Hello everybody.  Unfortunately, this month I have terrible news to report about laundry room leases.  

On September 25, 2020, the California Court of Appeal ruled in favor of Dadson Washer Service, Inc. (“Dadson”) and against the apartment owner in a case which upheld the validity of Dadson’s automatic renewal clause and which extended Dadson’s initial 10-year laundry room lease term for 20 additional years – that is, a total of 30 years!

Here is a summary of that case: Eighteen years ago, Dadson gave to a prior owner of a 22-unit apartment building in West Hollywood a laundry lease by which Dadson would lease the laundry space in the complex for an initial ten years. That 10-year term was specified on the front side of the lease. 

However, the back of the lease provided that the initial term would automatically renew for two additional 10-year terms unless Dadson elected not to renew it.  The only way the lease would not automatically renew for either of the two 10-year terms was if Dadson, not the apartment owner, gave written notice of its intention not to have the lease renew.  So essentially, Dadson gave itself a 30-year lease which only Dadson had the power to shorten by either 10 years or 20 years!

The lease was already into its second 10-year term when a new party (“MES”) purchased the apartment building in 2017 from the prior owner who had signed the lease in 2002.  

After acquiring the property, MES notified Dadson that the lease did not comply with the Civil Code (specifically Section 1945.5) which, MES maintained, voided the lease’s automatic renewal provisions.

Dadson disagreed and refused to vacate.  MES then filed suit against Dadson for cancellation of the lease in a case entitled MES Investments vs. Dadson Washer Service, Inc.

After the Los Angeles Superior Court ruled against MES, MES appealed the case to the California Court of Appeal on the basis that Civil Code Section 1945.5 empowers the party who did not prepare a lease of residential real property to void an automatic renewal unless the renewal provision appears immediately prior to the place where it was signed.  In Dadson’s lease form, the signatures of the parties appeared on the front side of the lease while the renewal provision appeared on the back.

So, the issue became whether the laundry room in the apartment building was residential real property.  If the laundry room was residential real property, then MES, as the owner of the apartment building, could void the renewal provision. If the laundry room was not residential real property, then MES could not void the automatic renewal.

Unfortunately, the appellate court held that the laundry room Dadson was leasing was a “machine room” and therefore was not residential real property.  The court determined that the laundry room was not residential real property because it was not part of the dwelling units in the building.

While I disagree with the Court’s determination that a laundry room in an apartment building which is used by the residential tenants for residential washing and drying of clothes is not residential real property, my view is irrelevant as the appellate court ruled otherwise.  (Case No. B297634.)

Driving the final nail into the coffin, on December 9, 2020, the California Supreme Court declined to reconsider the Court of Appeal’s decision, meaning that the appellate court’s ruling that a laundry room is not residential real property is final and binding. [Note to attorneys:  One other possible way to void an automatic renewal provision, which the lawyer in that Dadson case unfortunately did not raise, is to contend that the provision was unconscionable, both substantively and procedurally, at the time the lease was signed.]

 

Why Would Any Owner Give Dadson a 30-Year Lease???

Over decades, I have seen numerous Dadson laundry leases with initial 5-year terms plus two 5- year automatic renewals (potentially, 15 years in all) and Dadson laundry leases with initial 10-year terms with two 10-year automatic renewals (potentially, 30 years in all).

Think about that for a moment.  What owner would knowingly give any tenant a 30-year lease to rent a room in their apartment building?  Probably not a single one!  So why would any owner allow Dadson, or any other commercial laundry company, to have a potential 30-year lease of a laundry room?  I can think of only two reasons:

First, the laundry company offered the owner a substantial amount of money up front for that 30-year lease. But that is unlikely unless the owner had in mind to pocket the cash and thereafter sell the building.  The lease would then remain in effect solely to the detriment of the new owner.  

Second, and more likely, the owner did not understand that the lease term could extend for 10 or 20 additional years solely at the discretion of the laundry service.  For example, in the MES vs. Dadson case, Dadson’s automatic renewal provision in its lease provided that the term could last up to 30 years and that only the “lessee” could give notice to terminate the renewal provisions.  But who was the “lessee”?

