Hello everybody. For many years I have cautioned members of the Apartment Owners Association about the insidious automatic renewal and extension clauses which frequently appear in laundry company leases. In my column this month I will review those and other problematic provisions and make specific recommendations to AOA members as to how to avoid them.
Oppressive Automatic Renewal Provisions
Far and away the biggest single problem with laundry leases is the inclusion of an automatic renewal or automatic extension provision. When included, laundry companies typically tuck away such clauses in the dense legalese of their contract. The verbiage reads something like this:
“It is further understood and agreed by and between the parties hereto that this lease shall be renewed from the date of its expiration for two (2) additional terms each equal to the original term unless LESSEE gives LESSOR notice … at least 180 days prior to the end of the then-current term of LESSEE’S intention not to renew this lease.”
Before proceeding further, I ask you to re-read the quotation. Then answer to yourself the following question: Under that provision, who has the right to terminate the automatic renewal of the lease term, i.e., the apartment building owner or the laundry company?
Owners often conclude that it is they who may terminate the renewal. Why? Because they believe they are the lessee as it is they who are renting the washers and dryers from the laundry company for their tenants’ benefit.
In fact, the right to terminate is just the opposite. Only the laundry company may cancel the automatic extensions. That is because laundry leases define “LESSEE” as the laundry company, not the owner.
Of course, it is true that the laundry company supplies the washers and dryers for the apartment building. But it is also true that the laundry service is the lessee because it leases the laundry room from the owner, who is the lessor. The owner does not ordinarily lease the appliances from the laundry company.
Thus, under the above quoted provision, if the initial term is 10 years (as many pre-printed laundry leases provide), the total term of the lease may be as long as 30 years unless the laundry company elects to terminate either the first or second renewal extension. Let me repeat that for emphasis: The lease term may be as long as 30 years! What owner in his right mind would knowingly give a company a 30 year laundry lease? Probably none.
Here is a real life example. Within the past two years, a client of mine purchased a midsize apartment complex in Los Angeles which was subject to a lease with Dadson Washer Service, Inc. (“Dadson”) The lease was signed by a previous owner in 2004. The initial term of the lease was for 10 years.
On the back side of the lease in the middle of 16 other paragraphs was a paragraph containing legalese similar to the verbiage I set forth in the quotation above. That paragraph meant that upon the expiration of the lease in 2014, it would renew for 2 additional terms each of 10 years in length unless the LESSEE (i.e., Dadson) gave written notice of Dadson’s intention not to renew the lease. In other words, at the end of the first 10 years in 2014, the lease would automatically renew until 2024, and if Dadson did not give notice of cancellation, in 2024 it would renew until 2034. 30 years in all!
My client was shocked to find that out. To his chagrin, Dadson was not willing to voluntarily cancel the lease, as my client wanted.
Because laundry leases are almost always drafted by the laundry companies, some of those companies frequently include automatic renewal clauses. Unfortunately, owners often do not understand the legal import of those clauses until years later when they want to terminate their relationship with the laundry service.
Many companies’ form leases provide that the initial term is either 5 or 10 years. With some companies, the duration of the initial term appears in the lease in words, (e.g., “five” years or “ten” years), rather than being designated with numerals (e.g., “5” years or “10” years). One reason for this is that some businesses do not want it to be readily apparent to the apartment owner of the long length of the initial lease term.
But regardless of the reason, many laundry leases are written in such a manner that it takes careful reading to actually ascertain what is the duration of the initial term.
Then, once that initial term is set, an automatic extension or renewal of the term may be embedded in the prolix of the remainder of the lease. For example, a number of Dadson’s older leases which are still in effect include the automatic renewal on the reverse side of the document in paragraph “H” of 17 paragraphs labeled from “A” to “Q.”
Voidability of Renewal Provisions
Is it possible to void the automatic renewal provision? Perhaps.
California Civil Code §1945.5 provides that in a printed lease for the hiring of “residential” real property which contains an automatic renewal or extension provision, the clause is voidable by the party who did not prepare the lease unless (1) the provision appears in at least 8-point boldface type in the body of the lease agreement, and (2) the recital of the fact that the provision exists in the agreement appears in at least 8-point boldface type immediately prior to the place where the lessee executes the agreement.
In various lawsuits I have litigated on behalf of owners against laundry companies, the principal issue is whether the laundry room is “residential” real property (as I contend), or “commercial” real property (as the laundry services maintain).
Unfortunately, there is no published judicial decision as to whether a laundry room in an apartment building is “residential” real property (which is the type of property necessary in order to be covered by the protection of Civil Code §1945.5), or is “commercial” real property (which would not be covered). Lawyers may only rely upon published opinions as judicial legal precedent for existing or future cases. Published decisions are almost exclusively limited to the determinations of the California Court of Appeal and the California Supreme Court. Neither of those tribunals has ever addressed the validity of an automatic renewal provision in a laundry lease.
Laundry companies argue that laundry rooms are commercial real property because the machines they install in them are coin-operated and serve a commercial revenue-generating purpose.
It is my legal opinion that laundry rooms in apartment buildings are residential, not commercial, real property and therefore noncompliance with the Civil Code section empowers the apartment owner to void the renewal provision. I base that opinion on a number of reasons, but chief among them is the fact that the property as a whole is residential, and merely because one small fraction thereof is used as a commercial venture for residential tenants does not change the residential nature of the real estate. In other words, residential real property is not converted to commercial real property merely because there exists some limited commercial use of it.
