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What’s Hot on the Hotline? 10-Day Right to Cancel

Robert Ebin /
parking lot filled with cars

Just about everyone in the industry is familiar with the 10-day right to cancel retail installment sale contracts, which allows dealers to “spot deliver” vehicles.  Recently, on the Hotline we have received a large increase in calls regarding 10-day cancellation letters and the seller’s right to cancel in general. Given the nature of these calls, the aim of this article is to provide a reminder about cancellation rights and provide information on what can be done after the 10-day rescission period has expired.

Seller’s Right to Cancel Retail Installment Sale Contract

Contrary to what some of you may think, the seller’s right to cancel (due to inability to assign the contract on acceptable terms) is not provided by law, but rather is contractual by nature.  What this means is that a dealer does not have a right under the law to cancel a contract because it could not assign it to a lender, but rather only can obtain this right by language in the contract.  Thankfully, the standard LAW 553-CA Retail Installment Sale Contract has this language built-in (found in a box on the back of the contract). Here is the language for reference:

Lease Contracts

While just about everyone in the industry is aware of the Seller’s Right to Cancel box on the LAW 553-CA Retail Installment Sale Contract, many of our recent calls pertain to lease contracts and cancellation rights.  Many mistakenly believe that lease contracts also have pre-printed seller’s right to cancel language.  On the contrary, many, and perhaps most, lease contracts do not have this pre-printed language. As such, you must ensure that lease cancellation rights language is inserted in the blank box on a lease contract (or incorporated by reference therein). Here is some sample language:

Dealer intends to assign this lease to the institution named in the agreement. It may take a few days to verify your credit and assign the lease. You agree that if the lease is not accepted for assignment under terms acceptable to Dealer, Dealer shall have the right to cancel this agreement. Should Dealer elect to cancel, Dealer shall give you notice within 10 days of the date this contract is signed. Upon receipt of such notice, you must immediately return the vehicle to Dealer in the same condition as when delivered, normal wear and tear excluded. If vehicle is returned in a condition that is acceptable to Dealer, Dealer shall refund all consideration given.

Be sure to confirm in advance that this language is acceptable to the proposed assignee lessor and remember to have the customer acknowledge this additional language by signing or initialing the blank box.

This is something that you want to be especially aware of if you recently changed/updated your DMS or if you transitioned to e-contracting for leases.  We have heard reports of the language disappearing or no longer loading into the blank box after switching or updating DMSs.  We have also heard reports of dealers having issues inserting this blank box language on e-contracts. Remember, and it goes without saying, if your lease contract does not have cancellation rights language, you cannot, and should not attempt to, cancel that lease agreement.

What Happens if the 10-Day Letter is Not Sent (or Sent Out Late)?

Obviously, a 10-day letter that was never sent out has no legal effect.  But remember, a cancellation letter that was sent after the 10-day period really has no legal effect either, and could even potentially be construed as a misrepresentation to the customer. Absent defaulting on the contract (more on this later), a dealer is really limited in what it can do to remedy the situation.  A dealer can:

  • Try to persuade the lender to accept the deal as written (offer to pay points if necessary).
  • Ask the customer to voluntarily cancel or rewrite the deal. Remember that with this option, the decision by the customer must be completely voluntary, and the dealer must not attempt to force or strong-arm a customer into cancelling or rewriting the contract.
  • Unconditionally guarantee (UG) the deal.
  • Carry the contract in-house and start accepting payments from the customer.

None of these options are likely palatable to a dealer, which is even more reason to timely send out 10-day cancellation notices.  A few other quick points to remember on this topic:

  • A conditional acceptance or an acceptance with stipulations (i.e., “stips”) should not be considered an acceptance by a lender, and absent an unconditional acceptance, we highly recommend a dealer send a 10-day cancellation letter out so as to preserve its rights.
  • “10 days” is 10 calendar days and not business days.
  • In calculating the 10 days, the date of the contract is not included, and the first day is the day after the contract was executed.
  • The customer does not have to receive the letter within 10 days.  Rather the letter only needs to be sent within 10 days.  We highly recommend sending one 10-day letter via U.S. mail, first-class, and a second 10-day letter via U.S. mail, certified, return receipt requested.

What about Default?

Even if you miss the 10-day deadline, you may not necessarily be stuck carrying the deal in-house if there is a default by the customer.  If there is such a default, the dealer may have the ability to demand the customer return the vehicle (and can potentially allow for repossession, if necessary). Section 3b LAW CA-553 Retail Installment Sale Contract defines default as:

  • Failing to make any payment on time;
  • Giving false, incomplete, or misleading information on a credit application;
  • Filing for bankruptcy;
  • Losing, damaging, or destroying the vehicle; or
  • Breaking any agreements in the contract.

Regarding the last point above (i.e., breaking any agreements in the contract), this would include such things as:

  • Removing the vehicle from the US or Canada (section 2b);
  • Transferring an interest in the vehicle without written permission (section 2b);
  • Exposing the vehicle to misuse, seizure, confiscation, or involuntary transfer (section 2b);
  • Failing to repay any repair or storage bill, taxes, fines, or charges incurred by the lender for the vehicle (section 2b);
  • Failing to maintain physical damage insurance for the vehicle (section 2d); or
  • Failing to provide documents or other information necessary to verify any information in the credit application (section 8).

However, before automatically assuming that a customer has defaulted and demanding the return of the vehicle, the dealership must scrutinize the deal.  In some cases, for the consumer’s conduct to amount to an actionable default, the default must be “material.” For example, if the dealer claims the customer provided false or misleading information in the credit application, the false information must be significant (i.e., it would affect a lender’s decision as to whether to provide financing). Also, double-check that the false information was in fact provided by the customer and not a dealership employee.

Although we specifically referenced the LAW CA-553 Retail Installment Sale Contract, you should note that many lease agreements typically have similar (and sometimes additional) terms regarding default as well.

Determining whether a customer has defaulted or whether a default is material can be tricky. Therefore, dealers are advised to seek advice from knowledgeable counsel on these types of issues, especially before any attempt is made to recover the vehicle.


We know that these times are hard, and everyone everywhere has been affected by this global pandemic. We are all in this together, and this too shall pass. Hotline clients are invited to contact us at (800) 785-2880 (then press “4” for hotline) or [email protected]. We are here to answer any questions you may have.

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