Ordinarily, my articles appearing in this column for members of the Apartment Owner Association address a single aspect of the law. This month I depart from that custom because there are two fields of law, arising from two Superior Court cases finalized near the end of 2011 that are important to bring to the attention of the Association’s readers. The first case deals with required disclosures of encroaching walls, and the second with the validity of automatic renewal clauses in a laundry leases.
Disclosure of Encroaching Walls
This first litigation involved a cinder block wall which was constructed about 30 years ago several feet west of the true boundary between two properties. The lots were situated more or less beneath the prominent hilltop “Hollywood” sign rising above Hollywood, California. Specifically, the wall encroached on the true owner’s property by about six feet along its entire 122 foot length. My clients, who became next door neighbors, purchased their adjoining property in April 2010. Within a couple of weeks after escrow closed, the owner (a former “Miss Norway”) approached her new neighbors to discuss the encroaching wall and the fact that she had advised the listing agent near the inception of the escrow that the wall might encroach on her land. The listing agent, who was employed by one of the most prominent real estate brokerage companies in the United States, did not disclose to the buyers the fact of the potential encroachment or that the owner next door believed there might be a problem with the location of the wall.
Soon after the close of escrow, the owner had a survey prepared which confirmed the encroachment. Shortly thereafter, the former beauty queen filed suit against my clients to compel removal of the cinder block structure. My clients then filed a cross complaint against the listing agent and the brokerage company (as well as the seller) for fraud and indemnity in connection with their alleged concealment from my clients of the owner’s potential claim.
In October 2011, the real estate licensees and the seller settled the case with my clients by collectively paying $65,000.00 for my clients’ damages. In addition, and most importantly, we successfully negotiated with Miss Norway to deed to my clients an exclusive easement for the entire area situated between the true boundary and the block wall, which she then did.
What is significant about this case is that licensees (and the seller), while denying any wrongdoing or liability in connection with the settlement, paid a substantial sum of money due to the fact that they withheld material information from the buyers. Concealing such information is contrary to the rule of law in this State. California jurisprudence requires a seller and licensee to disclose to a buyer all material facts which are known to them that affect the value or desirability of property and which the concealing parties would have reason to believe are not known to or readily observable by the buyer.
Had the case gone to trial, it is likely that the jury would have found that the licensee and the seller were liable for that concealment and have awarded substantial damages against them. It is also probable that the court would have found that my clients had acquired an equitable or other type of easement for the land situated between the true boundary and the wall.
That litigation illustrates what AOA members should know, namely that the ancient doctrine of “Caveat Emptor” (i.e., Let the buyer beware) no longer applies. Instead, members should be guided by the new principle, “Let the seller disclose.”
One other important aspect of the case, and lesson that can be learned, is that by settling, a litigant may be able to obtain a more advantageous result than if he won at trial. Here, the true owner agreed that after the easement was recorded, my clients could apply to the City for a lot line adjustment. Upon the completion of the lot line adjustment, the owner agreed my clients would then actually become the new owners of the land in issue. The easement would thereupon be extinguished because a party cannot (and need not) have an easement on property he/she owns. Had the matter proceeded to trial, the Court would not have had the jurisdiction to change the location of the boundary line. However, by settlement, the parties could move the line, which they are now doing, subject to the City’s approval.
The moral of the story for AOA members is that when they sell their apartment buildings, as well as any other real property, be certain to disclose all known material facts which are unlikely to be known or observable to the potential buyer. That disclosure should always be in writing so that the buyer may not later deny that it was made. Rarely do such disclosures “kill the deal.” This same recommendation is applicable to real estate agents. That is, disclose all known, but potentially adverse, facts.
Laundry Leases
The second case I bring to your attention involved the automatic renewal and extension clauses in laundry leases. For years I have cautioned AOA members about the problems inherent in many laundry agreements. In particular, I have alerted readers about the insidious automatic renewal/extension clauses that some laundry companies doing business in California include in their lease forms.
My firm has filed Superior Court lawsuits against several of these laundry companies urging that the court declare that such renewal and extension clauses are voidable because they fail to meet certain statutory requirements.
Automatic renewal/extension clauses typically provide that the renewal is for a minimum of one, and usually two, terms equal to the initial term. Thus, if the initial term is 10 years (a common duration in many laundry leases), then at the expiration of that term, the lease will renew for two additional 10 year terms (i.e., a total of 30 years!) unless the laundry company elects to terminate the lease.
