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Laundry rooms: when is a lease not a lease?

Most apartment buildings in the New York metropolitan area provide basement space for clothes washing and drying facilities. The basement area is frequently set aside by the landlord for a concessionaire to install and maintain coin-operated clothes washing and drying machines to be used by the residents of the building. These concessions can be of great value both to the landlords who share in the income from these machines as well as to the concessionaires. A big laundry business has developed over the years with a large number of laundry equipment companies competing for these concessions.

The terms of the concessions vary from building to building and from landlord to landlord, resulting from negotiations with the concessionaires. These negotiations are usually straight forward. They deal with the term of the concession, the price to be charged to the tenants for the use of the coin-operated machines, the kind of laundry machines to be installed as well as the percentage of income to be derived by the landlords. What creates a problem, however is the lack of understanding of the legal implications of the contract itself between the landlord and the concessionaire. Is the contract a lease? Is the contract a service agreement? Is the contract only a license for the concessionaire to install and maintain laundry machines in the landlord's apartment house?

The case of Sebco Corp. vs. Mid-land Island Equities Corp., Supreme Court, Rockland County provides a good guide for landlords who enter into contracts with laundry concessionaires. The facts in that case are that in October 1985, Sebco a laundry machine company, entered into written contract with a landlord under which Sebco was given the exclusive privilege of installing and operating coin-metered laundry equipment in the landlord's building for a period of six years. The contract provided that the concessionaire shall have the "use and occupancy of the space near the plumbing, gas and electrical fixtures' in the basement of the landlord's building. The contract also provided for an automatic renewal of its term unless either party gave notice of intention not to renew registered mail, not later than 30 days prior to the expiration date.

The contract was entitled "Lease Agreement". The contract was not recorded.

The building ran into financial difficulties and was ultimately sold at auction in a mortgage foreclosure sale to the new owner, Mid-Island Equities Corp.

Upon the expiration of the term of the Lease Agreement, Mid-Island Equities demanded that Sebco remove the laundry equipment. When the concessionaire refused to do so, Mid-Island threatened to disconnect the machines. Before that could be done however, Sebco commenced an action against Mid-Island for an injunction to restrain it from taking the threatened action to disconnect the machines.

In the course of the law suit, the laundry machine operator claimed that it had entered into a lease with the former owner and that the lease term was automatically renewed since no notice to the contrary was given as required in the lease. The new landlord claimed however, that although the agreement was entitled "Lease Agreement", it was in fact only a service contract or at most a license granted by the landlord to the concessionaire to have the machines installed and operated in the building.

The case was heard by Justice Joan B. Lefkowitz of the Supreme Court, Rockland County who reviewed the papers submitted in this litigation and decided that the new owner had a perfect right to require the concessionaire to remove the coin machines from the building. The judge ruled that the mere fact that the agreement was called a "Lease Agreement", does not make it a lease. The judge defined a lease as an instrument which gives exclusive possession, control and dominion over a certain defined area. If the instrument grants only use and occupancy, without exclusive possession, it is a mere license. It is the transfer of absolute control of possession of property at an agreed rental which differentiates a lease from other arrangement dealing with property rights. In determining what the parties meant by their agreement entitled "Lease Agreement" their intentions control rather than the name given by the parties to the agreement.

There have been a large number of law suits involving coin-operated laundry machines with the overwhelming majority concluding that only licenses to serve the tenants of the buildings were granted by the owners, rather than leases. In most cases, as in this case, the agreements were licenses, not leases, since they granted "exclusive privileges" and "use and occupancy", not exclusive possession and control of the property in the basement area. Since they are licenses, the landlords can revoke them at any time after their terms expire.

The court determined that even if the contract with Sebco was to be considered a service contract and not a license, the concessionaire would still have no rights. The law with respect to the renewal of service agreements (General Obligations Law, 5-903 (2)) states that an automatic renewal clause is non-enforceable unless the one supplying the service (concessionaire) gives notice (to the landlord) that such automatic renewal provision exists. No such notice was given by the concessionaire prior to the expiration of the term of the agreement. Therefore, the automatic renewal clause was null and void and the six-year term of the agreement was expired.

Sebco, the concessionaire, also contended that when the new owner acquired the deed to the building, it knew that there were coin-operated laundry machines in the basement of the building and therefore had "constructive notice" of the existence of the Lease Agreement. The court ruled, however, that the law provides that a lease with a term in excess of three years must be recorded in the City's Register's Office or it is deemed void as against a subsequent good faith purchaser of the property (Real Property Laws [section]291). Since this lease was not recorded, the new owner was not legally put on notice that the lease existed. Further, the mere fact that laundry machines were maintained in the building did not give rise to constructive notice on the part of the new owner that such lease arrangements were made with a laundry machine concessionaire.

Owners should be careful in entering agreements with laundry machine concessionaires. The terms of the agreements with the laundry machine operators and not the titles given to those agreements will determine the rights between the parties.

Edward L. Schiff is a senior partner in the New York City law firm of Schiff & Kirschenbaum.
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Title Annotation:Getting Down to Cases
Author:Schiff, Edward L.
Publication:Real Estate Weekly
Article Type:Column
Date:Mar 25, 1992
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