. 735 October Term, 1978, Appeals from the Orders dated January 3, 1978 of the Court of Common Pleas of Montgomery County, Civil Action, Equity at Nos. 77-8950, 77-9497, 77-11727, 77-12077, 77-12239, 77-12688 and 77-13138 respectively.
Martin J. Resnick, Philadelphia, with him Norman P. Zarwin, Philadelphia, for appellants.
Kell M. Damsgaard, Philadelphia, for appellee.
Price, Hester and Hoffman, JJ. Price, J., files a concurring statement.
[ 260 Pa. Super. Page 541]
These are seven similar cases brought by various service station franchisees against their common franchisor, Exxon Corporation (Exxon) to enjoin Exxon from collecting increases in service station rentals, to compel Exxon to return all collected rent increases, and to negotiate in good faith
[ 260 Pa. Super. Page 542]
with the franchisees (appellants) to set mutually agreeable rentals. In each case, the lower court sustained Exxon's demurrer, and dismissed appellant's complaints. It is from these orders that appellants now appeal. We affirm.
The facts of each of the seven cases, here consolidated on appeal, are substantially similar, but are set forth here separately for the sake of clarity. Because the cases come to us upon a dismissal of the actions, all well-pleaded facts revealed in the complaints and exhibits properly attached thereto must be taken as true.
Appellant Robert G. Witmer is the lessee of an Exxon service station at Route 222 & Tuckerton Road in Temple, under a one-year lease which expired on March 5, 1977. The lease had set the rental payments for the station at 1.65 cents per gallon of gasoline sold, and was frozen by the federal government under the authority of the Economic Stabilization Act of 1970. This lease contains a "rental reopener" clause*fn1 which provides that Exxon may, once
[ 260 Pa. Super. Page 543]
during the term of the lease, and upon sixty days notice, increase the station rental, but not by more than one cent per gallon. If the lessee objects to a proposed rent increase, then he may terminate his obligations under the lease without liability.
On July 29, 1976, about seven months after rent controls on the service stations were abolished, Exxon wrote to Witmer, giving notice of its intent to increase his rent under the rental reopener clause, in stages to 3.83 and 4.03 cents per gallon.*fn2 In its letter, Exxon characterized these increases as the reestablishment of fair market rentals, now that rents were no longer controlled. Exxon later submitted to Witmer a new lease for 1977-78, calling for a station rent increase to 4.3 cents per gallon during the term. Witmer refused to execute this lease, but did not vacate the premises. On April 14, 1977, Exxon wrote to Witmer stating that he would be treated as a holdover tenant for a new one-year term*fn3 under the provisions of the former lease. By letter on April 26, 1977, Exxon notified Witmer that his rental during the holdover term would be increased to the aforementioned 4.3 cents per gallon, pursuant to the "extensions and renewals" clause of the lease,*fn4 which gives Exxon the right to
[ 260 Pa. Super. Page 544]
increase the rental when the lease is extended or renewed by operation of law for any reason. If the lessee objects and the parties cannot reach a mutually agreeable rental, then the rent is determined by a predetermined formula set forth in the clause, the only variable being the market value of the lessor's property, as determined by an independent appraiser named by the lessee who is acceptable to Exxon. By this letter, Exxon also brought to Witmer's attention these appraisal rights. However, Witmer never invoked these rights, and Exxon began to collect rent of 4.3 cents per gallon of gasoline sold to Witmer.
Appellant Walter B. Slingerland is the lessee of an Exxon service station at 9451 Academy Road, Philadelphia. He was operating under a one-year lease ending March 1, 1977, with a rental of 1.75 cents per gallon. Also on July 29, 1976, Exxon notified Slingerland of staged rental increases of 2.21 and 2.41 cents per gallon under the rental reopener clause,
[ 260 Pa. Super. Page 545]
again citing the abolition of rent controls as the reason for the increase. For the new 1977-78 term, Exxon submitted a lease with a rental of 2.91 cents per gallon. Slingerland did not execute this lease, and on March 3, 1977, Exxon wrote to him stating that because he remained in possession after the end of his term, he would be treated as a holdover tenant bound under the former lease for a new term of one year. Exxon notified Slingerland that it would collect a rental of 2.91 cents per gallon during the holdover term pursuant to the extensions and renewals clause. Again, Slingerland did not exercise his appraisal rights, and Exxon began to collect the increased rent.
