Ringfencing advance payments by consumers could see businesses pass on higher costs to customers

ALTHOUGH recent abrupt closures of gyms and fitness studios have caused customers to lose prepaid amounts, protecting such upfront payments by law would simply drive up operating costs, lawyers told The Business Times.

Earlier in September, Kyklos Studio and its affiliated brand X Fitness allegedly closed down overnight – with the owner becoming uncontactable – and left several users unable to gain refunds for spin and yoga packages ranging from S$200 to S$600.

Since 2019, the Consumers Association of Singapore (Case) has received at least 23 complaints due to the “sudden” closures of 14 gyms and fitness centres, involving more than S$16,000 in contract value, said Case president Melvin Yong.

But if prepayments were protected by law, businesses might pass on the higher costs to customers, said lawyers.

Rezvana Fairouse, associate director at NLC Law Asia, noted that gyms or fitness studio operators generally use prepayments to fund their day-to-day operations. If legislation required prepayments to be set aside for certain periods or be given super priority in a liquidation, for example, this would “severely” impact the gym’s business operations, she said.

“Consequently, such potential negative impacts may (be passed) on to the consumers in the form of price increases for gym memberships, decrease in service levels, and so forth,” she added.

Navin Naidu, partner at Dentons Rodyk’s white collar and government investigations practice group, noted increasing calls for legal ringfencing of consumer prepayments for goods and services, but added that such regulation could drive up compliance costs.

“The key is in striking a delicate balance between keeping business costs manageable and protecting the public,” he said.

Lee Ee Yang, managing director of Covenant Chambers, said the government “may be of the view that there is no necessity to regulate this area, given that the risk of default is commercial in nature”.

“Further, balanced against the risk of default and loss of prepayments is the benefit that consumers gain from getting a cheaper rate on the gym membership fees via an upfront payment model,” he said.

Prepay, but at your own risk

Lawyers told BT that if a gym or fitness studio becomes insolvent, there is minimal protection for consumers who have made prepayments.

Granted, consumers still can pursue legal action against errant companies that close down. Most customers should have a valid claim for the recovery of monies, apart from limited circumstances such as if they owe fees that may be set off against the prepayments, Lee said.

But whether legal action would yield “practical results” depends “in large part on whether the gym company has sufficient resources to honour its payment obligations”, he added.

It is challenging for consumers to recover their prepayments because the administrator assigned to wind up the company will need to first pay off secured and preferential creditors.

Fairouse said that membership contracts are likely to be in the gym’s favour: “Consumers generally would not be able to negotiate on specific terms, and would have little choice but to accept the gym’s terms if they wish to sign on for the membership.”

“The harsh truth is that prepayments are almost always at consumers’ risk, unless the prepayment is protected under one of CaseTrust’s accreditation schemes,” said Felicia Tan, who specialises in dispute resolution at TSMP Law Corporation.

Case’s accreditation arm CaseTrust has schemes for industries such as renovation as well as spa and wellness services, under which customers of an accredited business can recover unconsumed prepayments or deposits if the business goes bust.

While there is currently no such accreditation scheme for gyms, Yong said that Case is looking into developing schemes for both the fitness and furniture industries, where consumers tend to make large prepayments upfront. The association has also called on the government to consider new legislation to protect consumers, he added.

For now, consumers have the option of filing a claim with the Small Claims Tribunals, said Yong. They can also file a chargeback request with their bank if they had used their credit card to pay for packages and if the purchase transaction took place within the preceding 120 days, or file a proof of debt with the liquidators.

As for lodging a police report, that does not mean that action will be taken against the gym operator or that customers will recover their money, noted Naidu. A criminal offence or criminal breach of trust would require “proof of dishonest intention at certain crucial points of the transaction,” he said, which may not be present in all cases.

Bigger players can afford shorter payment cycles

On a practical note, it may be more useful for consumers to take measures to protect themselves, said Naidu. For instance, they should opt for instalment plans instead of making large prepayments, especially when transacting with businesses which do not have a proven track record or accreditation.

While yoga and spin studios – such as the now-defunct Kyklos Studio and X Fitness – tend to sell packages of a fixed number of classes, other kinds of gyms have time-based payment cycles.

Brad Robinson, founder of Ritual Gym, said it is common for smaller players to “live month to month” and rely on a “good” month of sales to pay the bills.

“But when sales stop coming in, they’re in trouble because they’ve taken all that money upfront, spent it, and now they’ve got these customers to support but no revenue to support their business,” he added. Ritual Gym, which has 5 outlets across Singapore, bills members on a monthly basis in order to collect “recurring” revenue.

Bigger operators such as Australia fitness franchises Body Fit Training (BFT) and F45 Training, offer shorter payment cycles without long-term lock-ins. For instance, BFT bills members on a fortnightly basis.

BFT Geylang Bahru maintains at least 3 to 6 months of reserves at any point in time to sustain cashflow, said owner Richardo Chua.

The shorter contracts “keep studios on their toes”, but the “strength of the brand” ultimately matters, Chua said. Being part of an established franchise also yields economies of scale, he added – in the case of BFT, members have access to all outlets, which helps with membership retention.

Said Ritual’s Robinson: “Smaller gyms like the comfort of a longer contract or cash upfront; there’s probably some fear in the operator to take such a risk (with shorter contracts). For a new gym with 25 members, to say ‘You can cancel anytime if you don’t want to come back’ is stressful.”