Negotiating Rental Contract Provisions

Question:   I have some very large customers who either delete large sections of my rental contract or insist on using their own.  What’s the risk, and how should I respond?

James Waite’s Answer:

In recent years, an increasing number of lessees, particularly large contractors, event operators and governmental institutions, have begun insisting on making modifications to the rental contracts most other customers sign without much more than a cursory review.  Some customers even insist on using their own contracts instead (or perhaps adding their own “Addendum” to the contract.  This comes as no surprise in the current litigation environment, but rental operators often find it difficult to know whether or what to agree on when a customer makes significant changes.

Most rental operators are rightfully reluctant to turn away business, but that doesn’t necessarily mean they’re stuck with agreeing to all of the customer’s changes, some of which may dramatically increase both the cost and the risk for the rental operator.

So, what’s to be done?  The answer depends on a number of factors, including: 

  1. Economics:  The size and potential value of the proposed rental; 
  2. Cost/Risk Analysis:  The extent of the proposed contract modifications and the additional cost/risk they create for the rental operator; 
  3. Alternatives:  The potential for alternate, and less risky/costly rentals to other customers during the same time period; 
  4. Relationship:  The value of the customer relationship;
  5. Flexibility:  The customer’s willingness to negotiate the requested changes (some are flexible; others may be more rigid; while others may become upset at the first indication of disagreement); 
  6. Potential “Trades”:  The availability of compensating “trades” such as a deposit or letter or credit requirement, or perhaps the provision of additional security, monitoring, inspections, maintenance and/or insurance, in exchange for modification of the rental customer’s rights and/or obligations under the rental contract; and 
  7. Other Factors:  Other factors, such as reputational value (a large project may generate significant publicity for the rental operator, while a difficult or unsuccessful negotiation may impact the rental operator’s reputation for “customer-friendliness”).  

Effectively balancing these issues requires careful consideration of the rental operator’s objectives, and critically, an understanding of which changes create the greatest (or the fewest) number of potential hazards for the rental operator.  In some cases, the rental operator may simply have no choice but to either agree to the customer’s modifications or walk away from a potential rental, but in my experience, that is rarely the case.  In fact, most customers who seek to negotiate their rental contracts realize their initial “shot across the bow” is overreaching to some extent, and in fact, expect the rental operator to refuse at least some of their proposed changes (“It was worth a shot” having been heard many times in my office over the years).

For larger and more profitable rentals, such exchanges virtually always warrant review by an attorney experienced in equipment rentals.  Nowadays, equipment is too valuable, and the potential lawsuit risk is too great, to risk doing without it. In other cases (i.e., with respect smaller and/or shorter rentals), however, spending the money to have an attorney review a customer’s contract modifications may simply not be justified by the potential income. For those transactions, rather than simply taking your chances, I’ve created a list of the top 10 changes rental operators should, in my opinion, simply never agree to (there are more, but time and space constraints require us to limit them to 10).  Here they are:

  1. Do Not Delete:  Warranty Waivers:  Warranties (express and implied promises regarding the utility and condition of rented equipment) can cover almost any use to which the customer intends to put your equipment.  Even if the customer misuses or abuses it, he/she may be able to recover damages from the rental company based simply on a claimed breach of an implied warranty of fitness, merchantability and/or suitability.  Consequently, rental operators should insist on including a waiver of express and implied warranties.
  1. Do Not Delete: Acknowledgment of Examination and Selection:  Including an acknowledgement that the customer has examined rented equipment and found it acceptable can also be extremely helpful to both rental operators and their insurers because it eliminates implied warranties with regard to defects “that an examination ought in the circumstances to have revealed.”  Including an acknowledgment that the customer selected the equipment based on his/her independent judgment (and not on the recommendation of the rental operator) can be extremely helpful in avoiding claims based on breach of the implied warranty of “suitability” (that, by recommending a given piece of equipment, the rental operator “warranted” that such equipment would be suitable for a particular job described by the customer).  The “selection” provision is sometimes deleted where the rental operator actually does make such a recommendation, but deletion is generally discouraged, and should never be agreed to where the rental operator has not provided a recommendation.
  1. Do Not Delete:  Safety Instruction Acknowledgment:  A rental operator usually cannot be held liable for a customer’s misuse of rented equipment if that misuse was the cause of the customer’s injury; provided that, the rental operator made available to the customer adequate instructions.  Therefore, obtaining the customer’s acknowledgment that he/she received adequate oral or written instructions regarding safe use of the equipment and was advised to review any and all written operating instructions and safety materials carefully can be invaluable.
  1. Do Not Delete:  Waivers of Incidental and Consequential Damages:  Some liabilities can extend well beyond what most would expect an ordinary contract breach (such as a rental company’s failure to provide equipment as promised) to create. “Incidental and consequential damages” can extend the rental company’s liability to include not only the customer’s cost to obtain replacement equipment, but also the customer’s associated financial losses.  For example, if the customer loses a construction job or is forced to pay a penalty because he/she was unable to obtain equipment promised by a rental operator, the customer may sue the rental operator for lost profits and/or reimbursement of the penalty.  Rental operators should, therefore, insist on including a waiver of incidental and consequential damages, as they create significant and unpredictable risk.
  1. Do Not Delete:  Proper Use Requirement:  As most rental operators know, there may be hundreds of potential uses, both proper and improper, for a piece of equipment, and some customers seem determined to discover them all.  Rental operators, therefore, need to place reasonable limits not only on the types of such possible uses (and prohibit use for any illegal purpose), but also where, when and by whom the equipment may be used. Doing so will help the rental operator recover for any damage to or destruction of the equipment.  Further, including a prohibition on use for any illegal purpose, the rental operator may make recovering equipment that has been seized by the police, DEA, or other law enforcement agencies (e.g., trailers used to transport drugs or other contraband) faster and easier.  Most importantly, a “Proper Use” clause can help rental operators limit “Products Liability” claims by placing responsibility on the customer for using rented equipment properly. Customer misuse will, in many cases, void a Products Liability claim (subject to some limitations).
  1. Do Not Delete:  Assignment and Subletting Restriction:  If subleasing and assignment are not prohibited in the rental contract, the law generally permits a customer to assign (transfer) a rental contract, or sublease rented equipment, to a third party, which can create a number of problems: Who is the recipient/sublessee? Does he/she have the necessary training, skills and/or funds to properly use and/or pay for the equipment? An assignment or sublease can cause the equipment to land in the hands of an unqualified operator or worse, a recipient who intends to steal it or use it for a dangerous or illegal purpose.  
  1. Do Not Add:   Waivers of Lien Rights:   For example:  The rental operator hereby waives any and all liens and claims on or against any property of the customer arising in connection with the rental.” Many states have now enacted “mechanic’s lien” laws that permit unpaid lessors to file liens on non-public real estate (real estate not owned by the government) improved or modified with rented equipment.  Such liens can be powerful enforcement tools, and should never be waived (a right to foreclose on and seize property is much more potent than an “unsecured” legal claim).  Mechanics’ liens are generally “implied” under the laws of the states that permit them.  This means that deleting a lien grant contained in a rental contract usually won’t effectively relinquish your lien rights (though because these laws vary substantially from state to state, they should be thoroughly reviewed in each case), but if the customer’s proposed modification includes an express waiver of lien rights, the rental operator should delete it if the customer’s project is in a state that honors such liens when taken by equipment lessors.
  1. Do Not Add:  Waivers or Modifications of Repossession Rights:  For example:  The rental operator expressly waives its right to repossess the equipment” or “Lessor agrees to give Lessee not less than three (3) days’ prior written notice before enforcing any rights or remedies (including repossession rights) arising from or in connection with Lessee’s default.”  For the unfortunate rental operator who agrees to either of these modifications, he/she will likely have difficulty recovering rented equipment after the Lessee’s default, and may have to resort to filing a lawsuit. This, of course, can be time consuming and expensive, and it may be anyone’s guess as to where the equipment will be, or what shape it will be in (or how much rental income will be lost), by the time the equipment is recovered.
  1. Do Not Add:  Limitations on the Rental Operator’s Claims:  For example: “All claims for damage to or destruction of equipment must be submitted to the lessee in writing within 48 hours of the date the equipment is returned, and shall be subject to review and approval by the lessee, whose determination shall be final and binding on all parties.”  Note the language “subject to review and approval by the lessee.”  This means that, if the lessee does not “approve” the claim, it is, by definition, “disapproved” (and therefore, not valid).  The above language would also automatically void any claims not submitted to the lessee in writing within 48 hours of the return of the equipment.  As most rental operators realize, there is no objective rationale for forcing an equipment owner to “rush” through a return inspection, and doing so may result in overlooking substantial non-apparent damage (e.g., a bent frame or axle).   
  1. Do Not Add:  Provisions That Shift Repair Obligations to the Rental Company:  For example: “’Major Repairs’ are for the account of Lessor. For these purposes, Major Repairs are defined as those involving any equipment damage or failure, the repair cost of which exceeds $500.” This clause shifts to the rental operator financial responsibility for the most expensive types of equipment repairs (those costing more than $500), even if the customer damages or destroys the equipment, perhaps even through its own negligence.  This type of provision is plainly unfair, but absent some legal justification for refusing to enforce it (for example, “unconscionability” or the parties’ “mutual misunderstanding” of its effect, both of which would be legal “long-shots”), a court would, in all probability, enforce it (“freedom of contract” being more or less sacrosanct in the legal field, at least as between two businesses).