Appellant Larry Miller is the lessee of an Exxon service station at 3919 North Front Street, Harrisburg. He was operating under a one-year lease ending May 18, 1977, at a rental of 1.8 cents per gallon. On June 29, 1976, "when the ink on the lease was hardly dry," Exxon gave notice that because rent controls had been ended, a rental increase under the rental reopener clause to 2.58 and 2.78 cents per gallon would become effective in September 1, and December 1, 1976, respectively.*fn5 Exxon submitted a new lease for the term 1977-78 with a rental of 3.28 cents per gallon. Miller declined to execute this lease and remained in possession; on May 20, 1977, Exxon informed him that he would be treated as a holdover tenant for one year under the terms of his prior lease. On May 31, 1977, Exxon gave notice that it would collect a rental of 3.28 cents per gallon during this term pursuant to the extensions and renewals clause of the lease. Miller did not exercise his appraisal rights under the lease, and Exxon began to collect the increased rent.
Appellant Francis J. Fritz is the lessee of an Exxon service station at 7720 York Road in Baltimore, Maryland. He operated the premises under a one-year lease ending May 31, 1977, at a rental of 1.85 cents per gallon. On September
[ 260 Pa. Super. Page 54630]
, 1976, Exxon gave notice under the rental reopener clause to increase the rent of the station to 2.08 and 2.28 cents per gallon. Exxon proposed a lease for the new 1977-78 term with a rental of 2.51 cents per gallon. When Fritz declined to execute this lease, he was informed by Exxon on June 6, 1977, that he would be treated as a holdover for one year under the terms of the old lease. One week later, Exxon notified Fritz that his rent for the holdover term would be increased to 2.51 cents per gallon under the extensions and renewals clause of the lease. Although this letter advised Fritz of his appraisal rights, he never exercised them, and Exxon began to collect this rent on its gasoline sales to Fritz.
Appellant Alexander Lauer is the lessee of an Exxon service station at Route 202 & Swamp Road in Doylestown. He operated the premises under a three-year lease ending May 16, 1977, at a rental of 1.78 cents per gallon. There is no rental reopener clause in Lauer's lease. In June and July, 1976, Exxon notified Lauer that with the ending of controls on service stations rentals, his rent would be increased in the future. True enough, a few weeks before the expiration of the existing lease, Exxon submitted a new lease for one year at a rental of 2.25 cents per gallon. As Lauer refused to execute the lease, Exxon notified him on May 24, 1977, that he would be treated as a holdover tenant for a one-year term under the terms of the prior lease. On June 3, 1977, Exxon gave Lauer notice that his rent for the holdover term would be increased to 2.25 cents per gallon, effective August 1, 1977, pursuant to the extensions and renewals clause in the lease, and advised him of his appraisal rights thereunder. However, Lauer did not exercise these rights and Exxon began to collect the increased rental on its gasoline sales immediately.*fn6
Appellant John W. Rintz is the lessee of an Exxon service station at 700 East Chestnut Street in Lancaster. He operated his station under a one-year lease ending June 1, 1977
[ 260 Pa. Super. Page 547]
at a rental of 1.9 cents per gallon. Although there is a rental reopener clause in Rintz' lease, Exxon did not exercise it. In April of 1977, Exxon submitted to Rintz a new one-year lease with a rental of 2.9 cents per gallon. Rintz refused to execute this lease. On June 2, 1977, Exxon advised Rintz that it would consider him to be a holdover tenant for one year under the same terms as the expired lease. On June 10, 1977, Exxon notified Rintz that pursuant to the extensions and renewals clause of his lease, his rent for the holdover term would be 2.9 cents per gallon, and advised him of his appraisal rights thereunder. However, Rintz did not exercise these rights, and Exxon began to collect the increased rental.