The lessee was Dadson because Dadson was leasing the laundry space into which it would install its equipment.  But almost no owners I have counseled over the past 30 years (if they even read the automatic renewal provision on the back side of the lease when they signed it) had initially understood that Dadson was the lessee.  

Most owners, if they had read the renewal provision at all, mistakenly assumed they were the lessee because Dadson was providing the laundry machines.  Those owners saw themselves as the lessees having in mind, albeit mistakenly, that they were leasing the laundry equipment.

 

Right of First Refusal Provisions

Another troublesome provision that Dadson and some other laundry service companies have occasionally inserted in their leases is a Right of First Refusal (“RFR”) clause.

While the legalese will vary from laundry company to laundry company, the concept of a RFR provision is that upon the expiration or termination of the lease, the “lessee” (once again, that is the laundry service) will have the right of first refusal to match any offer from a new company to (1) lease the laundry room space, or (2) to sell coin-operated laundry equipment, such as washers and dryers, for use in the laundry room.

The RFR provision prevents the owner from leasing the laundry room to a new laundry company without first offering to the prior laundry service a new lease on the same terms and conditions as the new company’s proposed lease. 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 first giving the prior service an opportunity to re-lease the room.

The RFR provision also prohibits the owner from purchasing coin-operated laundry equipment from some other company without first allowing the prior company to sell similar machines to the owner.

So, the following are my recommendations of what owners should do to protect themselves from oppressive laundry room leases.

 

Recommendations 

  1. Read every word in every paragraph, front and back, in a laundry lease before signing the agreement to be certain that you understand and agree to all of the details in the contract.  Don’t just skim over the legalese, particularly on the second page or back side of the first page. Read every word carefully and think about what you are reading.  Attorneys never speed read through contracts.  We read them slowly and think about what each word means. So, act like an attorney when a laundry service gives you a lease to sign.
  2. Never sign a laundry room lease at the laundry company’s office or while a salesman/saleswoman is present at your home or office.  You need private time to carefully and thoroughly read the lease and not feel rushed or pressured while the laundry service is present.  Instead, require the company to email you the lease, not hand it to you while they wait for you to sign it.
  3. Never sign a laundry room lease that contains an automatic renewal provision.  If a laundry company presents you with a new lease containing an automatic renewal or automatic extension clause, strike it out before signing the document.  Better still, find another laundry service which does not include the renewal or extension clause in their lease in the first place.  You probably would not want to do business with a company that attempts to overreach from the get-go.  Indeed, there are a number of reputable laundry services whose leases do not contain such oppressive provisions.
  4. Never sign a laundry lease which gives a Right of First Refusal to the laundry company.  Strike out that provision, or better still, find another laundry service that does not include such a provision in its form agreement.
  5. 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 of rent you will receive (based on the number of quarters or electronic amounts taken in by the machine) is not subject to a minimum number of washes or dries per day.  Require that you receive a fixed percentage of the gross revenue each month.  Also, specify in the lease that the laundry company will pay you your rent no less frequently than once per month, just like any other tenant. 
  6. Add a provision in the lease that recites: “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 because 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.  (Attorneys reading this article may wish to review California Civil Code Sections 1195 and 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 am suggesting, the laundry service is prohibited from recording the lease.

Best of luck and careful reading when signing any new laundry room lease.  It is the only way you will be able to protect yourself.

 

Dale Alberstone is a prominent real estate attorney who has specialized in real property and resident manager law for 40+ years.  He is also a former arbitrator for the American Arbitration Association.  

Mr. Alberstone has been awarded a 5-Star AV rating from Martindale-Hubbell, the 130-year-old national rating service of attorneys.  A 5-Star AV rating is the highest possible rating bestowed and reflects an attorney who has reached the highest level of professional excellence and who is recognized for the highest levels of skill and ethical standards.

The foregoing article was authored on January 2, 2020.  It is intended as a general overview of California law only and may not apply to the reader’s particular case.  Readers are cautioned to consult a lawyer 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, 269 S. Beverly Drive, Suite 1670; Beverly Hills, California 90212, or phone: (310) 277-7300.