Maria Di Gregorio, from Iron Cove Law, has a unique perspective on owning and running a service station. She is a practising lawyer and the owner of multiple service stations. In this interview with Maria Di Gregorio, we discuss the areas service station owners should be aware of, from a legal standpoint, as well as some risks that are not always known.
Maria, can you tell us a bit about yourself? A service station owner and a practising lawyer is an interesting combination. How did this come to be?
I am first generation Australian. I grew up in a delicatessen. My parents worked hard in their deli business but always channeled the profits into property. I always wanted to be a lawyer but I had a competing passion for property. A few years ago, I was fortunate enough to be working as a lawyer in the petroleum space. We acted for freehold and business owners alike. It didn’t take long for me to want to be part of the deals that were transacting across my desk. Service stations, in the right location and with proven tenants, provide a solid return and generally, with long leases, are a secure investment. I bought my first service station in 2015.
As a lawyer and a service station owner, what types of issues have arisen that your average business owner might not be aware of?
It isn’t easy to get funding for purchase of a freehold or business. Service stations are considered a specialised security and banks regularly change their policies regarding specialised securities. For example, you can borrow up to 80% of the purchase price for an office or industrial unit but only 40% to 50% for a servo.
Insurance is very important. You cannot base the best policy option on price alone. It’s important to take time to sit with your insurer, review your operations and ensure that you make all the relevant disclosures to the insurer before you take out your policy. Most people don’t know that insurers do not do any due diligence on a policy or disclosures until its time to claim. An insurer investigates disclosures only when it is called on to payout. So, for the humble service station owner/operator who doesn’t think it’s important to disclose that their site has deep fryers, for example, if a fire caused by the deep fryers occurs, the insurer could refuse the claim.
Another important issue around insurance in leasehold sites is understanding whose responsibility it is to insure what. Where does the land owner’s policy end and where does the tenant’s begin? This is determined by the clauses of the lease. If your insurer doesn’t ask you for a copy of your lease, your insurer may not have experience in the service station industry. You should consider working with an insurer who can advise you on your insurance needs once they have read your lease, whether you are a land owner or tenant.
What risks should service station owners be aware of from a legal standpoint?
The biggest risk is what lies beneath. Think of a service station like the tip of the iceberg. The greatest unknown lies beneath and there is no way of accurately quantifying the damage or remediation cost of contamination owing to leaking tanks or pipes. Yes, environmental reports can assist but you really have no idea of the gravity of an environmental disaster until you start the remediation.
Be clear on the responsibilities between the owner and the tenant, especially in the event of contamination and remediation being required. Insist on a baseline report before entering a lease, whether you are a land owner or a tenant.
Service station owners frequently enter into agreements such as leases, subleases and supply agreements with fuel wholesalers. What advice can you give with regards to these agreements and contracts?
Get advice, get it early and invest in relevant advice from a lawyer with experience in service station transactions. Never assume you understand leases, supply agreements or commission agency agreements as the smallest of clauses, and sometimes the use of just one word, can affect the application of the agreements to you. There is nothing standard in the petroleum industry and every agreement you sign requires due diligence and advice from your lawyer.
Also beware of interstate agreements – the rules in NSW and Victoria regarding leases are different, as is the conveyance process. Legal fees make up such a small percentage of the transaction costs but can save you hundreds of thousands of dollars if anything goes wrong in the future.
Is there any other advice you would like to give to service station owners in relation to the legal aspects of their business?
It’s important to understand your obligations regarding law and your responsibilities to the parties you have entered agreements with. Some of the most common areas where we see problems are:
- Contamination and remediation: So many leases for service stations do not adequately deal with this issue which is so critical to the service station industry. There is no industry standard so operators should not assume they are not responsible for contamination caused during their lease term but be proactive to avoid it in particular, if the site was leased without a baseline environmental report.
- Be proactive about what lies beneath: There are many regional and even metropolitan sites where the health of the tanks and underground fuel infrastructure is neglected. The health of the underground assets is of critical importance to operators running successful businesses. The EPA has done a great job overhauling the industry, in particular with the vapour recovery requirements and more operators are now monitoring fuel according to the regulations. If you operate a business, take monitoring seriously and if you own the freehold, pay attention to the numbers. If necessary, carry out a tank and line test or an environmental assessment of your site because prevention is less costly than crisis management.
- Supply and branding: Buying foreign fuel can be a breach of your supply agreement and in some cases immediate breach of your agreement with the oil companies. Operators should take supply and branding agreements seriously, in particular if they operate multiple sites. The oil companies have never been forgiving on this issue.
- Lease option renewals: There are many operators out there with expired leases where they believe that an option on their lease is enough to enforce the lease whereas an option must be exercised to have effect. Most leases have a window of time within which to exercise an option and must be done to secure the additional term at the site
- Pay attention to the industry and your backyard: There is a shift towards developing new sites as opposed to refurbishing old sites. This is interesting given all the media coverage on the advent of the electric car. The industry is changing and operators should get involved in the changes in the industry. Operators of regional sites should also pay attention to any road and highway changes that can result in their sites being bypassed. In Victoria, we know of at least one highway that will critically affect five service stations in the surrounding area.