Cancellation Fees For Services – How They Can Protect Your Small Business

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When running a business, certainty is key.

Subscription revenue is a great way to get this certainty by locking your customers into long term contracts (think: gym memberships, phone plans, etc.).

However, there is always the risk that your customer will cancel this subscription and stop paying for the service.

This can be detrimental — especially if you’ve invested a lot of resources into offering this service with the long-term revenue in mind.

Your business’ operational and financial security could also be impacted by customers who cancel on a job at the last minute (say, a hairdresser’s appointment, a car rental agreement, etc.).

In these situations, business owners might want more certainty in their terms and conditions to ensure that these things don’t happen.

One way to do this is by imposing cancellation fees.

Cancellation fees are a great way to help you feel more secure about the possibility of customers cancelling at the last minute. Plus, they encourage your customers’ long-term commitment to your services.

However, there are some legal limitations on imposing cancellation fees — specifically, it is seen to be ‘unfair’ by the law.

So, if you’re interested in using cancellation fees in your business, you need to make sure you’re doing it right.

What are they? When can you use them? And at what point do they become unfair?

We’re here to help!

What Is A Cancellation Fee?

Consumers generally have the right to cancel on services, such as when the service was not delivered as promised.

But cancellation fees are also a way for businesses to make sure they’re protected.

Put simply, a cancellation fee is when you charge clients for cancelling on a service without following the required processes under your T&Cs.

This could include cancelling on pre-booked services, appointments or even subscriptions.

Cancellation fees are generally included in the terms and conditions of a business that customers sign when they first start using your service.

And, even though they’re commonly seen in large organisations like airlines or hotels, cancellation fees can provide certainty for small businesses, too.

Budget can be tight for small businesses, and losing a big contract can be a real headache.

Let’s go through some examples of when cancellation fees may protect small businesses.

Gym Memberships

Let’s say you run your own local gym, which offers memberships to be paid monthly or even annually.

There are a number of things you should consider in your Gym Terms and Conditions — learn more about what you should include in these T&Cs here.

But what happens when someone cancels their gym membership before they’re billed to actually pay for it?

Since gym memberships usually allow unlimited access to facilities with only a monthly or annual fee, customers can potentially exploit their membership by using its benefits and not paying appropriately.

Customers could also exploit their membership if they’ve been given discounted fees for a six or 12 month contract, but suddenly change their mind after only two months and want to get out of the gym membership.

This is where cancellation fees come in.

In cases like these, gym owners would generally impose a cancellation fee if no reasonable notice has been given by the customer.

What is ‘reasonable’ can vary from business to business, depending on the particular nature of your business and what is being cancelled.

In situations where gym memberships are paid monthly, generally at least a month’s notice is required if a customer wants to back out of their subscription.

Cancellation fees can help protect you from these scenarios (as long as they’re not ‘unfair’ — we’ll go through this later).

Without cancellation fees, customers can potentially exploit their membership by using the facilities and canceling their subscription right before payment needs to be made.

Car Rentals

Moving away from subscription-based services, let’s think about hire and rental businesses.

If you’re running a small car rental business, there’s always the risk that customers will cancel their hire of the car at the last minute.

Losing a customer on such short notice can be a huge loss for a small business, especially when a small car rental only has a few cars available for hire.

The last thing you want is to lose a job that could have been otherwise rented by another customer if earlier notice was given.

Therefore, having a cancellation policy in your Hire Agreement can put your mind at ease that your customers will uphold their end of the agreement, and can only cancel within reasonable notice.

Why Should My Business Use Cancellation Fees?

Cancellation fees are not unique to subscription-based services like gyms or rental businesses.

Deciding whether your business should impose a cancellation policy is entirely up to you.

The main benefit of cancellation fees is that they provide protection for small businesses in the face of short-notice cancellations.

These situations can be frustrating for any business, as the service would already have cost you money — like the supplies you may have already ordered, the staff you may have hired for the job, and other customers you may have lost while reserving the service.

For this reason, having a clear cancellation policy keeps business owners secure with their terms and conditions, and ensures customers are aware of what they’ve agreed to.

But, if you’re going to implement cancellation fees, it’s important to do it right.

How Can I Make Sure My Cancellation Fees Are Legal?

If you want to implement cancellation fees within your business, you need to make sure you have a clear cancellation policy set out in your terms and conditions.

But, before you do that, you need to ask yourself: is your cancellation fee fair?

The Australian Consumer Law protects consumers from any contract (including your terms and conditions) that contains unfair contract terms.

The court can rule that contract terms are unfair if they:

Cause an imbalance in the rights of either party,
Are reasonably unnecessary to the advantage of one party, or
Cause a detriment (delay or financial) to a small business

If a court decides that your contract terms are unfair, they can declare that term ‘void’, meaning neither party will have to comply with it.

Therefore, you need to make sure your cancellation policy does not do any of the above (though, there are some exceptions!).

So, When Can I Charge A Cancellation Fee?

Generally, you can charge a cancellation fee if the customer who cancels on you fails to give you reasonable notice.

And, if they do give you reasonable notice, you’ll need to make a ‘reasonable’ attempt to fulfill the vacancy once you have been notified.

Therefore, before you charge a cancellation fee, it’s a good idea to make sure that you:

Only impose the cancellation fee if no reasonable notice has been given
Ensure that the cancellation policy does not constitute an ‘unfair’ contract term

What To Take Away…

While cancellation policies are quite common within large organisations where there is a lot of money involved, they can also be used to benefit small businesses.

In a small business, budgets are tight and losing money because of last-minute cancellations can be frustrating. Cancellation policies provide certainty to small businesses who cannot afford these expenses.

However, when you’re putting a cancellation policy into your business’ terms and conditions, it’s important to do it right.

You need to make sure the policy is reasonable and does not constitute an unfair contract term under the ACL.

A good lawyer can help you understand how cancellation policies could work to protect your business from unexpected cancellations, and how to do them right so that they’re legally enforceable.

If you need help putting together a strong cancellation policy, or would like to know how else your terms and conditions can be drafted to protect your small business, we’d love to help!

You can reach us on 1800 730 617 or drop a line at team@sprintlaw.com.au.

Regie Anne Gardoce

Regie is the Legal Transformation Lead at Sprintlaw, with a law degree from UNSW. Regie has previous experience working across law firms and tech startups, and has brought these passions together in her work at Sprintlaw.

Tomoyuki Hachigo

Tomo is the co-founder of Sprintlaw and a commercial lawyer with a broad range of legal experience. Before starting Sprintlaw, he was an M&A lawyer at a top-tier law firm advising businesses of all sizes from large corporates to startups.