Most dealership and franchise agreements require the franchisor's prior written consent to the transfer of a business from one franchisee to another. The new franchisee is often required to sign the franchisor's then-current agreement as a condition to getting the franchisor's consent to the transfer.

Can a franchisor unreasonably withhold consent, or can an incoming franchisee or dealer be coerced to sign up with a franchisor? A California appellate court has said no and upheld a lower court's ruling that a petroleum products distributor and franchisor of "76" brand gas stations unreasonably tried to coerce a purchaser to sign a new franchise agreement. The franchisor was found to have breached the seller's franchise agreement, which excused further performance by the seller and purchaser.

The seller asked several times for the franchisor's consent and for the original branded reseller agreement. But the franchisor never obliged or responded to the purchaser's transfer application, short of telling the seller they were "working on it."

After nearly a month with no response, escrow closed without an assignment of the original reseller agreement. The seller continued to buy gasoline for the purchaser, who paid the seller for the gasoline shipments until the franchisor stopped delivering gasoline.

The franchisor then told the parties it was considering other potential purchasers and never took the purchaser's application seriously. The franchisor refused to make further gasoline deliveries to the station unless the purchaser signed a 64-page franchise agreement on the spot. The franchisor refused the purchaser's request for time to review the agreement, and rejected its offer to pay in advance for gasoline deliveries made before finalizing the agreement. The franchisor threatened to sue the purchaser and put it out of business unless it signed "then and there."

The trial court came down hard on the franchisor, finding the franchisor was unreasonable in failing to respond to the seller's request to assign the original agreement and in its actions and threat toward the purchaser. The appellate court agreed, affirming that the franchisor breached the original reseller agreement because it gave no notice to the seller or purchaser before placing a hold on the purchaser's gasoline orders. The purchaser also received an attorneys' fees award based on the agreement, even though it never entered into any contract with the franchisor.

While franchisors often reserve the right to impose conditions on assignment of a franchise, a franchisor cannot unreasonably withhold consent to impede a transfer.

See: Westco Petroleum Distributors v. Huntington Beach Industrial