Appellant John J. Kunkel is the lessee of an Exxon service station at 1008 Second Street Pike in Richboro. He operated his station under a one-year lease ending June 7, 1977 at a rental of 1.53 cents per gallon. There is a rental reopener clause in Kunkel's lease, but Exxon did not exercise it. Prior to the expiration of the term, however, Exxon submitted a new one-year lease with an increased rental of 2.5 cents per gallon. Kunkel refused to execute this lease, but did not vacate the premises. On June 8, 1977, Exxon advised Kunkel that he would be treated as a holdover tenant for one year under the same terms as the old lease. Eight days later, Exxon gave notice of a rent increase to 2.5 cents per gallon for the holdover term pursuant to the extensions and renewals clause of the lease, and advised Kunkel of his rights to an independent appraisal. However, Kunkel did not exercise these rights, and Exxon began collecting the rent increases.
As can be seen from the above, the facts underlying appellants' contentions are substantially similar. The appellants have all been, for varying lengths of time, operators of Exxon gasoline service stations who lease their stations from Exxon, paying rent on the basis of gasoline purchased from Exxon. For years, the rentals charged were frozen or regulated by the wage-price freeze of 1971 and the various
[ 260 Pa. Super. Page 548]
Phases thereafter.*fn7 The controls ended on December 31, 1975, and soon thereafter Exxon increased the station rentals. In several cases where the lease had a rental reopener clause, this was accomplished immediately in mid-lease. In all cases, upon the expiration of the existing leases, Exxon's proposed new leases contained rental increases. None of the lessees agreed to execute these new leases. In each case, Exxon decided to treat the lessees as holdovers for another year's term. This was its right to do by operation of landlord-tenant law. (See note 3, supra). Then, in each case, Exxon gave notice of its intent to collect the increased rentals during the holdover term, as was its right to do under the extensions and renewals clause in each lease. In each case, Exxon advised the lessee of its right to have the rent determined by an independent appraiser acceptable to both parties, if the lessee objected to the rent increase. In each case, the lessee declined to exercise this appraisal right. Rather, the holdover lessees brought these equity actions to enjoin Exxon from collecting the increases.
Before we turn to the issues at hand, let us first note what is not in contention in this case. None of the appellants' pleadings contend that Exxon has violated its lease.*fn8 This is not a case of breach of contract. The actions taken by Exxon have been within its powers under the leases. Appellants seek relief under theories outside of contract law to avoid the obligations of their leases.
Appellants first contend in Count II of their complaints that Exxon cannot raise its rents without prior good faith negotiations with the lessees, and cannot unilaterally increase the station rentals solely because the leases permit them to do so, because the parties are in a special franchisor-franchisee relationship.
[ 260 Pa. Super. Page 549]
This contention must be measured in the light of the recent decision of our Supreme Court in Atlantic Richfield Company v. Razumic, 480 Pa. 366, 390 A.2d 736 (1978). Razumic was the operator of an Atlantic Richfield (Arco) service station under a three-year lease which expired on August 1, 1973. Arco notified Razumic on June 29, 1973, that his lease would not be renewed. However, Razumic refused to vacate the premises at the end of the term, and Arco brought an action for possession under the Landlord and Tenant Act before a District Justice. Eventually, Arco won a directed verdict for possession from the court of common pleas. The record did not reveal why Arco no longer wanted Razumic as a dealer,*fn9 who had been in the business for twenty years, who had in the past been named one of the top ten dealers in the Pittsburgh area, and was once characterized by Arco as an excellent dealer.
The Razumic court found that while the parties there were landlord and tenant, their lease and business practices indicated that they also had a franchisor-franchisee relationship. The lease restricted Razumic's use of the premises to that of an automotive retail service station; prohibited subleasing or absentee operation; and prevented Razumic from improving or altering the premises or interfering with the appearance of the Arco trademark thereon. Arco reserved the right to audit Razumic's books in order to check rental calculations and to have final say on all Arco trademark designations on the premises. Razumic was required to operate so as to enhance the reputation and good will of the Arco trademark, including participation in Arco promotions and advertising displays. The evidence showed that Razumic's business practices conformed to these requirements.
