Many leased company cars remain well below the agreed mileage limits because employees are working from home because of COVID-19. This saves on gasoline and tires, but in fact makes the leasing rate more expensive. Fleets are looking for alternatives.

By Manfred Godeck

On average, company cars—their numbers peaked at 150,000—were still racking up 33,000 kilometers per year until 2019. Because of the pandemic and various lockdowns, constant driving also ended in many places. Business trips, meetings with colleagues at other locations, visits to trade fairs and client meetings were cancelled. “We are currently seeing cases of customers having undershot their lease allowances by 50,000 to 100,000 kilometers just a few months before the end of the contract,” said Ilona Janssen, senior partner at Expense Reduction Analysts, a cost management consultancy.

Excess kilometers are three times more valuable than unused kilometers.

Now, many lessees are scouring the fine print of their leases and are at the very least surprised, if not perturbed. While lessees do receive a refund for driving fewer kilometers than stipulated, the terms of the refunds often favor the lessor. “Minus a normal tolerance of 2,500 kilometers, a maximum of 7,500 kilometers will normally be reimbursed. But there is no upper limit when it comes to excess kilometers,” says Janssen. In addition, the credit for unused kilometers is only a fraction of what would have to be paid for excess kilometers. A ratio of about 1:3 is most common.

As a result, the final settlement also reveals an increased rate for each kilometer actually driven during the lease. Experts have long criticized this, maintaining that loss in value per excess kilometer should not deviate so greatly from the gain in value per unused kilometer. “You should not accept a lower rate,” according to ADAC [the German counterpart to AAA]. Unfortunately, however, many have done so in good conscience. After all, until a year ago, most company cars were reliably driven up to the limit. Lessees would therefore be well advised to pay attention to the possibility of a recalculation upon termination of the contract.

The contract is amended as if, for example, it had been written for 100,000 kilometers instead of 150,000 kilometers. Minus a handling fee, the refund would then be credited to the leasing rates of the remaining term. Some leasing companies offer a regular adjustment. In this case, the leasing rate decreases or increases, but not as disproportionately. “Fleet contracts should regulate this point clearly and fairly; otherwise, the benefit is rather meager,” says cost manager Janssen.

There is probably nothing to be done about contracts that cannot be recalculated and according to which unused kilometers are billed unfavorably. Lessees are unlikely to be able to invoke a disruption of business fundamentals due to COVID-19, under Para. 313 of the German Civil Code (BGB), according to lawyers for ADAC. According to the prevailing legal situation, it is the lessee’s risk if they are unable to use the leased vehicle to the extent originally envisaged by the lessee. According to a recent decision of the Federal Court of Justice, there is not even a legal right of withdrawal in the case of kilometer contracts (VIII ZR 36/20).

This category includes so-called “open” leasing contract models. In these cases, in contrast to the usual “closed” contracts with limited terms and mileage, the lessee uses a car or van as much, as little, and as long as they need it. The leasing rate, similar to a loan agreement, covers the pure financing costs; the final settlement takes place after the resale proceeds have been determined. “The shutdown is bringing companies back to what is really indispensable and reviving the basic idea of leasing: to pay only for what you actually use,” says Majk Strika, Managing Director of the fleet management company ARI Fleet Germany. In the case of concluded contracts, on the other hand, the rate effectively paid should be based on a calculated residual value, various fees and set limits. Each change should involve a cost dynamic.

A sample calculation illustrates this impressively. Assume, for instance, that the monthly installment of a leasing contract is EUR 500, and mileage of 120,000 kilometers has been agreed for a term of 36 months. Each excess kilometer costs 12 cents, while each unused kilometer is reimbursed at 4 cents. The cap is 7,500 kilometers. If the lease ends with 140,000 on the odometer, i.e., 20,000 more than agreed, then EUR 2,400 will be billed – which then brings the leasing rate to 14.5 cents per kilometer. On the other hand, for 20,000 unused kilometers, only EUR 300 will be reimbursed, and the leasing rate per kilometer will be 22.1 cents. What’s more, if you simply put an unneeded vehicle in the garage, you end up paying EUR 17,700 and return a nearly brand-new car to the leasing company. With a full-service lease, you could at least terminate the service portions, as far as the contract allows.

Large fleets may be able to hope for goodwill.

ADAC advises: “You should always try to make a contract adjustment in cooperation with the lessor. It is to be assumed that some lessors will respond to it just to keep their customers.” Large fleets with hundreds of vehicles may be able to hope for goodwill, at least more than the self-employed. But it’s hard to imagine anyone would take that.

Buying a car and then maybe having to take out a loan is still the fate of little people. The clever entrepreneur, on the other hand, will take advantage of leases with low rates and services especially for frequent drivers. For many during the pandemic, the economics suddenly no longer make sense. What’s needed now are solutions that make the “smart alternative to buying” even smarter.

 

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