[By Lance Formwalt, Jack Selzer and Heath Hoobing of Seigfried, Bingham, Levy, Selzer & Gee, P.C., 2011; R-2013 | Keywords: Business, Contract, Rental Contract]
Has anyone ever advised you to read the fine print in a contract before you sign it? While this advice is always sound, if you are like most people, you don’t typically follow this advice. The print on the back of the contract is small and usually difficult to understand. However, when it comes to certain rental contracts, not taking the time to read and understand the fine print and make changes can later cause you a headache and cost you thousands of dollars.
Our Equipment Dealers Practice Group has worked with three dealers in the last 12 months on problems they had with uniform rental contracts. These contracts are short, but contain fine print on the back with two terms that are traps for dealers:
Automatic Renewals – A lengthy initial term (often 3-5 years) that automatically renews for the same period unless the dealer gives a written notice to the supplier. This means that if you don’t remember to terminate the agreement at the right time, your 5-year contract just turned into a l0-year contract! This can lock you in a uniform deal that other uniform suppliers can often beat. In contract law, this automatic renewal is sometimes called an “evergreen provision,” meaning that if you don’t timely terminate the agreement, it is always “green” and, in this instance, green (as in money) for the uniform supplier.
Liquidated Damages – This is a legal term that means if you cancel your contract early, the supplier will claim that you owe a fixed amount to them. This amount is usually based on a percentage of how much you would have paid if you remained in the contract. Depending on how many locations and how much time is left, we have seen suppliers claim liquidated damages of $40,000 to $100,000 – a lot of money for a uniform contract!
Improve Your Position and Change the Contract Before You Sign
Before you sign one of these contracts, be on the lookout for onerous “gotcha” terms. Because there are competitors in this business, our experience is that suppliers will negotiate on the front end of a deal if you know what to ask for. We recommend that you focus on the following key terms:
- The price. Is it competitive? Have you shopped the market?
- Right to cancel. You should have the right to cancel on short notice at any time during the contract term. (For example, a dealer can end the contract by giving 60 days’ notice.)
- No liquidated damages. You should not be liable to the supplier for “liquidated damages” if you terminate early.
- Your right to assign. You should have the right to assign the contract without supplier consent if you sell your dealership (or location).
What Should You Do If You Have Signed an Agreement with Evergreen and Liquidated Damage Provisions?
Provide a timely termination notice. Be sure you know the deadline (put it on the calendar) and procedure for canceling the contract before it renews. Notify the supplier in writing of your intent to cancel in advance of the stated deadline.
Re-bid your contract. In your cancellation notice, tell the supplier that you intend to re-bid your contract, and invite the supplier to participate. By bidding your contract to other suppliers (and informing them of the key terms you expect … see above), you could obtain the leverage you need to negotiate better terms.
Consolidate multiple contracts. If you operate in multiple locations and have different suppliers (this may happen when dealerships have been merged or acquired), offer to consolidate all the contracts with a single supplier. The supplier may be willing to waive any early cancellation penalty in exchange for the additional business.
Check with your lawyer. In some states, the standards for the enforcement of liquidated damages may limit your exposure. In addition, if your supplier has failed to live up to its commitments in the contract (e.g. consistently dirty uniforms), this may be sufficient reason to let you out of the contract without damages.
How Does This Apply to Your Dealership?
There are two situations when these contracts can have significant impact.
Save money at renewal time. Many dealers understandably view these contracts as an afterthought. However, when you look at the total amount that a dealership can pay for uniforms and compare it to a price that you can get through competitive bidding, your dealership can potentially save thousands of dollars per location. As a result, you want to make sure you understand when your contracts are up for renewal so you don’t miss this opportunity for savings.
Dealership sales/merger. When a dealership location is sold or merged, the acquiring party might not like the terms of the uniform contract. If that occurs and the selling dealer can’t terminate the contract on short notice, you have suddenly introduced an economic issue in your deal that has very little to do with your actual business and may cost the seller a significant amount of sale proceeds by having to pay-off the contract. Another issue that can come up is when a merged dealership is counting on efficiencies from combining uniform rental or other contracts … if the contracts don’t give you the flexibility we recommend above, you may be surprised when you can’t realize the savings until several years down the road.
Note: This information is to alert you to legal developments and should not be considered legal advice.