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leased fire alarm systems and monitoring transmitters October 14, 2017

KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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leased fire alarm systems and monitoring transmitters
October 14, 2017
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leased fire alarm systems and monitoring transmitters
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Ken
    In the past, leased fire alarm systems in NYC, as well as leased sprinkler monitoring transmitters, was the business model to adhere to (or as AFA would say, equipment and system is installed to provide a service of which the ownership of the whole installation is retained by the provider and never sold).   Did I get that right?   You, the service provider retains ownership of the whole installation (equipment, wire, pipe etc.) and therefore control that customer from making a quick change to another firm without having an expensive cost of a replacement installation.   
    Things have greatly changed due to the constantly changing technology and the new thought is to lease the intellectual technology (the program).  For now we will side step the leased intellectual properly (ownership of the program) alternative solution.   
    A recent clarification by the FDNY defined the transmitter now as a “Dedicated Fire Alarm System” and therefore requires it to be filed with the Buildings and Fire Departments plus have an inspection.   By filing this with the Buildings Department it is now considered to be a part of the building, real property and a capital improvement with no intent of removal regardless if you lease it or not.  The removal would also require a filing which most likely would not be approved unless a replacement system is provided as part of that filing.   Despite what other may say, you cannot just remove the system and put a burden and responsibility on the building owner and leave the building unprotected.   The filing and approval of plans is equivalent to a building permit when it applies to fire alarm system in New York City.   So what does all this mean?   No more leased fire alarm transmitter to monitor fire sprinkler systems and now a required filing and inspection that in the past was not required.   
    As for fire alarm system leasing, a Buildings and Fire Department filed and approved job was and still is questionable to begin with.   Unlike a burglar alarm system, it is consider to become part of the building and not removable like electrical wiring and plumbing fixtures despite what other may say even when define as personal property and never sold in the agreement.   
    Lastly, if the building owner declares it as a capital improvement and the vendor does not collect sales tax on the whole installation and pays it on the material only, it provides further credence that it is part of the building and permanent.   
    Let’s see the feedback on this and on how other will defend the right to lease these systems and put the burden on the building owners when removed of which I am sure will follow. 
   Yours truly,
 In A New York State Of Mind
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Response
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    To sell or lease has been an issue since I've represented the industry [and I'm sure before then].  In NYC the common practice was to lease commercial systems.  You are correct that now I believe most transactions are for the sale of the equipment where [if you use the Standard Form All in One agreements] you continue to own not only the passwords, which you will disclose when the subscriber has fully performed under the agreement, but all the programming; it's your intellectual property.  Sort of like providing your subscriber with all the coca cola it wants but not having to give up the secret ingredients.  Or Microsoft allowing you certain program functions, but surely not all.  So you allow the subscriber to arm and disarm and maybe perform a few other functions, but not reprogram the system or add to it so that another alarm company would have hard time taking over the system without significant time and expense.
    Leasing equipment has certain tax advantages to a commercial customer; the payments are fully deductible.  A sale may entail limited write-offs over a period of time; so not fully expensed as paid.  Of course, the motivation for leasing, from your perspective, is control of the account.  You mention AFA.  Its business model embraces leasing and it's likely a significant factor in its ability to retain fire alarm customers for 50 or more years.  Consider the small annual increases, you figure it out.
    Reminds me of an interesting case I had almost 40 years ago, representing Holmes Protection.  Barely out of law school and I am sent a case to sue the publisher of the New York Law Journal.  He calls me, tells me he has never been sued in his life, and wants to resolve the case immediately.  He was in renewal term then, but the monthly was $900.  I asked what facility was being monitored, assuming it was the law journal building, and he told me it was his modest apartment in Manhattan.  Holmes had been monitoring for over 40 years, and with annual increases this was the current monthly charge.  Keep in mind that technology wasn't what it is today, so I think he had a dialer that called Holmes.  Well, even my developing sense of right and wrong were stung by this revelation.  I promptly settled for $500 or so and a one year's subscription to his sister publication, the National Law Journal [the old bastard wouldn't give me a subscription to the NY Law Journal for free].  
    OK, back to leasing.  First of all, you make an important point about notifying and perhaps getting permission from the AHJ to terminate fire alarm services.  That could be the case not only in NYC, but any jurisdiction that requires a plan, permit, inspection and approval from the AHJ for the alarm system [usually fire].  So even in a sale you might need to notify the AHJ that you are terminating fire alarm monitoring.  I haven't heard of needing permission from the AHJ to terminate monitoring or repair service, and I can't imagine that you could be compelled to provide an inspection.  Unlike utility services, which are regulated by the state or federal government by tariffs, alarm companies and alarm services are still private and not subject to tariffs or other regulation regarding terms of the contract [other than laws affecting contracts - but not pricing], charges and termination.  So it  makes sense that the Fire Department will want to know if you are terminating fire alarm monitoring, but it shouldn't be able to stop you.  The fire department's appropriate response and remedy is to notify the building owner that without fire alarm monitoring the Certificate of Occupany will be pulled and the building will not be permitted to open or be occupied.  That should motivate even the most pissed off or broke subscriber to settle up with the fire alarm company.
    Many a subscriber has argued that the fire alarm system can't be removed because it's part of the realty, no matter what the contract says.  AFA has litigated that a number of times, and consistently prevailed, either through favorable decisions or shear perseverance and aggressive litigation strategy.  So have I, for the same reasons.  If you can structure your deal with a lease I think you are better off.  Why:
  • you continue to own the system and that gives you better control over the account
  • you should learn how to get the same money, covering your equipment expense by charging for the installation
  • RMR tends to be prices higher
    The lease terms may help if there are laws dealing with real property that limit the protective provisions.   Though both the sales and lease All in One states that the equipment is to remain personal property, a lease would support that characterization.
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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
ken@kirschenbaumesq.com
516 747 6700
www.KirschenbaumEsq.com