Although the lease set forth a three year term of occupancy, there was no express provision granting Arco the
[ 260 Pa. Super. Page 550]
right to terminate the parties' relationship at any time.*fn10 However, the Supreme Court found that because Arco required Razumic to spend much of his time and effort building up good will for the Arco trademark and products, it would be unfair to allow Arco to terminate the franchise. In effect the Court was applying the principle of unjust enrichment to the franchise relationship."*fn11 To this end, the Court held that franchisors attempting to terminate a franchise relationship must "deal with its franchisees in good faith and in a commercially reasonable manner . . . ." (480 Pa. at 378, 390 A.2d at 742). Because no reasons appeared in the record for Arco's termination which met the standard of good faith and commercial reasonableness, the
[ 260 Pa. Super. Page 551]
directed verdict in favor of Arco was reversed and the case remanded for trial.*fn12
Appellee Exxon presses upon us several reasons why Razumic is not applicable to this case, but we find none of them persuasive.
Appellee first argues that there is not a franchise relationship between itself and the appellants as there was in Razumic. Exxon points out that its leases do not contain provisions restricting appellants' use of the premises to enhance Exxon trademarks. In fact, the Exxon leases all state:
"It is understood that Lessee operates an independent business. Nothing in this lease shall be construed as reserving or granting to Exxon the right to exercise any control over Lessee's business or the manner in which same shall be conducted. . . ."
However, aside from the terms of the lease, each of the appellants' complaints allege the following facts, which of course must be taken as true for the purpose of the appeal:
(1) Exxon has licensed appellants to use its trademarks.
(2) Exxon has exercised strict supervision of quality controls over the products sold under their trademark.
(3) Exxon maintains and exercises a right of inspection over the appellants' stations.
[ 260 Pa. Super. Page 552]
(4) Exxon limits the products which appellants can sell at their stations.
(5) Exxon controlled the hours and days that appellants' stations should be open for business.
(6) Exxon supervised every aspect of appellants' business.
(7) Exxon has benefitted by the appellants' creation of goodwill in Exxon trademarks.
We think these facts make out a franchise relationship between Exxon and the appellants here under the standards set forth in Razumic. What is important is the actual control of the lessee's business -- product limitations, quality controls, hours controls, station inspection -- all to protect and enhance the good will of the lessor's trademarks. In light of these facts which show the actual practice of a franchise relationship, we do not think it is significant that the relationship is not explicated in the service station lease.*fn13
Exxon next contends that Razumic did not create any rights or obligations in the context of service station franchises which are not part of the Gasoline Act.*fn14 The Gasoline Act, which prohibits franchise terminations except for certain enumerated reasons, does not prevent lessors from raising service station rentals,*fn15 and in fact provides that a lessor may terminate a lease for nonpayment of rent.*fn16 The court below found that since Exxon did not terminate appellants' franchises, Exxon did not violate any provision of the Act.
[ 260 Pa. Super. Page 553]
We think, however, that this argument misapprehends the scope of the Razumic decision and the lawmaking functions of a common law court. The operative facts in Razumic were not controlled by the Gasoline Act, which the legislature did not choose to make effective until February 22, 1976. Exxon would reduce Razumic to an acceleration of the effective date of the Gasoline Act, which a court cannot do. What the Court in Razumic did, as a common law court, was make new law in the adjudicative context. The Supreme Court, in support of its decision, simply referred to the Gasoline Act as an argument by analogy. A common law court in making new decisional law is rightly conscious of public policy, and one way to determine public policy is to look at the recent acts of the legislature. However, so long as Razumic is not inconsistent with the expressed desires of the legislature, it continues to have precedential effect on subsequently litigated cases, such as the instant case.
Exxon finally argues that Razumic is not applicable because it dealt only with the failure to renew a service station lease and ejectment of the franchisee, and should have no relevance to the facts of this case, in which Exxon has renewed all of the appellants' leases and continues to operate in a franchise relationship with them. Again, we think this misapprehends the intended scope of Razumic.
