Stuck in an unfair laundry lease

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Stuck in an unfair laundry lease

Roseann KoefoedPro Member
Rental Property Investor · Frankfort, IL · Member since 2020 · 26 posts · 23 votes

I just closed on 24 units in Illinois. I found out at the closing table that the Seller was passing to me a completely unfair laundry lease with Jetz. 10-year auto renewals if I don't provide 365 days' notice to cancel.  Was originally signed 15 years ago, two landlords ago.


Seller had lied in person when touring the property that they "liked" the arrangement with Jetz. After reviewing the Jetz contract at the closing table, I called the sales broker pissed and they admitted that they had also tried to get out of it but could not. I negotiated $10k in credit to cover my legal fees to fight the contract.  I had to close because I need the property for tax purposes.

I contacted Jetz this week and it's clear they are not interested in a buyout or being reasonable in any way. So if I remove their machines, they will sue me for "breach of contract". I want to buy them out because they are only making about $50/month anyway. 5 years left on lease, so $3000 would cover it.  Although I really don't understand how the machines are only generating $100/month (of which they keep 50%).  Just doesn't make sense relative to how much we make in other buildings in the same area.  Separate issue.

I do believe that their lease falls in the "unconscionable" category which is a means to fighting a contract in court. But looking for advice. I really need control of the laundry income because it impacts the NOI for my refi next year.

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Karl B.
Rental Property Investor · Erie, PA · Member since 2015 · 1k+ posts · 2k+ votes
2y

Any space for your own washers and dryers? Undercut them :-)

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    2y

    I think you're totally out of luck. You had the opportunity to walk at the closing table. Needing the property for tax purposes is a completely indefensible claim in any court. When you decided to sign the papers, and take the $10k credit from the seller to boot, you essentially signed off on the contract. 

    I think fighting this is going to be a losing proposition. Concentrate on increasing your NOI in other arenas if you need a stronger balance sheet for next year's refi.

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  • Lisa Hammond
    Real Estate Professional · Newton, KS · Member since 2016 · 44 posts · 36 votes
    2y

    Yup, that's how Jetz operates and should absolutely be illegal; I've got two owners in the same boat. Not only that, but their maintenance is terrible and we often have 30% of the machines out of service. 

    1Reply
  • Karl B.
    Rental Property Investor · Erie, PA · Member since 2015 · 1k+ posts · 2k+ votes
    2y

    Any space for your own washers and dryers? Undercut them :-)

    4Reply
  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    2y

    This is going to sound harsh, but I have to address the elephant in the room.

    How did you decide what to pay for this property without a full financial T12 statement? In the commercial space, price should be based on the income generated, so you really need to know the income to determine a good price. A financial statement would have shown the washing machine income was lower than expected.

    Do you not require the seller to provide all existing contracts prior to the expiration of the due diligence period?  You said you saw the contract at the closing table.  Getting contracts is a pretty basic requirement as part of due diligence.

    1Reply
  • Greg M.
    Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
    2y

    1) Check the contract. Who sets the price of the machines? I set prices in one building. Sorry, need to reduce W&D fees to $0/load. 

    2) Put in a hidden camera. Check the usage vs the reported income. If it doesn't match, cancel the contract for fraud. They won't fight this. 

    3) Sue me! They likely won't because they know their contract is so one-sided that the court is going to void it and they don't want that precedent. If they do sue, most they can recover is their lost revenues, which as you said is $50/month for the next 60 months. That's $3K minus their expenses of servicing the machine and collecting the funds. Maybe a judge awards them half. 

    4) The machines break / are vandalized extremely often. They're out there weekly fixing a machine. 

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y

    @Roseann Koefoed

    You are going to lose that lawsuit. Curious why it’s a bad deal. They get 50% - do they have to service the machines?

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  • Nathan GesnerBusiness Member
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    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    2y

    You should never review an existing contract for the first time at the closing table. 

    I would honor the contract. Try to determine why the machines aren't making money. Are they priced too high? Are tenants over-riding them with zip ties or other tricks? Is someone stealing coins?

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  • Russ Kitzberger
    Realtor · Cincinnati, OH · Member since 2022 · 81 posts · 58 votes
    2y

    What you have is a legal issue that you need to capitalize to a business decision.

    NOI/Value modeling based on risk analysis is similar to tax strategy. First you get your legal opinions on the likeliness of winning, amount to be won (or saved, lost, etc), and the cost of litigation. Then run a few different financial models with various projections, best case, worst case, and what is most likely. From there the analyst will create a likely scenario and the probable range of noi/value created or lost from the scenarios. That data is used to make a decision.

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  • Roseann KoefoedPro Member
    OP
    Rental Property Investor · Frankfort, IL · Member since 2020 · 26 posts · 23 votes
    2y

    I'll definitely take the blame for not reviewing the Jetz laundry "lease" before closing.  My mistake was that I had assumed it would be a regular "contract".  Normal service contracts do not move from owner to owner.  For example, in IL most trash removal contracts are 3 years, but I've never bothered reviewing them closely because as the new owner I'm not obligated to honor the prior owner's agreement.  So I go shopping and the cut best deal I can with a new or existing trash vendor.

    The difference with Jetz is that their agreement is a "lease", not just a regular service contract.  It stays with the land so that future owners are stuck with it.  My lawyer did request all leases during DD and this was not provided.  It only showed up at closing.  And obviously I was angry because at that point I am under financial duress...had $10k in escrow, paid $10k for the insurance policy, $5k in loan costs.  Losing the 2023 tax benefits would have added to the financial pain, so I negotiated a credit and closed.  

    As contemplated, I'm now researching how to fight.  I wouldn't be where I am with 80+ units (while also mother to four kids and demanding day job) if I was not motivated and resourceful.  A couple tenants told me that the machines are always broke and their customer service is terrible.  So they go to friends/family members' homes to wash clothes.  Jetz poor service is contributing to the low sales.  This alone should be a breach of contract on their side.  I also suspect someone on their team is pocketing quarters after reading some former employee comments on Indeed.  I'll get to the bottom of it eventually.  What I'm sure of is that $130/month (I went back and looked, they averaged $130/month, not $100) across 12 machines is way too low compared to what I'm getting elsewhere for machines with almost the same cost/wash.  A wash and a dry is about $4 total.  So with 24 tenants, $130/month would indicate that each apartment is doing a full load only 1.35 times each month.  

    Thank you for all the comments.  I especially liked the idea to plant cameras and try to audit usage against the numbers they report.

    I'm struggling to resist the urge to just disconnect their machines and let them come at me for the breach of contract damages which would only be like $3-$4k.  Problem is their legal fees can be $20-$30k.  That's how they screw you.

    0Reply
  • Matthew Paul
    Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
    2y

    A washer will use   X  amount of water for one cycle , a dryer will use  X amount of electric per cycle .   A water meter and an electric meter will let you know the usage 

    2Reply
  • Jeff Moody
    Investor · Macon, GA · Member since 2016 · 4 posts · 1 vote
    1y

    I currently have a 74 unit midrise in a very similar situation to yours and was curious about what has transpired in the last year...were you able to get out of it, or did you just decide to suck it up and drive noi other ways?

    0Reply
  • John Clark
    Member since 2018 · 1k+ posts · 1k+ votes
    1y

    1. Give written notice now of non renewal of contract and repeat notice every 13 months before anniversary of contract.

    2. what does contract say about attorneys fees in the event of litigation?    

    3. How do you know laundry only grossing them $50 a month?


    4. why didn’t you get all relevant contracts prior to setting a closing date? Contracts are as much of an inspection issue as a roof or boiler.

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