THE LAUNDRY ROOM LEASE: A MAGNET FOR CONTROVERSY!

A friend tells you that he recently purchased an apartment building and was told by the laundry room operator that the operator is not going anywhere until the year 2020.  When?

Many laundry room leases, after initially providing for a five year term, will, a few paragraphs later, provide that the lease may be extended for two successive periods of five years each.  The lease will likely state that the options will be exercised "automatically" unless the lessee provides notice not to extend.  The lease may also provide that the lessor may terminate the lease only by written notice provided 90 days prior to the end of the "second extended term."  In other words, the owner of the apartment building may not be able to terminate the lease by notice before the lapse of approximately 15 years under the lease! 

In the area of residential real property, California Civil Code §1945.5 provides in part that:

"the automatic renewal or extension of the lease for all or a part of the full term of the lease if the lessee remains in possession after the expiration of the lease or fails to give notice of his intent not to renew or extend before the expiration of the lease shall be voidable by the party who did not prepare the lease unless such renewal or extension provision appears in at least 8-point boldfaced type, if the contract is printed, in the body of the lease agreement and the recital of the fact that such a provision is contained in the body of the agreement appears in at least 8-point boldfaced type, if the contract is printed, immediately prior to the place where the lessee executes the agreement, any waiver of the provisions of this Section is void as against public policy."

Although an apartment building generally involves residential real property, a laundry room filled with coin operated washers and dryers would seem to constitute a commercial enterprise, and thus exempt from such code section.  My research has not revealed a written judicial opinion determining whether the requirements of California Civil Code §1945.5 apply to a laundry room lease.  It is, however, probably only a matter of time before a heated legal battle between a building owner and a laundry room operator results in an appellate decision that will settle this issue in California.  Other jurisdictions may have similar statutes which may have been interpreted or which may remain uninterpreted as in California.

There was a time when little attention was paid to the content of a laundry room lease.  Apartment building owners are, however, becoming increasingly aware of the content and consequences of a long term laundry room lease.  As a result, building owners are consulting with attorneys more frequently regarding these matters.

Counsel for apartment building owners are advising their clients to consider the following issues in their discussions with laundry room operators:

1.   Limit the lease term to one, two or three years.

2.   Delete any automatic renewal clause, so that only a month-to-month tenancy will exist after the expiration of the initial term. 

3.   Specify the quality of the equipment to be installed, e.g., new or used equipment, and perhaps brand of equipment. 

4.   If the lease provides that following termination, the lessee nonetheless has the right of first refusal to meet any bona fide offer to lease the premises submitted by another company, on the same terms as the other company's offer, insist that the provision be deleted. 

5.   Review the nature of any public liability insurance required under the lease.

6.   Do not permit the laundry room lease to be recorded.  If a dispute arises between a building owner and the laundry room operator, a recorded lease will serve as a cloud upon title and make more difficult the building owner's effort to limit or remove the effect of the lease.

As a laundry room operator, how would you respond to these concerns of an apartment building owner?  Before you contact that next big, potential apartment building customer, you may wish to reflect upon these questions with your own legal advisor.  A hesitant, ambiguous response to a question considered important to the building owner may lose the customer!

Assume you are operating under an existing laundry room lease.  How would you respond as a laundry room operator if a new owner of the apartment building requests you to remove your coin operated washers and dryers and vacate so that the new owner can install and operate his own equipment, or enter into a lease with your biggest competitor?  Most operators would tell him that the equipment isn’t going anywhere and provide him with a copy of the existing lease entered into with the previous owner of the building.  

You can anticipate his retort that he never signed the lease or any document assuming the lease, and did not know of its existence.  He will likely also point out that the laundry room lease was not recorded.  Accordingly, he will presumably advise you that he is not bound by the terms of any such lease or contract and that you remain on the premises as a month-to-month tenant.  Assume he then hands you a thirty day notice of termination of the lease. 

So how might a laundry room operator respond?  

California Civil Code §1214 provides in part that:  "Every conveyance of real property . . . is void as against any subsequent purchaser . . . in good faith. . . ."  A laundry room lease is a conveyance of real property.  In order to be a good faith, innocent or bona fide purchaser of property, however, so as not to be subject to such a laundry room lease, one must be innocent of any notice of the existence of the laundry room operator. 

Assuming a laundry room operator has maintained the proper signage, an operator might advise the new owner that he has such notice because signs upon the equipment or upon the walls in the laundry room give notice of the name and address of the laundry room operator.  The operator might further advise the new owner that he had an affirmative obligation to inspect the premises, including the laundry room, to determine the presence of anyone outside the chain of title.

In purchasing an apartment building, income from the laundry room can generally be found in the broker's listing for the property.  Income schedules available for inspection by prospective purchasers and their lenders normally include laundry room income.  Such information provides further notice of the existence of a laundry room lease. 

The fact that the laundry room lease is unrecorded will not be of assistance to the new owner if he otherwise had notice of the existence of the laundry room lease.  California Civil Code §1217 provides "An unrecorded instrument is valid as between the parties thereto and those who have notice thereof." 

The California Court of Appeal advises that,

"an unrecorded lease is not void as against a purchaser who has notice of the lease or such notice as should put him on inquiry as would disclose its existence. . . .  The rationale of this rule is that a purchaser of premises occupied in part by a third person under an unrecorded lease cannot be said to be an innocent purchaser since possession by such third party may constitute notice to the purchaser, provided it is open, notorious, exclusive and visible, and not consistent with the record title. . . ."

It has also been held that "the purchaser is under a duty to make inquiry of [the] strangers' rights, and failure to do so deprives him of the status of bona fide purchaser."

The moral of the story?  Each situation of this type involves a different set of facts.  The message here?  Proceed cautiously with knowledgeable advisors in your corner!

[This column is intended to provide general information only  and
is  not intended to provide specific legal advice; if you have  a
specific  question  regarding the  law,  you  should  contact  an
attorney  of your choice.  Suggestions for topics to be discussed
in this column are welcome.]


Reprinted from The Journal
Myles M. Mattenson © 2006