Insofar as any court's decision is limited to its facts, then Razumic is limited to direct attempts to terminate franchises arbitrarily by refusing, without cause, to renew a lease. However, the Court also found that inherent in the franchisor-franchisee relationship is a duty of good faith and commercial reasonableness on the franchisor to respect the reasonable expectations of its franchisees when the franchisor desires to terminate the franchise relationship. Thus, Razumic applies to all cases where the franchisor attempts, either directly or indirectly, to disenfranchise a franchisee.
Razumic is not inapplicable here simply because Exxon chose to renew the franchisees' leases rather than eject them. If we were to so hold today, then it would be simple to circumvent the purpose of Razumic, which is to protect
[ 260 Pa. Super. Page 554]
the franchisee's interest in the value of his franchise -- the continuing good will of his own business. A franchisor, desirous of terminating a franchise, but without good cause to do so, could merely propose an absurdly high rent for the next term, not in good faith to collect more rent, but merely as a bad faith pretext or subterfuge to coerce a lessee out of his franchise. This would allow a franchisor to do indirectly what he cannot do directly under Razumic, and this we reject. We hold that Razumic also applies to indirect attempts by franchisors to disenfranchise franchisees arbitrarily and in bad faith. Therefore, we must examine the appellants' complaints here to determine if the rental increases were proposed as a bad faith pretext, an indirect attempt to disenfranchise the appellants.
We conclude that appellants have alleged facts which affirmatively reveal that Exxon did not violate the standards of Razumic, and have not stated a cause of action for equitable relief based on the franchisor-franchisee relationship between the parties. There are several reasons which prompt this conclusion.
The institution of the rental increases by Exxon was wholly within its rights under explicit lease provisions. This is unlike Razumic where the leases did not explicitly reserve a right to terminate the franchise without cause. The Court in Razumic thought the absence of such a provision was significant, if not crucial to their decision. Indeed, at one point in the opinion, the Court implied that it would enforce such a termination clause. Atlantic Richfield Co. v. Razumic, supra, (480 Pa. 366, 390 A.2d 736). This is consistent with the principles announced in Razumic, which applied the standard of good faith and commercial reasonableness to protect the "reasonable expectations" of the franchisee in maintaining his franchise. Where there is no explicit termination clause in his lease, a franchisee indeed has a reasonable expectation that the relationship will not be terminated arbitrarily without cause. However, when the actions of the franchisor are within plain and explicit enabling clauses of the lease, we find it impossible to say that the reasonable
[ 260 Pa. Super. Page 555]
expectations of the franchisee have been violated. Thus, the failure of Exxon to bargain for the rent increases here does not violate the Razumic standards, and the fact that the increases were imposed unilaterally can not fairly be said to have upset the reasonable expectations of the appellants.
Nor do we think that the rent increases themselves contravene the standards of Razumic. As we have said, Razumic deals with the attempt, direct or indirect, to disenfranchise franchisees. It is in the context of an attempted disenfranchisement that the Razumic standard of good faith and commercial reasonableness applies to protect the reasonable expectations of the franchisee. Under the circumstances of this case, we find it sufficient under Razumic that the rent increases instituted by Exxon were for the good faith purpose of collecting more rent, and were not a bad faith pretext or subterfuge to coerce the appellants into abandoning their franchises. The appellants' complaints nowhere allege that the rent increases were any such bad faith pretext, or that by them Exxon is attempting to force them to abandon their franchises. The gravamen of the complaint is that the rents were instituted without prior bargaining or negotiation, and are higher than the appellants should have to pay.*fn17 This does not state a cause of action under Razumic.
[ 260 Pa. Super. Page 556]
Moreover, Exxon demonstrated their good faith in every instance by renewing appellants' leases after appellants refused to execute new leases and held over on the properties. Rather than attempting to eject them as holdovers as would be their right under landlord and tenant law,*fn18 Exxon treated the appellants as holdover tenants for a year's term. This is not only evidence of good faith, but it means that another crucial element in the Razumic case -- unjust enrichment -- is not present here. The appellants do not claim that they have lost or been threatened with the loss of their franchises.
