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Thursday
Aug232012

Bonding and Contracts

In the health and fitness club business, failing to meet bonding requirements can get club operators into hot water. And the water couldn’t be any hotter than in North Carolina, where, in May, the owners of a large local chain were banned from operating any clubs in the state for 12 years because they didn’t maintain the bonds required by the state.

The company, Peak Fitness, which isn’t a member of IHRSA, has 28 locations. It will face a $2-million penalty if it violates the ban.

A bond—also known as a surety bond—is an agreement under which one party (the bond company) obligates itself to a second party (the consumer) to answer for the debt or default of a third party (the club).

States require bonding primarily to protect club members from financial losses due to a club’s closing or failure to open. In either of these events, the bond can be used to provide members with refunds. Currently, approximately one-half of the 50 states require a club to obtain a bond prior to preselling memberships, and about one-fourth require them to have one after opening.

For those that don’t obtain the proper bonds, there are a variety of possible repercussions, which vary from state to state. For example, in Massachusetts, a club, depending on the circumstances, may face a fine of up to $2,500 or a civil injunction. In some states, such as Texas, clubs may also face criminal charges.

To be fair, Peak Fitness is a rare case at one end of a broad spectrum. The chain had apparently violated a host of other regulations, and was cited numerous times for misconduct and bad business practices. However, the case harms the industry by casting it in a bad light.

“It’s unfortunate for the honest, trustworthy facilities—and there are plenty of them—that the actions of a handful of individuals reflect poorly on the entire industry,” observes Tom Richards, IHRSA’s legal counsel. Historically, the public perception of clubs has often been negative, Richards points out, due to rare cases such as this one, which can come to be regarded as the norm.

As a result, states often adopt a hard line with respect to clubs. To date, 39 states have passed specific consumer-protection statutes regulating several aspects of club operations. They deal with matters such as the automatic renewal of membership contracts, caps on the length of contracts, and the maximum amount a consumer can pay for a contract in a given year.

States often regulate how members are to be notified when their contracts are up for renewal. They can also limit the length of a contract to anywhere from 12 to 36 months, and may specify the number of days consumers must be given to decide whether or not to renew their contract, Richards explains.

IHRSA keeps tabs on any issue that has to do with bonds and membership contracts, as well as a wide variety of other subjects. Each year since 2006, the association has spotted at least four bills aimed at regulating these contracts, with a record high of 10 bills recorded in 2009. Today, for example, IHRSA is working to develop a solution for clubs that have found it difficult to secure bonds in Maryland.

“Generally, the legislative changes aren’t topics that make front-page news, but they’re critical to our industry,” says Tim Sullivan, IHRSA’s senior legislative analyst. “Clubs should protect themselves by staying informed. Since it doesn’t appear that state legislatures or consumer-protection agencies will let up on clubs any time soon, operators should take every step necessary to ensure that they’re in compliance with their state’s laws and regulations, and to remain aware of all relevant legislative activity.”

To receive legislative alerts for your state, please send an email to gr@ihrsa. org. To stay informed about all relevant legal and legislative developments in the industry, sign up for IHRSA’s weekly Capitol Report at ihrsa.org/subscriptions

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