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March 6, 2015Client Alert

Reminder to Lenders: Automatic Renewal Law Could Impact Your Loan Collateral

Wisconsin enacted a law in May of 2011 that prohibited automatic renewal of certain types of business contracts without notice and an opportunity to terminate. Because of the delayed effective date for this law and its somewhat complicated wording, it is not well understood.  However, if you have secured a loan with an assignment of income from a lease of business equipment or a business service and that contract has an automatic renewal provision, you need to understand whether the income stream from that contract is at risk of nonrenewal or violation of this statute.

On May 1, 2011, Wisconsin Statute §134.49 went into effect for certain business contracts with automatic renewal provisions. Although this law became effective immediately for certain new business contracts, it did not become effective for certain existing business contracts until they next came up for renewal or extension, thus, creating a deferred effective date. Now that those existing contracts are coming due for extension or renewal, the law’s new provisions apply. 

This law applies to “business contracts” without containing a finite definition of what an affected business contract is. The law also contains a long list of business contracts exempt from the law, which requires an analysis of what the contract is not, in order to determine if the law applies.   The legislative history behind the statute indicates that small businesses lobbied the legislature to enact a law that protects them from the automatic renewal of business contracts or leases for services or equipment. Much in the way that residential tenants are protected from a landlord’s inclusion of an automatic renewal provision in a residential lease, this requires notice and an opportunity to decline the renewal. The small business owners complained that they had been required to honor contracts for unwanted services or equipment for years, simply because they had failed to recognize an automatic renewal provision in a contract or failed to terminate the contract in the correct time period.

The new law invalidates automatic renewal provisions in certain contracts, unless the seller under the contract presents the customer with a notice at execution (for new contracts) or prior to renewal (for existing contracts) indicating that the renewal provision will automatically apply unless the customer responds to opt-out of the renewal, thereby terminating the contract at the end of the initial term. If the seller under such a business contract fails to give the required notice, the provision will be unenforceable against the customer and the contract will terminate at the end of the initial term. Importantly, failure to comply with the statute not only results in invalidation of the provision; it can also subject the seller to a penalty of twice the amount of damages incurred by the customer or twice the amount of the periodic payment required of the customer under the contract.

This law applies to business contracts for services and contracts for leases for business equipment leases, so long as the customer under contract is the end-user. While the statute excludes from its reach a long list of certain contracts—including those for real estate, titled vehicles, medical equipment, energy utilities and household equipment, to name a few—it would apply the following examples: (1) a contract for the lease of office equipment or heavy machinery not titled under Chapters 341 or 342, or (2) office or property management, cleaning, refuse collection, security, and other administrative services.

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