If you’re anticipating signing a health club, gym or martial arts school membership contract, it is very important to be aware of certain contract clauses. While some onerous or harsh terms can usually be identified in plain language (such as limited options and penalties for early cancellation), assignment clauses are generally overlooked or misunderstood. If you see the word “assign”, “assignment” or something referring to the ability of a financial institution to purchase the contract or note, don’t sign the agreement until you are sure you understand and appreciate the nature of what that clause means.
What is an assignment clause?
Generally speaking, an assignment or the ability to assign means the right to transfer property or legal rights from a party to a contract to a third party. For example, you sign a one year contract with a special discount for Karate classes at Fitness Dojo. But after four months you decide that Karate is not for you. With the right of assignment you could “assign” or transfer the right to receive the last eight months of Karate classes to your brother. Typically health club, gym and martial arts school membership contracts do not provide members with this option. But some right of assignment is often provided to the gym, club or martial arts school. Assignment also can allow your gym or health club to be sold to another successor company providing similar services. This is not necessarily bad for the consumer. Sometimes a failing club being sold to a more financially healthy club who intends to revive it under a popular brand. But there are other types of assignment and which can be impacting, especially on long term contracts.
Third Party Billing Companies v. Assignees and Financial Institutions
It is not uncommon for gyms, health clubs and martial arts schools to outsource billing to a third party who might charge credit cards and perform accounting services. But assignment is much more than just handling clerical work as a matter of convenience. It is the sale of your contract from your gym, health club or martial arts school to an entirely different entity. So if Fitness Dojo assigned its rights to Health Clubs Financial, you can expect the latter company to be billing you for services provided by Fitness Dojo. Health Clubs Financial could have the legal right to collect and sue you in case you fail to pay them the amount due for services provided by Fitness Dojo.
Why would your reputable gym, health club, dojo, dojang or martial arts school sell their contract rights to receive payment to a third party? In many instances the contract income may be assigned to the billing company in exchange for performing accounting, billing and collection services on behalf of a company. The club or school may not have employees or people who are adequately equipped to handle this part of the business. And collections is a most uncomfortable situation many service-based business owners would prefer to avoid. The billing company will usually charge the club a percentage of the contract receivables. And as the assignee, the billing company has more security that it will get paid. Unlike authority which can usually be revoked easily, assignment is usually much more complicated.
Another reason a company would sell a contract right to receive money is a write off of bad debt. A school or club might decide to sell bad debt accounts, deeming them too difficult to manage. They will likely receive a small percentage of the amount owed from a purchasing debt collections company or a financial institution.
Another motivation can be to receive cash sooner rather than waiting for periodic membership revenues to trickle in. For example, you sign a contract to pay Fitness Dojo $4,000 for a discounted 3 year membership. You pay $400 up front and are required to pay $100 per month, leaving a balance of $3,600 due over 36 months. Since Fitness Dojo may need money immediately for an upcoming renovation, they may sell the right to receive the three year $3,600 revenue stream to a financial institution (the "assignee".) Fitness Dojo would receive $1,200 immediately from the assignee along with $50 every month your $100 per month membership payment is in effect. While this may not happen often, it's certainly an issue of which you should be aware and ask questions if you see an assignment clause on your membership agreement.
Why should I care whether my gym, club or school owns my contract?
During the sales phase it’s common to hear self-testimonials about an excellent long standing reputation. “The Bullshido Korean Karate Kung Fu Institute Dojo is founded on 100 years of tradition. We always work things out with members who can’t or may not want to continue. We wouldn’t be around for so long if we didn’t or were a scam.” Now while intentions may be noble, your club, gym or school may be powerless to control working out financial issues such as early termination due to injury or moving from your home. If a contract has been assigned, the entire power and discretion to terminate the agreement may belong to Health Clubs Financial, the company that bought the revenue stream from your contract. The remedy that your school or club can provide will ultimately rely upon the agreement they signed with the billing company.
Don’t expect sympathy from the billing company or financial institution. They are primarily concerned with getting paid. If you’re claiming an injury, don’t be surprised if you're required to sign a release of your medical records and a diagnosis of a full disability. You’ll also likely be paying membership fees until their legal department decides in your favor to terminate your contract.
