Fine print can get lost in laundry contracts
Many of our multifamily apartment communities throughout the state provide for laundry facilities, serving both as an additional amenity for residents and a profit-generator for the owner/operator. While many choose to own and operate their own laundry equipment, others essentially subcontract this service to a vendor focused on this line of business. This article deals with the concerns owners and operators face when dealing with laundry vendors and their proposed contracts.
It is not unusual for an owner to acquire an apartment community that comes with a laundry vendor. Sometimes, the vendor doesn’t meet your expectations, or you want to replace the vendor with a company you’ve already worked with successfully. Knowing that the contract has some months or years left, you wait patiently for its expiration, only to learn it has either a “right of first refusal clause,” an “automatic renewal” – or even both.
A “right of first refusal clause” imposes a serious disadvantage on competition. Prospective replacement vendors know that the existing vendor need only match new bids to clinch a contract renewal that can last for years. It doesn’t matter whether the vendor did a lousy job, failed to replace equipment – or even inaccurately reported money collected and later divided with you.
In our experience, better laundry vendors don’t need this anti-competitive clause and don’t propose it; others, however, usually slip the clause into the “boilerplate” section of their agreement – a location you can easily overlook.
We regularly advise clients not to execute pacts with these provisions in them and are unaware of any laundry vendor who maintains their position when faced with the prospect of you locating another vendor — especially one without the clause in the first place. Be forewarned, however, that these clauses are judicially enforceable, and when faced with a claim to meet a later laundry vendor’s proposal, you would be well-served to retain qualified legal counsel for navigating this situation.
An equally frequent — and more obnoxious clause — is the “automatic renewal” provision, sometimes referred to as a “stranglehold” clause. Again, in many laundry contracts, it imposes an extremely specific duty on the owner or operator to provide notice of a non-renewal of the laundry contract, usually six, nine or even 12 months before expiration. Otherwise, it automatically renews itself for more years, sometimes with continued poor service, older equipment — and almost always without additional compensation to the owner or operator. Again, like the right-of-first-refusal clauses, these provisions are commonly strategically placed in the small print of laundry contracts, where owners are more likely to pass over them, much less remember the provision months before the expiration of the current contract.
Our office has long taken the position that automatic-renewal provisions, unless specifically tailored to meet the legislative mandates of California Civil Code 1945.5, are unenforceable and void at the election of the owner/operator. One particular laundry vendor has for years hired different attorneys to argue with us over this position, asserting that the Civil Code provisions do apply to them. To date, however, notwithstanding the dozens of times we have taken the position of unenforceability and successfully mandated they remove their equipment from an apartment community, they have yet to seek judicial intervention to enforce their provision – and we have successfully replaced them as laundry vendors. Again, once you provide notice of non-renewal, you can strike the automatic-renewal clause in any replacement laundry contract for the new term, whether with your existing vendor or a new provider.
As an owner or operator of apartment communities, you should first read the small print of any existing laundry contract, and for each property, remember that these contracts change over time. Moreover, the provisions in one community might differ significantly from those in another’s contract. It’s important to know whether there is a right-of-first refusal or an automatic-renewal provision in the agreement. At a minimum, calendar the deadline for providing the laundry vendor notice of your non-renewal, even if content with the service. This will provide more flexibility in negotiating a new agreement with the vendor – and allow seeking competitive bids from other established vendors.
When it comes time to negotiate a new agreement, ensure that both of these clauses are stricken. If you have any concerns, seek qualified counsel; these clauses are traps for the naïve, and some of the laundry vendors know this. You should also understand that these contracts may very well cost you money. If and when your apartment community is sold, the laundry contract is one of the due-diligence documents provided to the buyer, and depending on its terms, we regularly obtain a credit to the purchase price previously negotiated based on the quality or terms of the laundry vendor’s agreement.
The California Apartment Association’s Compliance Committee was asked to prepare a fair and equitable laundry agreement for use by our members to both protect the communities and ensure high quality of services for our residents. The Compliance Committee last year completed its work, and the form is accessible through CAA’s website. CAA also worked with some laundry vendors to ensure the agreement is fair to both parties, and we are pleased that Wash Laundry Systems, the largest laundry vendor servicing California, has agreed to use the CAA form when requested by a CAA member. You should avail yourself to the form and at least compare it to any proposed by a vendor. By all means, negotiate the terms of the agreement; both you and the laundry vendor will have to abide by it for years to come.
Stephen Pahl is a partner in the law firm of Pahl & McCay, with offices in San Jose and Los Angeles. Pahl serves as general counsel to CAA and regularly represents many of its members. His practice focuses on real estate matters, employment law exclusively representing employers, and commercial and business litigation.