In Short
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Understand operating leases, including terms, distance caps, and maintenance responsibilities.
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Register vehicles on the Personal Property Securities Register to protect your interests.
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Comply with Australian Consumer Law by ensuring contracts are clear and free from unfair terms.
Tips for Businesses
Before launching your car hire business, consult a legal professional to draft clear contracts that comply with Australian Consumer Law. Choose a business structure that suits your needs and limits personal liability. Regularly review your obligations under the Personal Property Securities Act to protect your assets.
Table of Contents
- 1. Operating Leases
- 2. Motor Vehicle Rental on the Personal Property Securities Register
- 3. Australian Consumer Law for Car Hire Companies
- 4. Choosing the Right Company Structure
- Single vs. Dual Structure
- 5. Directors’ Duties and Responsibilities
- 6. ASIC Compliance and Reporting Obligations
- Key Takeaways
- Frequently Asked Questions
The passenger car hire and rental industry is becoming increasingly competitive. As private and government sectors continue to outsource their fleet management and car rental, hiring industry operators should see favourable growth. There is also increasing demand from domestic businesses and tourists as vehicles become more accessible to borrow, including from emerging market participants and application-based service providers.
If you are opening up a business as a hire car provider, there are many legal considerations you should factor in before purchasing a fleet. For example, you should understand how operating leases work, the importance of registration on the Personal Property Securities Register and the unfair contract term changes which came into effect in November. As the Australian Consumer Law (ACL) binds all car rental operators, you must also understand how your advertising and business management practices are affected.
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1. Operating Leases
For corporations that employ staff who are required to travel frequently on the road, an operating lease is a leasing option that operates similarly to a long-term car rental. Often, the lessor company owns the vehicle and provides the client with exclusive use for a specified period in return for lease rental payments. When the agreement ends, the client will return the car to the lessor. While the rental agreement is often for a specified term, it can also be a specified kilometre limit.
Operating leases are a necessary expenditure for many businesses. Indeed, they are often more appealing than owning and operating a vehicle. Fully maintained operating leases offer corporate clients entire vehicle and fleet management services and can allow clients to adjust their demand for vehicles seasonally.
Also, operating leases allow for the option for lessees to upgrade with substantially less cost than owning the vehicle. Businesses scaling or forecasting employee growth will find the flexibility benefits of operating leases more appropriate than other arrangements, such as purchasing vehicles outright.
Contraction Considerations
Some of the contractual considerations a lessor will need to consider negotiating with the lessee include:
- term – time-based (duration) or distance-based (km);
- type of vehicle;
- whether service and maintenance are included;
- flexibility to upgrade or downgrade vehicle type;
- flexibility to add vehicles under the plan;
- termination or cessation;
- insurance;
- permitted drivers;
- security or guarantees; and
- warranties.
2. Motor Vehicle Rental on the Personal Property Securities Register
Car hire operators must consider whether they need to register their security interests on the Personal Property Securities Register (PPSR). A security interest in these circumstances refers to any property used to secure payment, such as a vehicle.
Under the Personal Properties Securities Act 2009 (Cth) (PPS Act), when an arrangement is for more than one year, this will be considered a PPS lease.
Where car hire operators register the motor vehicles, they should include the serial number in the registration, which will carry on if it is subleased or sold to a third party. In essence, registration reduces the likelihood of users misusing your vehicle, contrary to your interests.
Registering vehicles is not compulsory, but it is advisable as it will ensure the car hire operator maximises their priority over the security interest. Priority is the order in which the PPS Act will enforce interests in the property. If a lessor fails to register their security interest, they may also lose the interest in the event of liquidation or bankruptcy of the lessee.
Continue reading this article below the form3. Australian Consumer Law for Car Hire Companies
If your car rental business uses standard form car hire contracts, you must comply with the Australian Consumer Law (ACL). Ensure that your car hire contracts do not contain any unfair terms, for example, the ability for car rental companies to:
- increase fees without the right for the consumer to terminate;
- charge consumers without giving them notice or an opportunity to dispute the charge;
- make the consumer liable for matters outside their control;
- cancel the contract without allowing the consumer to cancel;
- prevent the consumer from relying on statements made by the car rental company; and
- avoid liability for negligence.
