Coauthored by Peter L. Cockrell, Associate, Hudson Cook, LLP

What happens when you lease a car to a servicemember or a member of his or her family? This article reviews the primary federal law that affects motor vehicle lessors when the lessee is a member (or a dependent of a member) of the military or the National Guard (i.e., a servicemember). In this article, we’ll address the relevant provisions of the Servicemembers Civil Relief Act (SCRA)—the federal law that protects servicemembers.

The SCRA permits a motor vehicle lessee who is a servicemember or the dependent of a servicemember to terminate a lease of a motor vehicle for personal or business transportation in two circumstances. First, the lease may be terminated if the lease is executed by a servicemember who, during the term of the lease, enters military service under orders specifying a period of not less than 180 days of service. Second, the lease may also be terminated if the servicemember, while in military service, executes the lease and thereafter receives military orders changing the servicemember’s permanent station from within the continental United States to outside of it or if the servicemember receives orders to deploy for a period of not less than 180 days. The lessee may then terminate the lease at any time after any of the events described above occur.

To actually terminate the lease under the SCRA, the servicemember must follow certain procedures. First, the lessee must deliver to the lessor a written notice of termination along with a copy of the servicemember’s military orders. Then the lessee must have the motor vehicle returned to the lessor no later than 15 days after delivery of the written notice. The termination is effective as of the later of either the lessor’s receipt of the written notice or delivery of the vehicle. The termination date is important because most lease accounting methods collect lease payments in advance, and under the SCRA, lease amounts unpaid for the period preceding the termination date must be paid by the lessee on a prorated basis. Any lease amounts paid in advance for a period after the termination date must be refunded to the lessee within 30 days of the termination date. When a servicemember terminates a lease in the manner provided by the SCRA, any obligation a dependent of the lessee may have under the lease is also terminated (e.g., as a co-lessee, co-signer or guarantor). However, a lessee’s termination of a lease does not terminate any obligation a non-dependent may have under the lease.

In addition to protecting servicemembers, the SCRA imposes certain restrictions on lessors. With regards to credit reporting, a lessor may not make an adverse report about the lease termination to a consumer credit reporting agency. A lessor is also prohibited from imposing an early termination charge or penalty on the terminating lessee. However, the lessor is entitled to collect for obligations and liabilities of the lessee that have come due prior to the effective date of termination, such as monthly rental receipts taxes, title and registration fees, excess mileage, and excess wear charges that are unpaid. Handling property taxes can be more difficult because of the way in which they are collected. Where the lease obligates the lessee to pay the tax, or to reimburse the lessor for paying the tax, a lessor’s ability to collect personal property taxes it has paid a taxing authority from a lessee whose lease terminated some months prior is difficult in any case, and even more so where the lessee has been stationed overseas.

Unfortunately, the lessor’s ability to make application to a court for relief from the SCRA’s provisions provides little comfort. The lessor must make the application before the termination date—an action the lessor will rarely be able to accomplish within the short time period afforded, and in most circumstances it makes little economic sense. Possible exceptions include an uninsured total loss vehicle due to theft or a “skip” situation.

There are also criminal sanctions to be wary of after the lease is terminated. A lessor can be fined or imprisoned for knowingly seizing the personal effects, security deposit, or other property of a servicemember or a servicemember’s dependent who lawfully terminates a lease. After the termination date, a lessor also cannot interfere with the removal of such property from premises covered by the lease. Although the SCRA does not specifically address a lessor’s right to apply the security deposit to pay amounts due during the period preceding the termination date, presumably the lessor may apply a security deposit to amounts owed. It is clear, however, that a lessor may not retain a lessee’s security deposit in anticipation that the lessee may owe an amount in the future.

In addition to the federal law described above, a large number of states, including Alaska, Hawaii, Illinois, Louisiana, Michigan, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island and Wyoming, either follow the federal law established by the SCRA or provide a statutory scheme very similar to it. Don’t forget state law when considering your treatment of servicemembers in the leasing context.