Club, gym, school, dojo, dojang and sifu owners
If you're a health club, gym or martial arts school owner (sifu, dojo, dojang), you'll probably want to consider the impact assignment may have on membership. Should something go wrong, such as a student who may wish to early terminate due to injury or another reason, you may be have limited ability to intervene and remedy the situation. This is because once you assign rights to a third party, they are legally entitled to those rights paramount to you. If a member feels that the financial institution isn't being fair and perhaps ruthlessly pursuing them, the reputation of your business may suffer. It is not uncommon for members to post their grievances online.
If you feel that you need to outsource billing solutions, you might consider authorizing a third party to perform work on your behalf. Another option is to make sure that you can terminate the agreement (and the assignments) with the billing company. Termination may require prior written notice of 90 days or more so as to have a reasonable separation period and to reconcile accounts. This way you still have control over your receivables.
I would also make sure that a school, gym or club owner has a right to terminate member contracts in its own discretion. There will certainly be some costs and fees. But at least in this fashion you can make good to students where you feel it is warranted without a significant financial penalty.
Identifying assignment clauses in membership agreements
A Taekwondo school agreement that I reviewed has the following words in very small print below the area where pricing appears. These terms may seem harsh but are probably not uncommon. And they make more sense now that you understand that an assignee may have already paid out more money to buy your contract than the payments you have currently made.
I understand that I am signing a contract/note which may be purchased by a financial institution. My failure to regularly attend and utilize center facilities does not relieve me of this obligation, regardless of the circumstances, to pay this note in full. I understand that, except as herein provided, my membership is absolutely non-cancelable.
The only ability to terminate this agreement is by death or permanent disability. The contract also requires at least 6 billable weeks to pass before the member may opt to pay $100 to request termination. And a permanent move of the member’s residence at least 25 miles away from the school or any affiliated school appears to only suspend the agreement. This may mean that the financial institution owning the rights to the contract will suspend billing until the time that the member moves within 25 miles of any affiliate school. At that time billing will commence, regardless of whether the member uses the Taekwondo school.
In another agreement for a martial arts school I found the following words appearing right at the top:
By signing below, Seller assigns rights under this agreement to XYZ.
The Purchaser is You. The Seller is the school, Fitness Dojo. And the company that purchased the rights to collect money is the assignee, such as Health Clubs Financial. It’s very easy to overlook the importance of this harmless looking statement, especially since it seems to only involve the seller and their signature. After making a sales pitch about how dedicated the school is towards doing right by and supporting its members, the agreement might be sold immediately upon impact of the pen with the paper. And when that happens, best intentions leave the room because the assignee / financial institution controls your agreement.
Important questions to ask a health club, gym or martial arts school before signing any contract.
It is absolutely imperative to perform due diligence before joining any health club, gym or martial arts school. It is advisable to search the Better Business Bureau website and performing online research to find a variety of reviews if any are available. If you wish to study a specific martial art or fitness routine, I recommend you researching the curriculum to make sure it accurately reflects what you think you're being taught.
Be careful with 1 year commitments and take great precautions for multiyear agreements, which I generally do not advise. Long term contracts should be reviewed by an attorney and you should spend time to consider the nature of your obligations under the agreement and early termination. You may want to ask these questions as well:
Gyms, health clubs and martial arts schools can be a fantastic experience. Being educated about your agreement is to your benefit and likely to help you enjoy the experience and set proper expectations.
- What is the length of this contract and does the school sell contracts for 1 or more years?
- Are there early termination rights? If so, what is the procedure to early terminate and what might I need to pay?
- Who owns the school, club or gym? Is it a franchise?
- Does the contract have an assignment clause? If so, to whom can be assigned? Why do you need this clause?
- Is the club, gym or school certified or a member of some type of standardizing organization?
- Personal Finance & Consumer Law:
- Consumer Transactions
Consumer Protection Assignment Clauses in Health Club, Gym and Martial Arts Membership Contracts
By Michael M. Wechsler |
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