Leasing fire alarm systems - October 1, 2012

see below for The Alarm Exchange

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Question - leasing fire alarm systems
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A Fire Alarm company in the NY area leases all of its fire alarm systems and retains full ownership of everything (pipe, wire, devices etc.). These systems are filed, inspected and approved as well as monitored. In the agreement with the customer it states that everything is owned by the alarm company and states the value of the equipment (most likely inflated). The alarm company get a nominal fee of let’s say $5.00 a month for the lease of the system but charges for everything not limited to services calls, parts, inspections and monitoring. For now let’s assume the monitoring is on a separate agreement than the fire alarm system lease. The system is installed at a completive price, maybe a little less than if the customer was to buy it from others (customer may not realize it is a lease when signing). The alarm company contends that they will have longevity with the customer because once it is installed and approved since it would be too expensive to replace if the customer were to replace it or buy if from them and have someone else provide all the services that they performed. The alarm company states that they can sue the customer for the agreed valve as set in the terms of the agreement. In addition they contend that if they were to sell the contract to another alarm company, the contract value would be equivalent to the agreed valve as set in the contract as opposed to or in addition to a multiple on the monthly charge. It was also stated that the job could be considered a Capitol Improvement and from their interpretation they would pay tax on the materials and the customer would pay taxes on the cost of the installation (their interpretation.
Here is my take on this deal. First I do not agree with this business plan in any way. Second I do not believe that the full agreed value of the equipment could stand up in court on equipment that is many years old and possibly no longer made or supported. Some sort of depreciation would come into the calculations and certain parts would not be consider recoverable for re-use such as bent pipe that is only good for recyclable purposes with little value. Third I believe that the defendants attorney can and would request a detailed list and prices for each of the materials as well as the manufactures suggested printed price list at that time to confirm the original value there contending the stated valve as it was listed to begin with.
I cannot believe that these agreements possess the value that this company states they are worth regardless of the stated value on the agreement once the jobs become old. I also do not believe that many companies would purchase agreements with low RMR as stated with large liabilities and rely on the service and inspections to make money or expect the pay out on the agreement when the customer defaults and they have to sue to get the stated value of the equipment if they can. As for the tax issue that is something on to itself. A so called fully lease job that can be removed if it could does not meet the definition on a Capitol Improvement that it becomes a part of the real property and thus whole installation materials and labor is subject to sales tax.
Please clearly comment on my beliefs stated above whether right or wrong and let your new division on sales of companies reply on the value of these agreements if they were to be sold. Also comment on the exposure to the alarm company if inspections and repairs were not performed because the customer did not want to pay form them for this leased system as opposed to a system sold to and owned by the customer if there was property damage or lives lost due to a fire and the system did not perform correctly because this work was not done.
For the record regardless of what anyone says, the installation of a fire alarm system becomes are part of the building just like electrical work and related electrical devices, is a capital improvement not subject to full or partial re-movement without changing the building. Some may claim they can remove the smoke detectors pull stations etc. as recoverable and for re-use again in another leased system but this is no different that removing a sink or other bathroom fixture that is part of the building that is considered a permanently attached fixture even though it can be removed and re-installed in another building. Remember once you file and have the job permitted and approved by a governmental agency (Buildings and Fire Department) it is hard to claim it is not a permanent fixture since it is attached to the building. This especially applies when it required for the Certificate of Occupancy for that building.
I am talking about a full fire alarm system here and not a central station transmitter with related components, that is a whole different subject on to itself. One other thing to note is once that job is filed, approved and officially on record, removing it does require a filing with the Buildings and Fire Department and in the case of NYC an inspection as well after removal. Who is going to pay for and do this? And yes a licensed engineer and electrical contractor would have to be hired to do this as required by the documents that have to be filed. I await you response since I have a dinner is riding on this.
Yours truly,
A. Nonymous
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Answer
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Thanks for the bar review question. Hope you'll have more to talk about at your dinner.
Leasing alarm systems to commercial subscriber was the popular business model. As fire alarms became more extensive I think the model shifted and now fire alarm systems are typically sold, except for the Communication System, which remains leased.
Why lease? You hit on the principal idea, retain control of the premises. If the subscriber wants to terminate the alarm contract the threat is that the alarm system will be moved and the cost to reinstall the system prohibitive. The alarm company has several options if the subscriber defaults or the contract terminates and these options depend on the terms of the fire alarm lease. In your scenario the lease provides for an "Agreed Value". Most likely the lease also permits the alarm company to elect to sell the equipment to the subscriber for this agreed value. You question whether that would be enforced. Well, unless the amount of the value was unconscionable it should be enforced. What's unconscionable? A term that no reasonable man would ask for and no reasonable man would agree to. That leaves a lot of room. Costing out the various components of the system may not be enough to challenge the purchase [or put] price. The Agreed Value may include much more than just the fair market value of the equipment at the time the put is exercised.
A second option is for the alarm company to demand it's equipment and sue to recover the equipment. That effort might be frustrated if the removal presents all of the issues you mention, such as building department and fire department permits and approvals. Lawsuits to recover actual equipment is generally known as actions to recover chattel; personal property. Your argument that the fire alarm system has become part of the real property is a good one, and gives me moment for pause in my analysis. Of course the alarm contracts, fire alarm contracts included, should specify that the equipment remains personal property, no matter what other characteristics it may have that would tend to render it part of the real property. If the parties have an agreement that the equipment is to be treated as personalty, that it can be removed, then why should a Court rewrite those terms? I don't see why a boiler can't be leased if that's what the building owner and heating company agreed upon. If the removal of equipment will not cause substantial damage or compromise the integrity of the real property then the parties should be free to fashion their own terms of agreement. [BTW, I'm an advocate for the alarm industry, not a Judge, so this is my argument - no research done to respond to this question. Any lawyers out there who would care to comment, please do]
Your next issue relates to the value of the contract. This fire alarm lease will unquestionably be valued based on its RMR, and I believe it will have a multiple on the high end. The Standard Forms do have a Fire Alarm Lease. However, I consider the Fire All in One to be our premier contract for fire. It includes the sale, installation, monitoring, inspection, service and runner service. If you do commercial fire, get the Fire All in One.
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Electronic Security Association of Virginia, Annual Conference.and Trade Show. October 16, 2012 at Virginia Beach Resort Hotel and Conference Center. For more information contact Lynn Comer at lynn.comer@shenvalleysec.com; (800) 538-2322
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