Case of the Month MES Investments, LLC v. Dadson Washer Service, Inc.

Case of the Month
MES Investments, LLC v. Dadson Washer Service, Inc.

MES Investments, LLC (“MES”) purchased a 22-unit apartment complex in West Hollywood in February 2017 that included a laundry room facility.  The space for the laundry room was leased to Dadson Washer Service, Inc. (“Dadson”) back in March of 2002 by the previous owner for an initial term of 10 years and would automatically renew for another 10 years unless Dadson decided not to renew it. At the time of this action, Dadson was already in the second 10-year term and, according to the lease, any new owner of the property would inherit the lease.

Dadson is a coin-operated washing machine service company.  It leases laundry room space from apartment owners and provides the machines for use by the tenants as well as maintaining them. The previous owner of the apartment complex wrote up the original lease with Dadson stating that the “Lessor grants, conveys and transfers to Lessee (Dadson) the exclusive use and possession of the laundry room(s) located at [the property] . . . for the purpose of installing, maintaining, and operating coin-operated laundry equipment.…” The lease also stated that it “shall be binding upon all future owners of the real property described above.”

During due diligence MES was made aware of the lease pursuant to an exception in the preliminary title report for the property that discloses “[a]n unrecorded lease dated March 6, 2002 between Detroit Ave Associates and Dadson Washing Service, Inc”.  According to the evidence presented by MES Investments, they read the lease at that time, but they did not believe the lease applied to the property, in part due to the lack of recording.

On February 28, 2017, the day of the purchase, Samuel sends out a letter informing Dadson that he is reviewing all contracts and will get back to him shortly.  February 28, 2017 a second letter is issued informing Dadson that the lease is in violation of Civil Code section 1945.5, which bars automatic renewals in certain leases, and that he will not accept the lease as the new owner. The letter further requested that Dadson vacate the premises by June 30, 2017. Dadson does not vacate the premises.  MES files a complaint for declaratory relief, cancellation of the lease and reasonable rental value.

The court ruled against MES’ assertion that the failure to duly record the lease made it unenforceable against a new owner.  According to the court, there was enough evidence to show that MES was aware of the lease whether it was duly recorded or not.  With respect to the Civil Code section 1945.5, the court also ruled that it did not apply to Dadson.  The voidable automatic renewal provision must appear for “the hiring of residential real property.”  In the court’s opinion, Dadson hired the premises for “installing, maintaining, and operating coin-operated laundry equipment.”

MES still wanted to argue that because the lease was not duly recorded it could not be enforced against a new owner as a covenant running with the land.  The courts rejected this argument because MES had actual knowledge of the lease when it purchased the property and also determined that recordation is NOT essential to legal recognition of a property interest. MES then argued that the court was unfairly “differentiating between residential aspects of the apartment house” and the” commercial aspects of the laundry lease”. It argued that the entire complex is “provided to facilitate the habitation of the tenants” which includes the “laundry room area”. In MES argument the laundry space is essential and must be deemed “residential real property”.  The court rejects this argument as well.