In the lawsuits, my firm has taken the position that a renewal clause is voidable because it does not comply with Civil Code §1945.5. That statute requires that for lease of residential real property, a recital of the fact that the lease contains an automatic renewal provision must be expressly set forth in 8-point bold face type immediately above the place on the document where the lessee signs.
With many of these lawsuits, the laundry companies promptly removed their equipment and agreed to terminate their laundry leases even though there were years left before the leases would expire. Unfortunately, that does not occur in all instances.
In mid 2011, my office filed a Complaint against Dadson Washer Service, Inc., to void the automatic renewal clause printed in Dadson’s laundry lease on the basis that it violated statutory law, among other reasons. Dadson then filed a Demurrer asking the court to dismiss the case on various grounds, one of which was that the laundry rooms in the apartment complex were not residential real property.
Even though my client’s Complaint alleged that the entire property was zoned R 3 (i.e., residential, multifamily) and that the use of the laundry rooms was restricted to the residential operation of washers and dryers by residential tenants who lived in the residential apartment buildings, the Superior Court judge determined that the rooms were not “residential” real property. The judge did not explain how she came to that conclusion, but nevertheless sustained the demurrer and dismissed the suit.
The determination of the Superior Court judge in that case is not binding on other Superior Court judges, nor does it constitute enforceable judicial precedent in other cases. Only published cases of the California Court of Appeal and of the California Supreme Court would have that effect. Unfortunately, neither appellate tribunal has ruled on the issue.
What is important for AOA members to know is that when a laundry company presents the form laundry lease to the owner or management company to sign, they should not agree to the lease unless the automatic renewal extension provision is stricken. If the company refuses to delete it, I recommend that members take their business to another laundry service that does not include such automatic renewals in their lease forms. Indeed, there are a number of reputable laundry companies whose form leases that do not contain the renewal clauses.
Other recommendations that I make relative to laundry leases are the following:
1. Delete any reference to a right of first refusal which would allow the laundry company to meet the terms of any new lease when the laundry company’s existing lease expires. That way, the owner can select a new service if he/she is unhappy with the present company.
2. Strike any provision which extends the term of the lease if the laundry company installs new equipment. Bad idea for an owner.
3. Do not agree to a minimum dollar amount that the laundry company will retain from each machine if that sum increases annually. Strike the clause. Otherwise, the minimum amount may become so substantial that the owner will be left with little or no monthly rental revenue.
4. Include a specific provision in the laundry lease that the laundry company will not record it. Recordation clouds an owner’s title.
5. In general, be careful to read every paragraph in a proposed lease, think about what you have just read, and strike any provisions which are unacceptable.
Concluding Remarks
The common denominator between a seller’s concealment from a buyer of material facts affecting real property and the automatic renewal clause in laundry leases, is that they are two very troubling areas of law for apartment owners. Owners who withhold material information are frequently sued by buyers. (The same is true where the seller’s real estate broker withholds material information. The buyer may sue the seller on an “agency” theory, meaning that the principal is liable for the acts of his representative.)
Thus, sellers of apartment buildings and their agents should always disclose material facts known to them which are not known or readily apparent to buyers.
With respect to laundry leases, I could not recommend more strongly that AOA members not sign any new lease which contains an automatic renewal or extension provision. Strike out the clause, or better still engage a laundry service that does not include the provision in its form lease in the first place.
Dale Alberstone is a prominent litigation and transactional real estate attorney who has specialized in real property law for the past 35 years. He has been appointed to periodically serve as a judge pro tem of the Los Angeles Superior Court and is a former arbitrator for the American Arbitration Association. He also testifies as an expert witness for and against other attorneys who have been accused of legal malpractice.
Mr. Alberstone has been awarded an AV rating from Martindale-Hubbell, which is a registered certification of Reed Elsevier Properties, Inc. An AV rating reflects an attorney who has reached the heights of professional excellence and is recognized for the highest levels of skill and integrity. His firm is rated A+ by the Better Business Bureau.
The foregoing article was written on January 2, 2012, and is intended as a general overview of the law and may not apply to the reader’s particular case. Readers are cautioned to consult an advisor of their own selection with respect to any particular situation.
Address correspondence to Dale S. Alberstone, Esq., ALBERSTONE & ALBERSTONE, 1801 Avenue of the Stars, Suite 600, Los Angeles, California 90067. Phone: (310) 277-7300.