We also note that in each case, Exxon called to the appellants' attention their right under the lease to have their rents determined for the holdover period by outside appraisal, and that each of the appellants refused to exercise this right. This is further indicative of Exxon's good faith. Furthermore, it is not proper for appellants to seek equitable relief where they have failed to pursue their available contractual remedies.*fn19
[ 260 Pa. Super. Page 557]
In sum, we find that while the Razumic decision is applicable to this case, the appellants' allegations affirmatively reveal that Exxon has not violated the principles enunciated in that decision. Rather, the record shows that the rent increases were instituted in good faith to collect more rent, and not as a bad faith pretext to disenfranchise the appellants, and were not outside the reasonable expectations of the franchisees. Next, we must turn to appellant's arguments for reversal not based on the franchisor-franchisee relationship between the parties.
Appellants contend in Count III of their complaints that the collection of the increased rents should be enjoined because the "rental reopener" and "extensions and renewals" clauses in their leases, as well as the rent increases themselves, were "unconscionable" and therefore should not be enforced. This argument is clearly without merit. Unconscionability may only be asserted as a defense*fn20 in an action on a contract for the sale of goods.*fn21 It is not a plaintiff's doctrine available for affirmative relief to enjoin the provisions of a lease of real estate. Moreover, even if the unconscionability doctrine did apply, we must note that rental adjustment clauses in commercial leases have been previously upheld and enforced by our courts, and appellants suggest no reason why businessmen should be prevented from bargaining on the inclusion of such matters in those agreements. See Pittsburgh Allied Fabricators, Inc. v. Haber, 440 Pa. 545, 271 A.2d 271 (1970).
[ 260 Pa. Super. Page 558]
Appellants lastly contend that they are entitled to equitable relief for Exxon's violation of the Gasoline Act*fn22 in Count I of their complaints. The problem with appellants' statutory cause of action is, however, that the complaint fails to set forth any violation of the Act by Exxon. The complaints and appellants' brief indicate that this theory of relief is based upon § 3(c)(1) of the Act, 73 P.S. § 202-3(c)(1) (Supp.1978-79) which states: "Nothing in subsection (b) shall prohibit termination, cancellation, or failure to renew:
"(1) if there is a failure on the part of the lessor supplier and the lessee dealer to agree upon the terms of a renewal agreement where both parties have acted in good faith trying to effect such a renewal . . . ."
The complaints here allege that in each case Exxon sent the appellants, without prior negotiation, a new lease with the unwanted rent increases, and later, without negotiation, instituted these rent increases for the holdover term under extensions and renewals clause. Appellants argue that this attempt to dictate a new lease and rent increase without prior good faith bargaining was in bad faith and therefore violative of § 3(c)(1).
We think that this is a misreading of the Gasoline Act. Section 3(c)(1) does not impose upon franchisors an affirmative duty to negotiate in good faith with its franchisees for lease renewals. It does mean that if the franchisor fails to bargain in good faith, then under § 3(b) of the Act, he cannot use the expiration of the old lease to terminate the franchise. Here, it is alleged that Exxon failed to bargain in good faith for the terms of a lease renewal. However, it is not alleged that Exxon used the failure to reach agreement to attempt to terminate appellants' franchises. Rather, in each case Exxon treated the holdovers as tenants for
[ 260 Pa. Super. Page 559]
another year. Since Exxon did not terminate any of the franchises, and did not engage in any other of the prohibited practices under the Act, the complaints fail to state a cause of action under the Act.*fn23
The order dismissing appellants' complaints is affirmed.
PRICE, Judge, concurring:
I concur in the result reached by Judge Hoffman, however, I cannot agree with the broad sweep and application given to Atlantic Richfield Company v. Razumic, 480 Pa. 366, 390 A.2d 736 (1978), and Kowatch v. Atlantic Richfield Company, 480 Pa. 388, 390 A.2d 747 (1978). Under the facts deemed established in this case, I would hold that there is no franchise relationship between appellants and appellee. The affirmation of the appellee's demurrer should be solely because appellee owes no duties to appellants outside the leases and outside the Pennsylvania Gasoline Act.*fn1 If this be so, there can be no question of the correctness of the court below in sustaining appellee's demurrer, since, even by the much stricter requirements Judge Hoffman imposes, he finds appellants have not presented a cause of action.
In all other respects I agree with Judge Hoffman.