I spend a lot of my practice helping companies review their lease agreements and update their procedures in order to stay compliant with the applicable statutes and case law. This process is not foolproof, and no lease agreement ever written can stop you from being targeted by disgruntled customers or plaintiff lawyers who sniff a pile of cash. But there are some things you can do on your own to help insulate yourself from liability.
About this time last year, I wrote an article for Shed Business Journal, which talked about all the pitfalls of our rent-to-own contracts and the importance of a routine review of your agreements. However, I realize that the article was more of an overview and did not really provide any specific information on things you can do to help prevent these issues.
When I talked to Marty Boltres and Matt Poe during Shed Week in Knoxville and pitched the idea of a regular legal column, we discussed how we could use this column to provide value to the readers. So that’s what I’m hoping to bring to this space now and in the months to come.
With that in mind, I would first like to invite you to submit questions which I will attempt to answer in upcoming issues. In my practice, there are times when I get questions about the same topic from several different people across the country all at once. If there’s something on your mind or something you cannot quite figure out, odds are someone else in the industry is facing the same dilemma. I suspect we will see a trend in questions or topics, and we will use this column to explore practical steps to keep your business thriving. So, when something comes to mind, email me (ngarrard@ wilkinspatterson.com) or Matt (matt@shedbuildermag.com) or Marty (marty@shedbuildermag.com), and we will try to help you in future issues.
EARLY PURCHASE OPTIONS INS AND OUTS
Can I make the early purchase option (EPO) whatever I want it to be? No.
Most state statutes have a series of items required to be disclosed to your customers in the lease agreement itself. These include things such as initial payment, monthly payment, number of payments to obtain ownership, total cost of ownership, early purchase calculations, and reinstatement provisions.
While some of these disclosures are fairly uniform, others such as reinstatement and early purchase options, can vary widely from state to state. So, if you have a standard lease agreement with uniform reinstatement and early purchase options for every state you operate in, I suggest you review those sections carefully.
There are several states that cap the contractual rent-to-own price at a percentage of the cash price. Therefore, in those states, your EPO language must ensure that you are never collecting more than allowed by state statute. For example, Maine, Connecticut, Pennsylvania, Vermont, and Iowa (among others) only allow for your total cost of ownership (RTO cost) to be two times the cash price of the shed.
So, if the customer’s early purchase could ever exceed two times the cash price, your contract is not compliant in that state.
Some early purchase options provisions I have seen base the EPO calculation on the remaining rental payments owed, and that can work in a lot of states. But in a state like Connecticut, the cash price of the shed must be considered to ensure compliance with state statutes.
Other states restrict the cash price the lessor can charge the customer (1.75 times the lessor’s cost in New York, for example). Then the RTO price is further limited by a separate multiple (2.25 times the cash price in New York). If your cash price or RTO cost exceeds either of these figures in New York, the agreement is considered void, the customer gets to keep your building, and you must refund all amounts paid to the customer.
Okay, but once the customer stops paying, the lease terminates forever, right? Not exactly. Every state that has a rental-purchase statute allows the customer to reinstate their lease agreement within a certain period based on a variety of factors. To make this even more complex, reinstatement provisions vary greatly from state to state, and a lot of times are even more convoluted than EPO.
Some states, such as Texas, simply require that the customer be given a specific number of days from the time the lease expires due to nonpayment in order to reinstate the agreement (at least 15 days in Texas). In other states, the time for reinstatement depends on the number of lease payments or amounts the customer has paid at the time of the expiration/termination.
In states such as Mississippi, Louisiana, Maryland, Oregon, and Nevada, the time for reinstatement depends on whether the customer has paid more than or less than two-thirds of the total rent-to-own payments. And even in those states, the reinstatement time periods are not uniform. Still, others allow you to limit how many times a customer is allowed to reinstate over a given period of time (West Virginia), and some require the customer to turn in the property within a set number of days in order to extend their time for reinstatement. In short, there is no uniform or one-size-fits-all reinstatement provision that you can use in every state.
I consider it lucky when I find a handful of states with identical reinstatement provisions.
Reinstatement and early purchase provisions are all contained in your state’s rental-purchase statutes, which are all published online. The NSRA also provides a comprehensive volume of applicable state statutes available in the brand-new members section of the NSRA website. If you are already a member, we’d welcome your input and suggestions for member benefits as we look to provide you with valuable resources as we build out this offering.
I’m looking forward to hearing your questions and feedback. Shed some light on your legal queries, and let’s nail down those lease agreements together!
