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Dangerous Precedent in Airport Negotiations

Some concession agreements now include “loss-of-use recovery” toward gross receipts — essentially equating it to revenues.

February 11, 2015, by - Also by this author

A dangerous precedent is about to be set if an airport concession agreement is approved with wording regarding what counts toward gross receipts.  

Car rental companies operating on airports are bound by concession agreements that dictate their business terms for a specified time period. These agreements are renegotiated at regular intervals, often every five years. One of the main tenets of a concession agreement is the “minimum annual guarantee,” which is an agreed-upon fee that the car rental company pays the airport for the privilege of operating there.

The fee is often based on a percentage of a car rental company’s annual revenue. What is included as revenue varies by agreement, but it always includes time and mileage and usually traditional ancillary revenue, such as counter sales of insurance-type products (CDW/LDW), navigation units, child car seats and the like.

Auto Rental News has learned that in at least two agreements with small commercial airports, the airports have attempted to add a clause that requires rental companies to include loss-of-use recoveries in gross receipts — essentially, equating loss of use as a source of revenue. One of those agreements is being negotiated now.

The clause is written as part of an exclusion to gross receipts. While recovery of damage payments for the cost of repairs to cars damaged by customers is excluded, loss of use is not:  
“The foregoing exclusion shall not include any amount paid to Company by a customer or insurance company as damages for loss of use of a damaged car, or a markup, fee penalty or charge related to and in addition to the actual cost of repairs.”

For the uninitiated, when a rental vehicle is damaged, the rental company is denied the use of that vehicle, which the courts have held is a compensable loss in and of itself. Loss of use is a calculation most often based on days out of service multiplied by the contract rate.

Lumping loss of use in with gross receipts is the definition of the proverbial “slippery slope.” Loss-of-use recovery is not revenue! Any payment of loss of use from one entity to another is solely to compensate the harmed party for losses sustained as a result of a damage incident. Recovery of loss of use is designed to make the harmed party “whole” as much as monetarily possible. It is part of the measure of damages. Because loss of use is remedial by its very nature, it is inconceivable to consider it as a source of revenue.

In fact, in the specific state in which these agreements are being negotiated, the state’s court of appeals has ruled that “the claimant is entitled to receive as damages such sum as will compensate for loss of use of the repaired vehicle.”

While loss of use has been a hot-button issue in car rental for years, there is specific legal precedent (see PurCo Fleet Services Inc. v. Judith Koenig) that car rental companies are entitled to recover loss of use and appropriate administrative fees.

This exclusion has other potentially treacherous implications, specifically found in the phrase “related to and in addition to the actual cost of repairs.” Pay attention to “actual.”

This could be legally interpreted as: If your rental car is damaged and the cost to repair is $1,500, and you decide to for whatever reason repair only half of the damage, then the airport is entitled to lump that $750 you saved in with gross receipts and call it profit!

Once again, you, the property owner, have the right to be “made whole,” but that doesn’t mean you are obligated to repair that rental vehicle to its condition before the accident. The person that caused the damage is simply obligated to compensate you for your loss. What you do with that compensation is nobody’s business but yours.

Because this is an ongoing negotiation, Auto Rental News has decided not to publish the specific airport where this is taking place. But it is vitally important to reveal this to the industry. If this agreement is finalized, it allows a dangerous legal door to be opened that allows legally recoverable damages regarding vehicle repairs to be viewed as revenues.

Has similar language been included in one of your concession agreements? Let me know.

Comments

  1. 1. Sharky Laguana [ February 17, 2015 @ 02:59PM ]

    The Greater Orlando Aviation Authority (GOAA) has been collecting 10% of LOU for years.
    Their policy requires the collection of 10% of all revenue (*including* LOU) from any renter that lands in the airport within 48 hours of commencing their rental. In addition there are no caps on the number of days, or provisions for one-way rentals not returning to Orlando. This leads to distortions where customers with essentially identical airport use pay wildly different amounts in airport fees. It is effectively a penalty tax on customers who choose to rent nicer vehicles, or have a need to drop off in another city.

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Chris is the executive editor of Business Fleet Magazine and Auto Rental News. He covers all aspects of the fleet world.

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