Don’t Let Security Alarm Contract Renewals Ruin Your RMR

Alarm monitoring contracts, and other alarm contracts with RMR to a lesser extent, need to have a term and need to have an automatic renewal provision.

NOTE: The opinions expressed in this column are not necessarily those ofSSI, and not intended as legal advice.

The overwhelming preferred business model in the alarm industry is based on recurring monthly revenue (RMR). It provides cash flow and is the single most influential factor when calculating the value of the business. Alarm monitoring contracts, and other alarm contracts with RMR to a lesser extent, need to have a term and need to have an automatic renewal provision. Why? Because without an automatic renewal the contract, and all services provided under the contract, would come to an abrupt halt upon expiration of the contract.

Can you imagine fire, or PERS, or other alarm services coming to an end without any notice to the subscriber? Yes the con-tract could provide that the alarm company will give notice that the contract is coming to an end, but no statute requires such notice – only a notice that the contract will automatically continue. Only a handful of states have statutes that affect automatic renewal. If you are not in a state that legislates automatic renewal you are free to have a renewal term as long as it’s not unconscionable. If you are in a state that has legislation then you need to comply with the statute, usually for notice to the subscriber.

Every state permits automatic renewal, though some have notice requirements. Written notice to the subscriber when the original term is about to expire and auto renewal is your responsibility, and few alarm companies actually comply with the notice requirement, calling into question the enforceability of the renewal clause.

At the end of the original or a renewal term you have several options. You can terminate. You can rely on the automatic renewal provision. You can send out a new contract that you describe as your procedure. If the new contract you send out has an increase in the RMR you are more likely to meet resistance from subscribers. Remember they have options and giving them the option of signing a new long-term contract with an increase may have them looking elsewhere for a cheaper service.

I recommend using the standardized All-in-One agreements, which have been carefully designed with a lot of industry feedback to make the renewal process more seamless. The forms have evolved over time and continue to evolve to keep pace with technology and changing times. RMR services are for a stated term, five years for residential and 10 for commercial. You are permitted to increase your RMR each year up to 9% and the subscriber has agreed to the increase. Don’t wait for an optional renewal term.

To avoid enforcement of the notice requirements for renewal, the All-in-One agreements renew month to month. You can rely on the auto renew provision but you’d be correct in thinking that your alarm contracts would be worth more if in original term and not renewal term, which is just a little better than expired term. If you want to get a subscriber to sign a new original term agreement you are going to have to offer some incentive, and an increase isn’t going to cut it. A decrease might. A system upgrade might. Even a free battery-powered CO or smoke detector might. This is really an issue for the marketing experts, not lawyers.

I think it’s a better idea to have subscribers sign new contracts rather than rely on renewal, but that isn’t going to work for big companies with lots of subscribers; it’s just not practical. But for most companies it’s a good idea to have face-to-face interactions with your customers from time to time, and every five years isn’t too much to expect. In that time you should be able to offer newer and better technology that not only justifies your new contract but increased pricing. You might also consider an increase in the fourth year and then a rollback price for the new contract.

About the Author

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Security Sales & Integration’s “Legal Briefing” columnist Ken Kirschenbaum has been a recognized counsel to the alarm industry for 35 years and is principal of Kirschenbaum & Kirschenbaum, P.C. His team of attorneys, which includes daughter Jennifer, specialize in transactional, defense litigation, regulatory compliance and collection matters.

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