Dealing with predatory contracts; The devil writes the details
QUESTION: I signed a lease a couple of years ago in order to finance some equipment. It had a $1 buyout clause, but it also said — in very fine print — that I had to give the equipment lessor advance written notice of my exercise of the buyout or it would “renew for a like period.” Of course, I forgot to send the notice, thinking I’d just send in the last $1 and become the owner of the equipment. Now the lessor is telling me I owe them another $72,000 — on equipment that originally cost $60,000 and on which I’ve been paying for two years. This is crazy. How do I get out of this?
Answer: It is crazy, but things like this are happening all over the equipment and event rental industry. Crazier still is the fact that, depending on where your business is located, you may, in fact, not be able to get out of it. Though most lenders and service providers feel compelled to act at least somewhat reasonably, I’ve been receiving an increasing number of calls from clients who have signed contracts that, in truth, weren’t meant to be read or, for that matter, understood by anyone other than a lawyer. These contracts are, to put it mildly, often predatory. They are written by people seeking to take advantage of the fact that you don’t have the time or the legal resources to avoid them. Once you’re in, you won’t get out without a very expensive fight.
How can this be? Broadly speaking, with respect to transactions, the law still tends to lump consumers into one category and businesses, both large and small, into another. This leaves small and mid-sized companies at a huge disadvantage relative to their larger competitors, many of whom have teams of contract negotiators and lawyers working to ensure this type of thing doesn’t happen.
Surprisingly, consumer protection laws often add to the confusion. As most people realize, federal and state statute books already are overflowing with laws that protect consumers with respect to virtually everything they buy or rent, as well as the amounts and terms upon which they can borrow in order to do so. These well-meaning laws, however, rarely apply to businesses, a fact that tends to numb many proprietors into a sense of dangerous complacency.
Do not assume you are protected. In most cases, you will not be, meaning that the contracts you sign in your capacity as a business owner will most likely be strictly enforced against you.
If you’re not a part of the elite group of mega-rental operators who have thousands of dollars to pay lawyers to negotiate each of their contracts, here’s what you can do.
Start with the basics. The first order of business is to investigate the vendor. Checking the Better Business Bureau’s record of complaints can be an easy way to learn about how a vendor treats its customers. A single complaint may simply be the inevitable grumbling of the lone disgruntled customer who will never be happy, but a long record of complaints, especially if they’re similar, should be a red flag. It also can pay to contact others in your industry and/or your attorney. For example, I keep lists of “Do Not Deal With” parties — those I tell my clients to steer clear of — and on the other hand, reliable referral sources. If you want to know or share some information about a vendor, call us.
Read carefully. Read each contract you sign carefully. Whether or not intentionally, contracts often are written in a way that makes them appear benign and actually discourages customers to look beyond their “basic terms.” If, for example, you see a contract with a block of information at the top — such as name, address, phone number, email, item description and more — printed in large font and then a lengthy section of “legalese” printed in a much smaller font, read carefully. We see this tactic used often, particularly in contracts for uniforms, cleaning services, credit card machines, payroll services, phone system leases and equipment financing.
We never change our contract. If you want to negotiate your contract, do so before you sign it. Be prepared for the vendor to tell you, “We never change our terms and conditions.” I’ve heard this time and again from brokers, salespeople, loan officers, installers and even bank vice presidents. I have yet to encounter a situation in which this actually has been the case — though I’ve never bought a car based on “no-haggle” pricing either.
What should be changed. It depends on the contract, but easy issues to look for and review carefully include:
Economic terms. Check the economic terms of your contract. If they don’t reflect what your salesperson told you, refuse to sign it until it is changed, or you have a satisfactory and extremely clear explanation as to why they don’t.
Implied interest rates. Do the math. In some cases, the implied interest rate on a purchase may far exceed what you’d pay on an ordinary credit card. Bear in mind that consumer protection laws applicable to interest rates may not apply.
