Loss of Use

Question: I rented a piece of equipment to a customer who severely damaged it. He says it was the result of a “natural occurrence.” I don’t know how true that is, but the repairs are going to cost over $50,000 and take at least a month. Can I charge the customer for the downtime?

James Waite’s Answer:

To a great extent, it depends on what your rental contract says.Most rental contract don’t expressly allow for recovery of rent during downtime for repairs or replacements, which can be an extraordinarily expensive mistake.

But, as is so often the case with legal questions, that is far from the end of the analysis. Recovering for lost rent also hinges to a large degree on whether the damage was the result of a “tort” – a civil wrong such as negligence, or the result of a “breach of contract” – for example, non-tortious misuse of equipment (if the contract requires the customer to use it properly).

What’s the Difference? Most courts around the country have determined that, in the case of a tort, a rental company will be entitled to elect whether to seek either: (a) its lost “profit” (the difference between its rental rate and its costs associated with renting the equipment) which may require more accounting and administrative effort than the recovery is worth; or (b) the “reasonable rental value” of the damaged item for a reasonable repair or replacement period. Problematically, subject to a few exceptions, most courts have historically, also felt compelled to limit “breach of contract” claims for lost use to only “lost profits” as called for under the Restatement (Second) of Contracts.

Don’t Walk Away From Perfectly Good Money. This, of course, might compel many rental companies to pursue only the greater “loss of use” awards available in connection with tort claims. That, however, could also be an immensely expensive mistake – i.e., those rental operators could be walking away from tens of thousands of dollars, as courts appear to interpret the language of the Restatement, as well as their own judicial precedents very differently, sometimes even mixing “tort” and “contract” concepts. In other words, you might still have a good chance at recovering for lost time if your rental contract allows for it (but not if you don’t).

An Old Concept Becomes a Revenue Opportunity. For example, in its landmark 2012 ruling handed down in Koenig v. PurCo Fleet Services, Inc., the Colorado Supreme Court appeared to mix tort and contract principles when it upheld a lower court’s ruling in favor PurCo Fleet Services, which sought to recover $228.76 in lost rentals in a breach of contract (rather than a tort) action against defendant, Judith Koenig.Notably, Ms. Koenig, who had refused to pay the charge after hitting a deer with a rental car, was also ordered to pay PurCo $247,890.00 in attorneys’ fees and $11,120.25 in litigation costs (No, those are not typos; they’re actually the product of her insurer’s decision to fight the claim in hopes of avoiding setting a potentially expensive precedent).

In a scathing dissent, then Chief Justice Nancy Rice pointed out that this remedy is a “tort” remedy, not a “breach of contract” remedy, and that the plaintiff should only have been entitled to its (presumably much lower, if existent) lost profits, if and to the extent it could have proven them, inasmuch as the plaintiff’s claim was based solely on the defendant’s breach of the rental contract – not on an alleged tort. Despite the apparent logic of this argument, the PurCo decision has held, and appears to be perhaps an indication of things to come.

Though whether and to what extent other courts around the country may adopt the Colorado Supreme Court’s position with respect to contract breaches in the absence of torts remains a question, it seems clear that damage awards for “loss of use” in general are gaining traction, as evidenced by awards of loss of use granted by other courts, including those in New Jersey, Wisconsin, Texas and California.Thus, rental companies should be aware that a significant revenue opportunity has recently been bolstered and substantially expanded in many states.

The Critical Issue for Rental Companies: Circling back to the specifics of the Koenig decision, perhaps the most important issue for rental operators was/is that the Colorado Supreme Court based its ruling largely on the fact that the rental contract signed by Ms. Koenig expressly allowed for an award of loss of use damages, regardless of fleet utilization. The fact that most courts can still be expected to limit recoveries for loss of use damages to “lost profits” when no “tort” claim is raised (i.e., in “breach of contract” – only cases) makes it imperative that your rental contract include an express right to recover such damages.

How Does One Do That? The question this raises is, of course: What is the most effective means of recovering for loss of use? In my view, incorporating a “damages” provision is certainly one possibly effective means of doing so. But, given the potential litigation expense (in the Koenig case, spending almost $260,000.00 in legal fees and court costs to find out whether a $278.00 claim is valid makes little sense for either the rental company or the customer), pursuing a claim for loss of use “damages” seems like a risky and potentially expensive option.

Alternatively, including provision in your rental contract that simply requires the continued payment of rent for the entire period between the rental commencement date and the date the rented item(s) is/are “returned to and accepted by the lessor in the required return condition” seems like a much more straight-forward approach.By creating a simple payment obligation, this dispenses with the “fault-determination and damages” issues, and goes straight to the heart of the matter – that rent is to be paid for the entire rental between delivery/acceptance and return/acceptance. This would appear to be particularly valuable when pursuing a breach of contract claim (though it would arguably be of no less benefit in a tort claim).

We Can, But Should We? In my conversations with the many rental companies I work with around the country, I’ve heard time and again that pursuing “loss of use” claims just isn’t how they treat most of their customers. Fair enough. There is no law that says you must strictly enforce every term of your rental contract against every one of your customers. What is true, however, is that if your rental contract doesn’t include a right to recover rent for lost time during repair/replacement periods, you likely won’t be able to recover it, at least not in the majority of breach of contract cases. Thus, for most rental operators, the best option is to “write aggressively, and act reasonably.” Use your rental contract to generate as much negotiating leverage for yourself as possible. You never know when you might need it.

James R. Waite is a business lawyer with over 20 years in the equipment industry. He authored the American Rental Association’s book on rental contracts, and represents equipment lessors throughout North America on a wide range of issues, including corporate law, contracts, real estate, employment, taxation, litigation, and buying, selling and financing their businesses and their equipment. He is a veteran of the United States Air Force, has a BBA in Finance from the University of Texas at San Antonio, a Juris Doctor from St. Mary’s University, and an MBA from Northwestern University. He can be reached at (888) 614-8886, or via email at info@wglconsulting.com.