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automatic renewal - why month to month makes sense
April 25, 2018

automatic renewal - why month to month makes sense
    The alarm industry's favorite business model is based on RMR [recurring monthly revenue].  Companies are valued based on their RMR and sold based on their RMR [almost all the time].  Though the actual provisions of a subscriber contract are of course essential, the foundation of the RMR model contract is it's term.  The Standard Form agreements set the term for residential at 5 years and commercial at 10 years.  Of course clients are free to change those term numbers, and often do.  Three year or less terms are not uncommon.  Though not the focus of this article, you may want to know whether the length of the term matters in valuation.  It does, but not significantly.  The type of subscriber, type of system and how long the subscriber has been a customer, are more likely to influence valuation.  Because the RMR model depends on the continuing services all subscriber contracts have automatic renewal provisions.
    Whether a subscriber contract automatically renews for the original term, one to five years, or month to month, is not likely to significantly influence valuation.  In fact, if the subscriber is in a state where automatic renewal is governed by statute, failure to comply with the statute is going to reduce the value of your contracts and your company.
    According to K&K's website there are 14 states with automatic renewal statutes.  [see Automatic Renewal - State by State].  If you know we missed any, please let me know.
    We don't see a lot of litigation regarding the automatic renewal statute because the law is pretty clear.  My firm does a lot of alarm collection work in New York [and other states] which has a statute affecting automatic renewal.  We haven't had any decisions regarding automatic renewal in thousands of cases that I can recall.  So I was surprised to see a decision hot off the press, which was not handled by my office. 
    Ambush Alarm sued a corporation and guarantor for breach of an alarm contract dated 2010 that had a five year term.  Ambush contended that the contract automatically renewed in 2015 for another five years.  Though Ambush admittedly did not comply with New York's automatic renewal notice [and most companies don't] it sued anyway and defended an appeal, contending that payment by the subscriber during the renewal term was sufficient to enforce the renewal term.  Without explanation [in the Appellate Term decision] the motion court denied the subscribers motion to dismiss.  The subscriber appealed.
    The Appellate Court explained that Ambush's position was untenable and would defeat the very purpose of the automatic renewal statute [GOL 5-903].  "The purpose of the notice provision is to protect service recipients from the harm of unintended automatic renewals of contracts for consecutive periods".
    The Appellate Court reversed the motion court and granted the subscribers motion to dismiss.  In doing so the court held that the contract terminated in July 2010.  The alarm company and its attorney should have known this result was a certainty.  Now we have an adverse decision against the alarm company.  While it is commonly said that bad facts make for bad law, here it was clear facts lead to a certain outcome that can only cause other judges to focus on the automatic renewal issue.  A case that should not have been brought ended up as it was destined to end.  The alarm company is lucky if the subscriber doesn't demand all the money it paid since the contract was terminated.  If the alarm company has enough of these subscribers who have not received the statutory notice the alarm company will be lucky if the Attorney General or Consumer Affairs office doesn't charge it was deceptive business practices and require it to notify all subscriber that their contracts expired.  
    The states with automatic renewal statutes all have their own notice requirements, but they do share a common exception.  If the contract automatically renews month to month it is excepted from any notice requirement and can continue indefinitely until canceled.  If you are in a state with a statute you need to comply with it.  Even if you don't run into the problem above, and get ambushed, so to speak, you are doing yourself an injustice because your company is not going to be able to sell the subscriber contracts for top dollar if there has been violation of the automatic renewal statute.  A buyer will be alerted to the problem as soon as you refuse to represent that you complied with the notices and show proof of compliance.  Expect those contracts to be excluded from the sale or priced well below the multiple offered for the other contracts.  
    And if your state doesn't have an automatic renewal statute now you're not entirely off the hook.  If a law gets passed your renewal will only be good until it renews again, and then you will need to comply with the notice requirement.  I've recommended month to month renewal for a long time now, and that advice has self-renewed for at least 20 years.   Don't let your contracts self renew that long.  
Get new contracts signed as often as you can, and upgrade systems as often as you can.  Both you and the subscriber will be happier.


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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
516 747 6700