Bonus:  NEVER Agree to Replace Your Rental Contract With Your Customer’s Contract.  In some cases, customers present their own “standard contracts” for use in place of the rental company’s.  This may be the riskiest (for the rental company) of all modification efforts.  The customer’s “standard language” is typically heavily slanted in favor of the customer (meaning very rental company-unfavorable), and anything but “standard.”   Note:  The origin of the term “standard contract” is unclear, but it may have been coined in the office of an attorney for a large rental customer. Rental operators should be exceedingly careful with these substitute contracts, as they can and often do, include language that strips the rental company of many important rights (See 1-10 above), and burdens the rental company with many obligations that should arguably be the customer’s.

Conclusion:

Customers are becoming more sophisticated. Rental operators now sometimes find themselves at a disadvantage, particularly when negotiating with large customers (many of whom have lawyers on staff, or at least on retainer).  Nonetheless, the basics remain the same.  Contract modifications made by customers virtually always increase cost and/or risk for the rental operator.  Fortunately, rental operators don’t simply have to “roll over” and agree to whatever the customer demands.  In fact, customers (and their attorneys) often expect more seasoned rental operators to refuse, or at least revise, some proposed customer modifications.  Knowing how to respond in a manner that both: (a) retains the most important protections for the rental operator; and (b) does so “reasonably” (at least enough to avoid prompting the customer to turn to a competitor) can be a delicate balancing act.  But with some practice, most rental operators will find they can achieve their business goals without exposing themselves to potentially catastrophic losses.  Feel free to contact us if we can help.

About the Author:

James R. Waite, Esq. is a business lawyer with over 20 years in the equipment rental industry. He authored the American Rental Association’s book on rental contracts, and represents equipment lessors throughout North America on a wide range of issues, including corporate law, employment issues, negotiating and drafting rental contracts, purchase options and other rental-related agreements (including Damage Waivers), as well as buying, selling and financing rental companies and their equipment.  He is a veteran of the United States Air Force, has a BBA in Finance from the University of Texas at San Antonio, a Juris Doctor from St. Mary’s University, and an MBA from the Kellogg School of Management at Northwestern University.  He can be reached at (866) 582-2586, or via email at j.waite@wwlegal.net.