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504 Q&A - Deed Restrictions

Oct 2007

Q - How does the Small Business Administration (SBA) view deed restrictions such as those that are common in the purchase of gasoline stations?

A - Under special circumstances where the seller or the former owner of the property will only sell with a deed restriction (e.g., requiring the buyer to purchase only from a specific supplier) such restrictions may be unacceptable to the SBA.

Issue: Deed restrictions in question are typically seen as part of a buy/sell agreement between an oil company and a purchaser of one of its gasoline stations. The SBA determines the deed restrictions to be unacceptable because they severely compromise the marketability of the business real estate collateral that would be securing a SBA-guaranteed loan.

SBA Public Notice:

In March 2006, the SBA provided procedural notice 9000-987 that specifically prohibited gasoline station with such restrictions. In the notice, the SBA stated:

“The Office of Financial Assistance [SBA Washington] recently advised the Sacramento Processing Center that it is not to approve any 504 loan for the purpose of purchasing a gasoline station where the deed includes a provision restricting the brand of service station that may be operated on the premises.”

According to the SBA, the purpose of the notice was to inform certified development companies that 504 loan requests to purchase gasoline stations with similar deed restrictions (or language that has the same effect), whether the restrictions are required as part of the purchase and sale agreement or already contained in covenants running with the land, are not acceptable to SBA.

Sample Language Deemed Ineligible:

The deed restriction language generally appears titled as “Use or Operation Restrictions” or “Petroleum Restrictions” in a special warranty deed or other document recorded as part of a purchase and sale transaction. An example reads as follows:

“No part of the Property shall be used by Grantee or any other Grantee Party, directly or indirectly, for an automobile service station, petroleum station, gasoline station or for the purpose of conducting or carrying on the business of selling, offering for sale, storage, handling, distributing or dealing in petroleum, gasoline, motor vehicle fuel, diesel fuel, kerosene, benzol, naphtha, greases, lubricating oils, or any fuel used for internal combustion engines, or lubricants in any form, or other petroleum or petroleum-related products, except for the personal use or consumption of such products by Grantee or its lessees of the Property, unless any such use is in connection with the operation of the Property as a Grantor branded service station. For purposes hereof, “Grantor branded service station” shall mean a service station under the brand [franchisor name] or any other brand of Grantor or any of its affiliates or their respective successors and assigns.

The above covenants and use restrictions bind and restrict the Property as covenants and restrictions running with the land and each portion thereof, and are deemed to benefit Grantor as a user of, operator of, or supplier of Grantor branded fuels to lands or retail operations in the jurisdiction in which the Property is located. These restrictive covenants will remain in full force and effect for a term of fifteen (15) years from the date of this conveyance whereupon these restrictive covenants will automatically lapse and terminate and be of no further force or effect.”

Q - How do I determine if there are unacceptable restrictions?

A - FFCFC will need to obtain a copy of the purchase and sales agreement and will also pull a copy of the warranty deed on the property. The purchase and sales agreement and warranty deed will be forwarded to appropriate legal counsel to review and confirm whether a deed restriction is in place on the property.

Note: If the purchase and sales agreement or deed shows unacceptable restrictions, the restrictions must be removed.

If you have a question you'd like the FFCFC 504 experts to answer, email it to insider@ffcfc.com.