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Ken

    For almost a century, most alarm contracts were provided under contracts where the alarm company retained ownership of the alarm system.   However, given new technology and in particular the digital dialer beginning in the 1970's, more and more systems were being sold outright to the end users.  Some large companies, trying to compete with smaller low cost entrants into the industry, decided to go the outright sale route as well. 

    Today, most systems, and virtually all residential alarm systems are sold on an outright basis.  Doing so enables the installer to get the most money up front from its customer for its installation.  So why should any alarm company be interested in "leasing" its systems?   First, one needs to understand the actual nature of the "leased system" in the context of alarm services.  In reality, alarm companies do not "lease" their property.  A properly drafted contract in such instances will provide that alarm company is providing specified services (ie- fire alarm, sprinkler alarm, burglar alarm, etc.) and that the alarm company retains ownership of the system it installs as personal property, including all devices, wiring and conduit with the right to remove same from the premises if the contract is cancelled.   

    Given that legal status, there are three distinct benefits to going the "leasing" route.  First and foremost is that subscriber accounts where the alarm company retains ownership of its installed systems provides the best protection against attrition. This is because if the account is approached by a legitimate competitor or just decides to shop, it must consider the cost of a new installation as part of the equation.  Of course, the existing company must be prepared to remove its system upon cancellation of its services.  Competitors who decide to quote against the "leased" incumbent with a bogus monitoring-only quote better be prepared for a legal battle with said incumbent.  Even in situations where someone new acquires the property from the subscriber, the reasoning is the same.  While the new owner may not have to utilize the incumbent any longer, the new owner never acquired ownership of the "leased" alarm system, which is the personal property of the alarm company and obviously not part of the sale of the building.  And yes, this matter has been litigated. 

    Second, because of the foregoing, the accounts where the alarm company retains ownership of its systems generally command significantly higher RMR than those which are monitoring-only. 

    Finally, the ability to contract services rather than as an outright sale may provide significant  cash flow and tax advantages for the subscriber, thereby providing an alternate option for a sales representative. Typically, the advance service charge for labor on an initial alarm services contract will be less than the installation charge on an outright sales contract.  Thus, the subscriber's initial cash outlay would be less with the services option.  In addition, payments made under the alarm services contract should be fully tax deductible in the year incurred as an expense whereas an outright sale will in many cases be deemed a capital improvement, thereby requiring that the cash outlay be depreciated for tax purposes over a period of years. 

    As a practical matter, the benefits of the old method of "leasing" is confined to commercial systems, because much of the above is not available or applicable in the residential marketplace.  However, given its long term benefit to alarm companies and its customers, it is something that can be very useful. 

 

Robert Kleinman, Chairman, CEO and General Counsel 

AFA Protective Systems, Inc. 

Syosset, NY
www.afap.com

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Response

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The Standard Form All in One agreements come in sale and lease format.  

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