Getty Issues Ultimatum to Dealers

Buy fuel from Chestnut or stop using our pumps and get out

Published in CSP Daily News

By  Carole Donoghue, Petroleum Editor

JERICHO, N.Y. -- Getty Realty Inc. has given dealers subleasing its sites in Connecticut until May 7 to arrange to buy fuel from New York jobber Chestnut Petroleum Distributors Inc. and sign temporary licensing agreements, CSP Daily News has learned. If they fail to do so, Getty said, it will start eviction proceedings against them.

Further, Getty said it forbids the retailers from using its pumps, tanks and piping to sell fuel that isn't supplied by Chestnut.

The ultimatum in the May 3 letter from Joshua Dicker, Getty's vice president and general counsel, noted that New Paltz, N.Y.-based Chestnut is "the exclusive supplier" to the sites under licensing agreements that would give the dealers the right to occupy the stations on a month-to-month tenancy until Chestnut has time to negotiate new leases with the retailers.

However, the 53-plus dealers do not want to sign the Getty licensing deals--or any subsequent leases with Chestnut--until they are assured that they will receive full franchises protected by the federal Petroleum Marketing Practices Act. Without PMPA coverage, they fear, Chestnut will force them to become commission agents, stripping them of the ability to control their own pump prices.

While rejecting the Getty licenses, the dealers have tried to reach a compromise. They sent checks for their rents directly to Dicker at Getty's Jericho, N.Y. headquarters, but Dicker has returned the payments. "This proposed arrangement is totally unacceptable to us and is hereby rejected," Dicker said, according to a copy of his letter obtained by CSP Daily News. If they do not sign the licensing agreements, Getty will "take any and all actions to cause you to surrender the premises and pay any damages suffered by its use."

Getty is a publicly held real-estate investment trust (REIT). Some sources say it is prevented from accepting rent money directly from the dealers under REIT regulations that require it to be a landlord only, with no involvement in control or operation of the stations. If Getty starts eviction proceedings, the dealers are likely to go to court. The proceedings could drag on for a year or more, depending on how clogged the court system is.

Currently, the dealers set their own pump prices and keep the profits they earn from fuel and inside-store sales. But as commission agents, Chestnut would be able to tell them what to charge for fuel, controlling their ability to compete on the street. Additionally, all profits from their gas sales would go straight to Chestnut. The dealers would receive only a commission on the sales--Chestnut is looking at a five-cents-to-12-cents-per-gallon payment, depending on whether the dealers pay their own credit card costs or whether Chestnut processes the card sales, sources said after attending a meeting where Chestnut made a presentation of its plans.

Chestnut told the dealers at a recent meeting that it has a number of brands, including Shell and Sunoco, although most of the Getty sites will remain flagged with BP under a new jobber agreement Chestnut has just signed with the refiner. The dealers say the brand won't matter if they have no PMPA protection against lease non-renewal or termination as commission agents. They point to dozens of Shell stations that Chestnut purchased in Connecticut a few years ago. Chestnut has replaced most of the original franchised dealers at those sites with commission agents, the dealers say.

"We want a DTW price that lets us see the fluctuations in the market, we're tired of jobbers charging us more for fuel when the price goes up but then keeping the difference for themselves when the price goes down," Mike Fox, executive director of the dealer group the Gasoline & Automotive Service Dealer's of America Inc.(GASDA), told CSP Daily News.

Chestnut CEO Mickey Jamal did not respond to a request for comment by press time.

The Connecticut dealers are part of a larger group of retailers in Massachusetts, New Hampshire and Rhode Island who had been supplied by Providence, R.I.-based BP jobber Green Valley Oil. In January, Green Valley stopped making full deliveries to the dealers, and then cut them off completely a few weeks ago. Green Valley also has not returned an estimated $1.6 million the dealers paid in security deposits, an issue that has prompted lawsuits from retailers ( click here for previous CSP Daily News coverage of the saga involving Getty Realty, Getty Petroleum Marketing Inc., Green Valley, BP and others).

(BP confirmed late last week that it has signed contracts with Chestnut and Lehigh Gas Corp. to supply two-thirds of the stations cut off by Green Valley, as reported in a Raymond James/CSP Daily News Flash on Friday. Lehigh will supply 69 BP stations in Massachusetts and 19 in New Hampshire. Chestnut will supply 40 BP sites in Connecticut, 10 in Rhode Island and two more in Massachusetts. Some 78 BP sites remain without fuel.)

When Green Valley deliveries dried up, the Connecticut dealers debranded their pumps and started buying unbranded product from East Haven, Conn., jobber, A.F. Forbes Inc. Forbes charges them the New Haven low rack price for fuel, plus another two to three cents per gallon  if they don't buy a full load, and is delivering approximately 42,000 gallons a day to the sites, sources said.

In an unusual move, Forbes is also paying a 0.25-cents-per-gallon rebate to GASDA to help fund its fight.

"I believe those dealers need help to defend themselves; they have been harmed by Green Valley Oil over the last few years and they have virtually no money left," Jerry Roberts, an official with Forbes, told CSP Daily News. GASDA is using the rebate to pay some of the dealers' costs, including credit card fees, maintenance, tank inspection and legal fees. "The price we're getting from Forbes is still 15-20cts/gal below what we were paying Green Valley Oil before," Fox told CSP Daily News.

Some sources suggest Getty doesn't care if the dealers become commission agents or not, as long as it receives rental income from their stations--Chestnut is said to be getting a rent break on the sites, at least while the impasse with the dealers continues. But the retailers are not so sure . Getty has hired as one of its attorneys the same lawyer representing Green Valley Oil in the legal affray, it said.

Sources who side with Chestnut in the dispute said the dealers are clinging to a business model that no longer works in markets where jobbers have purchased stations divested by "Big Oil." Jobbers had to bid for the sites, and many overpaid as a result. They must now find a way to pay down the loans they used to buy the sites. The problem is, they don't have the vertical integration that the majors had, and so can't subsidize their retail operations, these sources said.

"Putting dealers on a commission basis means that the jobber can take more out of the gas profits and can charge the dealer less for rent," said one source. "Say the net margin for the jobber is 25 cents per gallon. If the dealer wants 15 cents of that and the jobber needs all 25 cents, then something has to give. Dealers can't expect to turn back the clock. They're not the only ones having a hard time, jobbers are too."

"That's nonsense," said John Morgan, the Stamford, Conn.-based attorney representing the dealers. "When jobbers work with dealers, everybody makes money. This is not about money, it's about control. We approached both Getty and Chestnut with an open hand; we are being met with drawn swords."

Getty had been leasing 788 sites from New England down through Virginia to Getty Petroleum Marketing Inc. GPMI, in turn, subleased the New England sites to Green Valley Oil. GPMI filed for Chapter 11 in December and turned back the stations to Getty Realty on April 30, a move that Getty Realty maintains terminated all the leases on the outlets--including the dealers' agreements.

In all, Getty has signed new lease agreements covering 282 of the locations, with affiliates of Chestnut, Lehigh Gas, Ramoco Fuels and Sam's Food Stores, as well as adding to an existing lease with MWS Enterprises (Arrowmart). Those stations are in New England, southern New Jersey, southeastern and central Pennsylvania, and the Buffalo area of upstate New York and are anticipated to generate approximately $17 million in rent annually.

The company has also entered an interim supply deal with Global Partners LP to supply gasoline and oversight services to about 254 locations in the New York City and northern New Jersey market. Global will pay Getty a fee based on gallons sold, and will pay the commission dealers that sell the fuel about five to six cents per gallon in fees, sources said.