Automatic renewals. Be on the lookout for provisions that automatically renew your contract at the end of the stated term unless you notify the provider in writing of your election to terminate or exercise a buyout option. In more obvious cases of predation, these also will include terms that make it artificially difficult to do so, including requirements that you deliver such notice via certified or registered mail. If such a requirement is included, the provider will likely not be satisfied with an emailed or faxed notice. If you fail to deliver exactly the notice required in exactly the manner specified — and sometimes even if you do — you may find yourself stuck in a very bad contract.
Market rate renewals. In some cases, particularly with respect to real estate leases, renewals can be valuable — you may want them included — but usually only if they include a stated rental rate. A “market value” option — the right to renew at the then-current market rental rate — isn’t going to help you if you’re hoping to pay the same rent you’ve paid in the past.
Unspecified fees. Many predatory contracts include the right to charge fees for renewals, buyouts, assignments, appraisals and more. These are sometimes specified ; sometimes not. It can be a costly mistake to fail to insist on specified amounts and/or deletion of these charges.
Dollar buyouts. A dollar-buyout lease can be a good thing if properly dealt with, but in many cases, predatory lessors use them as “bait” in order to obtain extortionate long-term rentals from unsuspecting customers. Also, consider the fact that the 2018 revisions to the Tax Code limit the interest you can deduct to 30 percent of your taxable earnings (Internal Revenue Code Section 163(j)). So, you might be better off entering into a true rental, rather than a dollar-buyout lease.
Lump-sum buyouts. These can be useful as options, particularly if you enter into a true rental arrangement, but again, be sure to do the math before signing. Your effective interest rate could be higher than you realize.
Waivers. Waivers of warranties and claims often are part of equipment leases. They’re appropriate when a third-party financing source is acting as the lessor, but not when the lessor is the manufacturer or arguably, an affiliate of the manufacturer.
Indemnity provisions. Indemnity provisions — those that call for the customer (you) to indemnify, that is pay, the vendor for claims arising in connection with the agreement and/or the equipment itself also are commonly included. Be careful; they often require indemnification for far more than what most people would consider reasonable. Limiting or deleting them often is necessary in order to adequately protect the customer. One way to test this is to make it reciprocal. A vendor who won’t agree to what he/she is asking you to agree to might be one to avoid.
Parts and service costs. Parts and service charges can add enormously to the cost of leasing and/or buying equipment. Review the agreement carefully for coverage of issues like parts and service availability, timing and pricing as well as warranty terms and conditions.
Claim limitations. Limitations on the claims you can make under a contract often are required in true third-party finance leases, but they’re rarely appropriate in other contexts, for example, for uniform contracts. Delete them.
“Hell or high water” provisions. Provisions that require you to pay “come hell or high water” — such as whether or not you receive the goods and/or services ordered, whether it/they is/are complete, serviceable, proper, lawful, defective, etc. — are generally appropriate only in the context of third-party finance leases. They usually are not appropriate in other contexts, though we often see them in other types of contracts.
Read the last copy. We’ve heard of instances where salespeople have switched the negotiated contract for another, similar-looking, but legally very different contract at the last minute and actually presented it for signature. More than once, we’ve heard the customer didn’t read the last version and signed the contract — and was ultimately bound to it.
Take your time. A provider who gets impatient or angry if you review the contract is one who should be asked to leave and added to your “Do Not Deal With” list.
Litigate. Litigation may prove to be your only answer if you’ve signed a predatory contract. It is, however, rarely a quick or inexpensive option. That said, it can be worthwhile if you’re in a jurisdiction where judges and juries emphasize fairness over contract boilerplate. Remember that judges and juries can interpret the facts and the law in vastly different ways. In certain cases, even with respect to business-to-business transactions, they will throw out all or a portion of an unconscionable contract, but that is very rare. Ask your attorney if litigation is realistic before pursuing this option.
Your contracts are effectively the rules of your business relationships. They usually determine whether you’ll win or lose a dispute before it arises. Never take them lightly. If you hate paying lawyers, you’re not alone. Do yourself a favor and pay them as little as possible — which means paying one to review all of your contracts before you sign them. If you wait until afterward, I assure you, you will pay more.