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JUNE 2012 issue of
Rental Management

Risk Management: Analyzing your rental contract
Risk Management: Analyzing your rental contract
06/05/2012

Editor’s note: James R. Waite, Esq., is the author of Business Management: Contracts and Legal Guidelines and a managing partner of Winters & Waite, LLC. Since 1992, his law practice has focused primarily on equipment rental and leasing, and he currently represents dozens of rental companies throughout the U.S. He recently launched a website, equipmentrentalcontracts.com, offering contract analysis services and rental-specific contract forms. He recently discussed his work with ARA Insurance. An edited version of that conversation follows.

RM: What are the most important issues addressed by a rental contract?

James Waite: From the standpoint of a rental operator, identifying the equipment, specifying that the transaction is a rental (as opposed to a sale) and identifying the terms of the rental — e.g., rate, deposit, rental period, authorized user and location of equipment — are foundational issues. After laying the foundation of the transaction, protecting the rental company from liability and its assets from damage probably become the two most important issues for most rental operators.

RM: Why is it important for the contract to specify that it is a rental transaction?

Waite: It is often surprisingly difficult to tell by reading a contract’s “Terms and Conditions” whether the transaction is a sale or a rental. Probably the most important issue is making sure the rental operator is able to regain possession of rented equipment in the event the customer defaults. For example, under the U.S. Bankruptcy Code, if a lessee declares bankruptcy and is deemed to have an ownership interest in a piece of rented equipment (perhaps by way of a purchase option or a lease term that extends beyond 75 percent of the useful life of the leased asset), the rental store may find itself unable to immediately retrieve rented equipment because the renter’s interest must be dealt with as part of the bankruptcy estate’s assets.

RM: Besides the rental rate, what are some other payment obligations to include in a rental contract?

Waite: Opinions and local customs differ substantially throughout the country on this issue. Items I’ve grown accustomed to seeing charges for include:

  • Delivery and installation, including added amounts for remote or difficult to reach areas.
  • Teardown/retrieval.
  • Refilling holes or trenches.
  • Obtaining licenses and permits.
  • Overtime and “after-hours” deliveries and installations.
  • Excess usage (e.g., “double-shifting”).
  • Fuel surcharges for equipment returned with less than full fuel tanks.
  • Cleaning charges.
  • Equipment damage protection fees, though rarely more than 12 percent of the rental.
  • Sales and use taxes, which are becoming a very important issue for cross-border rentals, particularly because states have begun more aggressively pursuing additional revenues.
  • Fines, tolls, traffic tickets and similar charges.
  • Import/export/customs duties.
  • Late fees on past-due amounts.
  • Late return charges. Some prorate and others charge for an additional full rental period.
  • Interest on past due amounts, being careful not to exceed statutory “usury” limitations.
  • Attorneys’/collection fees.
  • Not sufficient funds (NSF)/declined credit card charges.

RM: The rental contract is often called a rental company’s first line of defense. Can you explain that?

Waite: Aside from maintaining high-quality fleets, comprehensive safety policies and good customer relationships, rental operators have three primary means of protecting themselves legally from large claims and lawsuits:

1. Use a solid rental contract that offers protection for your equipment and helps limit or eliminate liability claims.

2. Buy insurance to cover specific types of losses and liability claims that cannot be eliminated by your rental contract.

3. Incorporate/organize an LLC (limited liability company) to create a “corporate veil” for avoiding personal liability with respect to any claims that make it past both your rental contract and your insurance policy(ies).

I’ve seen inclusion of the right contract provisions save clients hundreds of thousands of dollars and I’ve seen failing to include them cost even more.

RM: What are some of the factors to consider when including equipment damage provisions in a rental contract?

Waite: Equipment damage provisions increase the customer’s duty of care with respect to rented equipment from the “ordinary care” standard implied under the common (case) law, to something approaching full responsibility for damage or destruction during the rental term. In addition to the physical damage to the assets themselves, these provisions can require the customer to compensate the rental operator for other costs associated with repair and replacement, such as shipping, handling and storage, as well as losses in revenue because the equipment is not available to rent.

Maura Paternoster is risk manager for ARA Insurance in Kansas City, Mo. For more information, call 800-821-6580 or visit ARAinsure.com.

 

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