When Mercedes-Benz scuttled Jona-than Sobel's $30 million deal to buy a New Jersey dealership last year by exercising its right of first refusal, Sobel sued. And he got a lot more cautious about where he'd buy more dealerships to add to his stores in New York.
Sobel declined to discuss specifics of his lawsuit. But in general "right of first refusal has a chilling effect on the buy-sell market," he told Automotive News. "Why would I spend the time and the effort to structure a complex transaction only to find out a manufacturer is going to use their right of first refusal to cherry pick my best deals?"
Sobel is one of many dealers caught up in the increasing use of right of first refusal by manufacturers in buy-sell transactions. Franchise agreements have long given most automakers the right to refuse the original buyer on a dealership transaction and assign the sale, with no changes to the terms, to a dealer of its choosing.
In the past couple of years, automakers are exercising that right at an unprecedented level, say dealers, buy-sell advisers and dealer lawyers.
Automakers say they're doing so for good reasons: to support their minority dealer development programs, make sure franchises go to high-performing dealers with strong customer-satisfaction track records and preserve the long-term value of the brand for the sake of both the automaker and its entire dealer network.
But others say it's happening for what appear to be inexplicable reasons, shutting the door on buyers who are considered high-quality candidates.
For dealers, automakers' invoking that option can delay transaction closings and cost would-be buyers time and money that can't be fully reimbursed. The increased use ultimately will hurt dealership valuations and reduce competition for selling dealerships, some dealers and buy-sell advisers warn.
Audi, Mercedes, General Motors, Nissan and Jaguar Land Rover have all exercised right of first refusal in a number of recent transactions.
Some of those cases have triggered recent lawsuits. In suits earlier this decade, in Virginia regarding Ford Motor Co. and in Georgia regarding Mercedes, courts sided with the manufacturers.
In two more current cases, Sobel sued Mercedes-Benz USA in August 2013, saying the manufacturer missed its deadline to exercise the option. Another dealer, Ed Napleton, who runs a 24-store group based in Illinois, sued Jaguar Land Rover this year, saying the manufacturer improperly used the option when Napleton tried to buy the five-store Long Island Automotive Group. Miami lawyer Manuel Kadre was the assigned buyer in both the Mercedes deal and the Long Island Automotive deal.
"For decades, it was extremely rare that buyers and sellers needed to worry about the right of first refusal," said New York dealer lawyer Leonard Bellavia, who represents both Sobel and Napleton. But now it's a problem, Bellavia and others say.
In the Sobel case, the sale of the dealership in question, Globe Motor in Fairfield, N.J., has been in limbo for more than a year with the owner, also named in the lawsuit, unable to complete the sale. A settlement is in the works.
Sobel, a former Goldman Sachs partner who bought the first of his four dealerships in 2010, is still looking for acquisitions -- outside New Jersey. He is searching in Florida and North Carolina, where right of first refusal is prohibited. He said he is also being careful about which franchises he considers.