If the court deems a contract term unfair, the court will treat it as if it never existed. Following recent changes to the Law in NSW, provisions relating to substantially prejudicial terms will apply. If any terms ‘substantially prejudice’ the consumer in NSW, you must take reasonable steps to make the consumer aware of these terms before signing. Failure to take reasonable steps can attract penalties.
Presenting the Contract
Car rental companies must also ensure that the contract is:
- presented clearly;
- expressed in reasonably plain language; and
- readily available to any party affected by the contract.
The court will consider any hidden fine print, technical language or complex schedules as a lack of transparency in the contract.
Under the Australian Consumer Law, car rental companies must also:
- not make incorrect statements or create a false or misleading impression in light of representations about liability and insurance cover;
- not deduct fees for damage without a reasonable opportunity for the consumer to dispute it;
- provide an itemised bill when requested by the consumer within seven days of the request;
- ensure motor vehicles are reasonably fit for any purpose under the consumer guarantees; and
- not hold the consumer responsible for any pre-existing damage to a vehicle.
While many car rental operators are franchises (including Europcar, Budget, Fleetcar, Avis, and Hertz), store owners and small independent operators should still be aware of their obligations under the ACL.
The ACL also imposes additional obligations on businesses to ensure they have not acted in a misleading or deceptive manner. Notably, your business cannot contract out of the ACL, even if the customer has provided their prior written consent. Accordingly, your vehicles must be safe and road-worthy.
Provided you have complied with your basic obligations under Australian Consumer Law, you have the freedom to contract with parties as per your negotiated agreements.
4. Choosing the Right Company Structure
When starting a car hire business, it’s crucial to select the appropriate company structure under the Corporations Act 2001 (Cth). The most common structures for car hire companies are:
- Proprietary Limited Company (Pty Ltd): This structure limits the liability of shareholders and is suitable for small to medium-sized businesses.
- Public Company Limited by Shares: More appropriate for larger operations planning to list on the stock exchange.
Consider factors such as tax implications, liability protection, and future growth plans when choosing your structure. Consult with a corporate lawyer to determine the best option for your specific circumstances.
Single vs. Dual Structure
When starting a car hire business, it’s crucial to decide whether to adopt a single company structure or a dual company structure under the Corporations Act 2001 (Cth). Each approach has its own advantages:
Single Company Structure:
- Simpler to manage and administer
- Lower setup and ongoing costs
- Easier to understand for stakeholders
Dual Company Structure:
- Better asset protection (e.g., separating operating assets from valuable assets)
- Potential tax advantages
- More flexibility for future business expansion
The dual company structure can be particularly beneficial if you want to protect your assets from potential claims. For example, you could have one company that owns the vehicles and another that operates the car hire business.
5. Directors’ Duties and Responsibilities
Under the Corporations Act, directors of car hire companies have significant legal responsibilities. Key duties include:
- acting in good faith in the best interests of the company;
- exercising care and diligence in decision-making;
- avoiding conflicts of interest; and
- preventing the company from trading while insolvent.
Directors should be aware that breaching these duties can result in personal liability. It’s advisable to implement robust governance practices and regularly review compliance with the Corporations Act.
6. ASIC Compliance and Reporting Obligations
As an incorporated company, your car hire business will have ongoing obligations to the Australian Securities and Investments Commission (ASIC). These include:
- annual review and lodgment of company details;
- financial reporting (for larger companies); and
- notifying ASIC of company officers, share structure, or registered office changes.
Failing to meet these obligations can result in penalties. Consider appointing a company secretary or engaging a corporate compliance service to ensure you meet all ASIC requirements.
Key Takeaways
Operating a car rental company requires a good understanding of various legal obligations. While a franchise network can draft and issue you many legal contracts on your behalf (including operating leases), you must still be aware of your obligations under Australian Consumer Law. Likewise, it is essential to know the terms, conditions, warranties, duties and implications for a breach of contract and the avenues for recourse.
If you have any questions about consumer law or drafting an operating lease, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Your car rental company will likely enter into contracts with users of your vehicles. Within these hire contracts, ensure that they do not contain any unfair terms. An example of an unfair term would be a term allowing your company to avoid liability for negligence. By including unfair terms in your hire contracts, your business is at risk of breaching the Australian Consumer Law.
It is paramount that you enter into clear, well-written contracts with any users of your vehicles. Otherwise, you risk miscommunication issues with your users. In particular, representations about liability and cover, as well as charges for repairs, and debits to credit cards, are common disputes that customers raise when they receive their bill.
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