Hello everybody. For decades I have cautioned members of the Apartment Owners Association about two insidious provisions that frequently appear in laundry leases.
One of them is the automatic renewal clause. The other is the “Right of First Refusal” clause.
This month I will discuss both of them in the context of a long term laundry lease that ended with my client filing an Unlawful Detainer against Dadson Washer Service, Inc. (“Dadson”) on March 30, 2017, and Dadson hauling away their machines on April 18, 2017. But first, let me review with AOA members the nature of those two onerous provisions.
Oppressive Automatic Renewal Clauses
The most insidious clause I have ever seen in a laundry lease is the automatic renewal (or automatic extension) provision. In the past, laundry companies typically tucked it away in the dense prolix of their contract, often in small print on the back of their form lease. The legalese 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 in writing by registered or certified mail return receipt requested at least 180 days prior to the end of the then-current term of LESSES’S intention not to renew this lease.”
Before proceeding further, I ask AOA members 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? Is it the apartment building owner or the laundry company?
Owners frequently 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.
In fact, the ability to prevent the renewal of the lease is just the opposite: only the laundry company may cancel either or both of the first two automatic extensions. That is because the laundry lease defines “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 customarily leases the laundry room from the owner, who is then the lessor. The owner does not ordinarily lease the appliances from the laundry company.
Thus, under the provision quoted above, if the initial term is 10 years (as many pre-printed laundry leases say), the total term of the lease may be as long as 30 years unless the laundry company elects to avoid either the first or second renewal extension. Let me repeat 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.
Let’s now turn to the other horrible provision.
Right of First Refusal Clauses
While the legalese will vary from laundry company to laundry company, the concept of a Right of First Refusal (RFR) provision in a laundry lease is that upon the expiration or termination of the lease, the “lessee” (i.e., the laundry service) shall have the right of first refusal to match any offer from a new company to (1) lease the laundry room space, or (2) sell coin-operated laundry equipment, such as washers and dryers, for use in the laundry room.
That RFR provision prevents the owner from leasing the laundry room to a new laundry company without first offering the new proposed rental agreement to the laundry company whose lease had just expired.
Thus, no matter how unhappy, if that was the case, the owner had been with the prior laundry service, the owner is prohibited from leasing the laundry room to a new company without giving the prior service an opportunity to lease the room on the same terms and conditions as the proposed new company.
The owner is also prohibited from purchasing coin-operated laundry equipment without first allowing the prior company to sell similar machines to the owner.
The Dadson Washer Service Eviction Case
Here is an example of how automatic renewal and Right of First Refusal provisions can work in the real world.
In early 2002, my client’s predecessor signed a laundry lease with Dadson Washer Service, Inc. for an initial term of five years. The lease was for the laundry room in an eight unit apartment building located in Los Angeles. Dadson would supply one washer and one dryer.
On the back side of Dadson’s lease sandwiched in the middle of 16 other paragraphs was a paragraph containing an automatic renewal provision. That provision was similar to the one I quoted toward the beginning of this article, except that the initial term, which started in 2002, was for five years, not 10 years. That meant that upon the expiration of the original term of the lease in 2007, it would renew for two additional periods of five years in length unless the lessee (i.e., Dadson) gave written notice of its intention not to renew the lease.
That is to say, at the end of the first five years in 2007, the lease would automatically renew until 2012 unless Dadson cancelled. If Dadson did not cancel after the first renewal, the lease would again renew from 2012 until 2017 unless Dadson cancelled the second renewal. If Dadson did not cancel either renewal, the total term of the lease would be at least 15 years!
In 2007, by which time my client then owned the property, my client served written notice to Dadson to discontinue its service and to remove its washer and dryer from the premises. (Although I refer to him as “my client,” I did not begin to represent this owner until 2016.) Dadson replied advising that the lease was still in effect and refused to then remove the equipment.
Some nine years later, on June 24, 2016, my client sent Dadson another letter advising that the company’s lease would terminate on or about March 7, 2017, which he understood would coincide with the end of the 15th year of the lease. My client asked Dadson to remove its appliances on or before the expiration date.
Unfortunately, March 7, 2017 came and went, but Dadson refused to remove its equipment. Dadson’s basis was that it intended to enforce its Right of First Refusal provision in its lease.
I then advised Dadson that my client had not leased the laundry room to any other party and that my client would not be purchasing coin-operated laundry equipment for use in the laundry room. Because of that, I explained to Dadson the RFR in their lease was not applicable.
Dadson responded by writing, “I hope you understand that I hear this excuse all the time.” It continued to refuse to remove its equipment.
With respect to new laundry equipment, what my client intended to do (and ultimately did do) was rent one coin-operated washer and one coin-operated dryer from another laundry service for use in the laundry room. The arrangement was solely for the rental of the equipment, not the lease of the laundry room or a purchase of the machines.
I even went so far as to send Dadson a copy of that new rental agreement to demonstrate that the RFR provision was not applicable to my client’s arrangement with the new laundry company. Unfortunately, Dadson continued to stubbornly refuse to remove its appliances.
With no other viable option available to him, on March 30, 2017, my client filed an Unlawful Detainer Complaint against Dadson in the Los Angeles Superior Court.
On April 18, 2017, without going to trial, Dadson threw in the towel by hauling away its washer and dryer. Presumably, that was because it knew it had no grounds to retain the appliances there and that it expected the Court would soon evict the company.
Although Dadson’s aforesaid 2002 lease printed the automatic renewal clause on the back of the document, I understand that Dadson has now relocated that provision in its newer lease forms to the front side just above the signature lines. But do not be fooled. No matter where it is set forth in the document, in my judgment it is a thoroughly oppressive and utterly unacceptable provision, as it was to my client.
Let me recommend the following to AOA members in connection with laundry leases:
- Read every word in every paragraph in a laundry lease before signing the agreement to be certain that you understand all of the details in the contract.
- Never sign a laundry room lease that contains an automatic renewal provision. 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 that tries to overreach from the get-go. Indeed, there are a number of reputable laundry services whose leases do not contain that oppressive provision.
- Never sign a laundry lease which allows a Right of First Refusal for the laundry company. Strike that provision, or better still, find another laundry service that does not include such a provision in its form agreement.
Here are two additional recommendations which have been the subject of prior articles I have authored for AOA members over the years:
- Strike any provision in the proposed lease that the owner of the property shall receive a percentage of the gross revenue collected by the laundry company above a base minimum number of cycles per day that the equipment is operated. In other words, insist that the percentage that you will receive as rent (based on the number of quarters taken in by the machine) on a monthly basis is not subject to a minimum number of washes or dries per day.
- Add a provision in the lease that, “Neither party shall record this lease or cause it to be recorded.” The last thing that you want the laundry company to do is record the lease as it then encumbers the owner’s title to the property. It is true that only notarized leases can be recorded. But shocking as it sounds, California has a statute which allows a notary to notarize a signature on a document based on the affidavit of a witness who saw a person sign the paper even if the signing person did not personally appear before the notary. (Lawyers reading this article may wish to review California Civil Code Section 1196.) Thus, laundry companies may obtain a notarization of the owner’s signature on the lease without the owner even knowing that it occurred, provided that some employee of the laundry company personally saw the owner sign the instrument and then tells the notary that. Once notarized, the lease can be recorded. But by adding the provision I suggested above, the laundry service is prohibited from recording the lease.
Dale Alberstone is a prominent litigation and transactional real estate attorney who has specialized in real property law for the past 40 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.
The foregoing article was authored in May, 2017. It 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.
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.