When are Lease-to-Own Agreements Subject to State Disclosure Requirements?

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In a recent decision, the Massachusetts Appeals Court held that a three-year lease-to-own agreement for a water heater was not subject to certain disclosure requirements.

In the case, Saia v. Bay State Gas Co., 88 Mass. App. Ct. 734, 41 N.E. 3d 1104 (2015), the Plaintiff saw a one-page advertisement by Bay State Gas Co. to lease water heaters at a “low monthly fee” with “no up front cost,” and “fast installation.”  The Plaintiff later signed a lease agreement which stated she would pay $28.16 per month for three years to use the water heater. Either party could cancel the lease upon written notice.  At the end of the lease, the Plaintiff could opt to buy the water heater for the greater of: (1) the sum of one-half of the paid lease payments subtracted from the “total installed price” of $1,510.87, or (2) $75.  After making 13 payments under the lease, the Plaintiff opted to buy.  Altogether, the Plaintiff paid $1,967.74 for the water heater, including lease payments, an upfront installation fee, the buyout price, and sales tax.

The Plaintiff subsequently brought a putative class action in Massachusetts Superior Court against Bay State Gas Co., alleging, among other things, misrepresentation and violation of General Laws Chapter 93A, the Massachusetts consumer protection statute.  According to the Plaintiff, Bay State Gas Co.’s misrepresentations included advertising the lease as having “no up front cost” and assuring Plaintiff that repairs were covered. The Plaintiff also argued that the transaction was actually a disguised credit sale or a retail installment sale agreement, and that, accordingly, Bay State Gas Co. should have made disclosures required by the Massachusetts Consumer Credit Cost Disclosure Act (“CCCDA”) and the Retail Installment Sales and Services Act (“RISSA”).

The trial court granted Bay State Gas Co.’s motion to dismiss, finding that “nowhere in the Amended Complaint [did] plaintiff articulate her loss.”  The Appeals Court reversed, in part, finding that the Plaintiff properly pleaded claims of misrepresentation and violation of G.L. c. 93A by alleging that the Defendant “deliberately mischaracterized the contract as a lease in order to avoid having to make the disclosures required for a credit sale.”  Following remand, the lower court entered summary judgment in favor of the Defendant. On the second appeal, the court affirmed, finding that the agreement did not constitute a “credit sale” under the CCCDA or a “retail installment sale agreement” under the RISSA.

The court concluded that the RISSA did not apply to the Plaintiff’s lease agreement because, under the terms of the agreement, the Plaintiff would have to pay a significant amount after fulfilling her obligations under the lease to become the owner of the water heater.  If she had paid all of the lease payments, she would still have owed $1,003.99 (nearly two-thirds of the “total installed price”) to become the owner of the water heater. The court relied on the Massachusetts Supreme Judicial Court’s ruling in Silva v. Rent-A-Center, Inc., 454 Mass. 667, 912 N.E.2d 945 (2009), in which the court held that a consumer’s rent-to-own agreement did not qualify as an “installment sale agreement” under the RISSA, in part because it did not allow for the renter to become the owner for a “nominal consideration” after fulfilling the terms of the agreement.

The court applied the same reasoning as the Silva court for the CCCDA and arrived at the same conclusion—that because the Plaintiff would not have been able to own her water heater for a nominal amount at the end of the three-year lease agreement, the lease did not constitute a “credit sale” under the CCCDA, and, therefore, the Defendant did not need to provide disclosures pursuant to the CCCDA.

This case provides a useful illustration for drafters of lease-to-own agreements and other installment sales agreements.  In Massachusetts, if a consumer’s final payment to purchase a product is more than “nominal,” the agreement likely will not be subject to disclosure requirements for credit sales or retail installment sales agreements.

David Scheffel

David Scheffel

David has extensive experience in consumer financial services litigation and co-chairs Dorsey’s Consumer Financial Services practice. He defends financial institutions against individual and class action claims alleging discrimination, predatory lending, violations of the Truth in Lending Act, the Real Estate Settlement Procedures Act, the Fair Housing Act, the Equal Credit Opportunity Act, and disputes between lenders and securitization trusts.

Amanda Prentice

Amanda Prentice

Amanda represents a variety of commercial and financial institutions in complex litigation in both state and federal fora. Amanda practices in the area of commercial litigation and has represented clients who have won at trial in both arbitration and in the Southern District of New York. Amanda represents a wide variety of clients, from large financial institutions and insurance companies to smaller, privately held companies. Amanda has had eight months’ worth of experience on a secondment to the litigation department of a Fortune 500 company involved in a variety of complex litigation, as well as many smaller matters. In addition, she has a substantial pro bono practice, including helping a client obtain an order of protection against an abusive ex-partner, and helping a Honduran client and her three children obtain asylum.

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