Recommendation: If presented with a new lease by any laundry company which contains an automatic renewal or extension clause, strike it out before signing the document. Better still, find another laundry service which does not include the renewal clause in their lease in the first place. You probably will not want to do business with a company who tries to overreach from the get-go. Indeed, there are a number of reputable laundry services whose leases do not contain that oppressive provision.
Right of First Refusal Clauses
Perhaps ranked second just behind the despicable automatic renewal clause is a “Right of First Refusal” provision in a laundry lease. While the legalese will vary from laundry company to laundry company, the concept is that upon the expiration or termination of the lease, the “lessee” shall have the right of first refusal to meet any offer from another company to lease the laundry room space.
Bear in mind that the laundry company is the “lessee,” and therefore upon any expiration or termination of its lease, that company must be offered a new lease by the owner of the building before the owner can enter into a new lease of the laundry room with some other service.
Thus, just when an owner thinks that he is finally finished with his existing laundry service and free to enter into a lease with a new company, the existing service may insist that the owner provide a new lease to that present service. That would prevent the owner from contracting with the new company.
Recommendation: Before signing any new lease with any laundry service, I recommend that AOA members tell the proposed new laundry company that any Right of First Refusal clause must be deleted from the lease if the company wants the owner’s business. I have never encountered a laundry company which will refuse to strike the provision upon request by the owner provided that the demand is made prior to, rather than following, the formation of the contract.
Low Rent Due to Percentage Increase Provisions
Some leases state that the rent that the owner is to receive will be a percentage of the gross revenue collected by the laundry company above a specified minimum. More specifically, the laundry service is to pay the apartment building owner as rent for the laundry room a percentage of the quarters, above a base minimum number, that the laundry service retrieves from the cash boxes in the washers and dryers.
But a latent trap may be lodged in the fine print of the agreement which sets the minimum to the number of quarters which would be generated by two cycles per day per appliance. For example, the lease may say: “The laundry company’s minimum income shall be increased annually by 5% over and above the cash value of two cycles per machine per day then in effect. No rent shall be due or payable when the gross collections do not exceed the minimum.”
In other words, the service’s income will automatically increase by 5% on an annual basis above the minimum of two washes or two dries per day, while the owner’s rent will correspondingly diminish dollar for dollar. I have had a number of clients over the years who no longer received any rent from the laundry company because of the inclusion of that type of percentage increase provision, and the requirement that there be at least two cycles per day for each machine.
Recommendation: Insist that the laundry company strike any percentage rent increase provision before you sign the lease. Instead, negotiate for a flat percentage of the collections without any minimum first going to the service and without any annual reduction to you or annual increase to the laundry service.
Recordation of the Lease
Only notarized leases can be recorded. But believe it or not, California has a statute which allows a notary to notarize the signature on a document based on the affidavit of a witness even if the person who signed it does not personally appear before the notary. (Lawyers reading this article may wish to review California Civil Code Section 1195.) Thus, laundry companies may obtain the notarization of the owner’s signature on the laundry lease without the owner even knowing that it occurred, provided that some employee of the company personally saw the owner sign the instrument.
Once the owner’s signature has been notarized, the service may record the lease with the County Recorder. That recordation places an encumbrance on the owner’s title, which is something that no owner should want.
Recommendation: The most effective way for an owner to prevent an encumbrance of an owner’s title is to specifically include a provision in the laundry lease prohibiting any recordation, such as the following: “Neither party shall record this Lease or cause it to be recorded.”
Extension of Lease Term Upon Installation of New Equipment
Some laundry leases provide that if the laundry company deems it in the best interest of the parties to replace the majority of the laundry equipment with new equipment, and if the owner does not object in writing to that replacement, the laundry service may then replace the appliances and the lease shall be extended an additional 10 (or some other amount of) years.
Please think about that for a moment. By allowing the laundry service to replace the old, unsightly equipment with new washers and dryers (which would be a good thing), the owner may then become burdened, if not oppressed, by a lengthy extended term.
Recommendation: When signing a new lease, strike, or have the laundry service strike, that type of provision. Better still, negotiate with the company for the insertion of a clause which requires the service to replace the appliances with new or like-new refurbished equipment after a given number of years. The number of years must also be negotiated before the lease is signed.
The most important recommendation I can offer to AOA members is that you read each and every sentence and each and every word in the proffered lease before signing it. Then, discuss and negotiate away any questionable or unacceptable provisions with the laundry service.
I believe you will find that most companies will make the deletions, changes or insertions that you request (or insist upon) so long as they are commercially reasonable. As there is much competition among the companies to procure your business, laundry services are likely to accede to your requests. If not, select a different company who is flexible.
Dale Alberstone is a prominent litigation and transactional real estate attorney who has specialized in real property law for the past 39 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. 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. You may Google the name Dale S. Alberstone for further background.
The foregoing article was authored in September, 2015. It is intended as a general overview of the law and may not apply to the reader’s particular situation. Readers are cautioned to consult an advisor of their own selection with respect to any particular issue.
Questions of a general nature are warmly invited. Address correspondence to Dale S. Alberstone, Esq., ALBERSTONE & ALBERSTONE, 1900 Avenue of the Stars, Suite 650, Los Angeles, California 90067. Phone: (310) 277-7300.