Purchasing a service station, whether the business or the land it sits on is a significant commercial investment. In addition to the usual challenges and considerations that come with purchasing a business or commercial real estate, service stations come with their own unique set of considerations. In this article, we set out the top 10 items to watch out for when purchasing a service station.
1. Environmental Protection and Contamination
Owing to the nature of a service station, where fuel is kept in tanks underground, there is a higher risk of environmental contamination than there is with other types of commercial sites.
You should always carry out a search of the Contaminated Land and Environmental Management Registers (CLR/EMR) to determine whether the land is listed on either of these registers. Operating a service station will, in many cases, be a ‘Notifiable Activity’ within the meaning of the Environmental Protection Act 1994 (Qld) (EPA) and the land will be recorded in the EMR.
You should ensure you are familiar with the relevant environmental legislation and satisfy yourself that the service station you wish to purchase is operating safely and legally.
Importantly, the fact that a parcel of land is not listed on the contaminated land register does not necessarily mean that it is free of contamination. When purchasing a service station, it is prudent to conduct a soil test to determine whether the land is contaminated.
Soil tests are valuable tools for leases as well as purchases of land. Under most service station leases, the tenant has an obligation to remediate the land at the end of the lease back to the condition it was in at the commencement of the lease. Without a soil test, there is no baseline to determine what contamination level (if any) existed at the commencement of the lease. This can lead to a tenant becoming liable to pay to remediate contamination which they may not necessarily have caused.
2. Tank and Line Testing
Is your contract subject to a satisfactory tank and line test? If not, should it be?
Because fuel tanks are kept underground, they cannot be readily inspected for leaks or other defects. The importance of ensuring that the underground tanks and fuel lines are working properly and free of leaks when you take over a service station cannot be overstated. Failure of a tank or fuel line can cause significant land contamination, not to mention loss of fuel.
3. Lease Terms, Equipment Ownership and Maintenance
When purchasing either the land or business, you should carefully read the terms of any lease in place. In particular, the Lease will often specify who, whether the Landlord or the Tenant/Operator, owns the above and
below ground fuel equipment (including the tanks and fuel lines). This equipment can be expensive to purchase, install and maintain. As such it is best to turn your mind to the ownership of these items so you know exactly what it is you are purchasing.
In addition to the question of equipment ownership, you should also consider who is responsible for maintenance of these items and how often. These details are commonly dealt with by the lease. Whichever party is responsible for the maintenance, it is prudent to ensure it is carried out regularly and by qualified professionals.
Obtaining finance to purchase a service station can often take significantly longer than other types of commercial property or businesses.
Financiers will often take an active role in carrying out their own due diligence before approving a finance application for this type of purchase. This often includes considerations relating to the business financials, environmental contamination and the terms of the lease.
As such, when making an offer it is important to keep in mind that an extended finance period may be required. You should speak with your financier about timeframes before entering into a contract that is subject to finance.
5. In-ground Fuel
If you are purchasing the business, do you know whether the in-ground fuel is included in the purchase price? Is the business sold on a ‘walk in, walk out’ basis or is it subject to a stocktake and if so, when will this occur?
When a stocktake is required for the sale of a service station, the estimated stock-in-trade amount can be split into ‘Wet’ stock (meaning fuel and other petroleum products) and ‘Dry’ stock (meaning the stock held in the shop itself).
6. Fuel Supply Arrangement
If you are buying the business, who will you be buying your fuel from? For example:
Will you be entering into a Franchise or Fuel Supply Agreement with, for example BP or Caltex? If so, will this come with branding obligations?; or
Will you be signing up with an intermediary or on-seller and operating as an independently branded service station?
In either case, you should enquire if there is an approval process that you will need to go through with your fuel supplier and whether you need to undertake training with them.
7. Expiry Dates of Lease and Fuel Supply Terms
If you are entering into a lease and a fuel supply term, do the expiry dates match up? You should avoid wherever possible one of these agreements expiring without the other.
8. Prospective Developments in the Surrounding Area
One of the items more commonly missed when purchasing commercial property are the development interests of other parties in relation to areas surrounding the property itself. Of particular interest will be the Department of Transport and Main Roads plans for future development in the area.
For example, if you are purchasing a service station located on a busy road with lots of traffic, is there a plan for the State or Local Government to build say, a bypass road which, while not directly affecting your land, might heavily reduce the flow of traffic past your site?
While this particular consideration may be of more importance to a purchaser of land, buyers of the business might also wish to look into these circumstances, particularly if taking a long term lease.
9. Proximity to Residential Areas
When a service station is located near or in a residential area, you should bear in mind that there is the potential for disputes to arise between you and your neighbours over noise, odours and other types of nuisance claims.
10. Key Staff
When you are purchasing the business (or the land and business), it is important to determine whether the seller has been operating the business themselves, or whether there are key staff members attached to the business whom you might wish to offer employment. This will be particularly important if, as the new owner of the business, you do not wish to manage it yourself.