Looking for some interesting reading while you're doing the wash? You might want to take a look at your property's laundry service contract; specifically, the controversial clause known as the right of first refusal. If your contract contains this clause, your present laundry services provider has an advantage over the competition and you may have a hard time switching to a different vendor, should you decide to do so.
Under the standard right of first refusal clause, when the current contract expires, your current vendor has the right to meet any authentic bid from any competitor. And if he does meet the best bid your property gets, then your property is bound to allow his company to continue operating in your building, even if you'd prefer to switch.
Not long ago, the right of first refusal clause was standard operating procedure within the laundry industry. But things are changing. Today some service providers are vehemently opposed to it and others include it in their contracts with reluctance. However, there are a handful of companies that not only have the right of first refusal in their contracts, but they will take your property to court over it.
Doing Business Without the Clause
Service Directions, Inc., a laundry services provider based in Pelham, New York with clients throughout New York, New Jersey and Connecticut, no longer has the clause in their contract. We dropped it about ten years ago because we believe we're here to provide a service, says company president Ron Garfunkel. Our competitors may match our bid, but can they match the fact that I'm in my office at 6:30 p.m. talking to a customer? We've even created a program that offers shorter term options than usual to fight the right of first refusal. And when it comes to bidding against companies that still have it, we don't waste our time because they're not matching our bid, they're just copying it.
Gordon & Thomas, a laundry services provider located in East Orange, New Jersey that has clients throughout the Mid-Atlantic East Coast, has also deleted the clause. There was a brief period in the late M-80s when we put it in our lease. It stayed for six months. We found it unconscionable and we removed it, says the firm's president Stuart Litwin. Our customers continue to do business with us because they choose to. The clause reduces the focus of this business to dollars and cents. Service quality and customer satisfaction must also be considered.
Fowler Route Company, Inc., a Union, New Jersey-based firm that provides laundry services throughout the East Coast, also dropped the clause. When we got into the New York market about 15 years ago, most of the people operating in the city were including the clause in their contracts and we began to also, says vice president Lee Stein. We ran into a lot of resistance. People would tell us, 'You've got the deal, but the clause is a deal-breaker.' So we dropped it.
Including the Clause
Then there are companies like Cointecha four-year-old laundry services provider in Yonkers, New York with clients throughout the five boroughs of New York, on Long Island and in Westchester Countythat still have the clause in their contracts, but aren't all that thrilled with it. It was a conscious decision to include the clause w ffb hen we started, says Cointech owner Ted Yates, but we have elected not to exercise it. If we can't keep a customer happy with service, what's the point? People should do business with a company that's not going to threaten them. It's reasonable to say that the clause will soon be coming out of our contract.
Automatic Industries, which provides laundry services throughout New York State, also has the clause in their contract, but, We realize it's a touchy subject, says Denise Savino-Erichsen, vice president of the Hempstead, New York-based company. We keep the clause because we're smaller and we're trying to stay as competitive as possible. But I feel that if someone doesn't want us at their property, we don't want to be there.
The Rationale Behind the Clause
With a service territory of 30 states plus the District of Columbia, Coinmach is the largest player in the laundry services industry. Not only does this Roslyn, New York-based company include the right of first refusal clause in their contract, they're also willing to enforce it. According to Coinmach president Mitchell Blatt, most people don't realize the tremendous investment laundry services providers make in the buildings they servicefrom providing top-of-the-line equipment to painting, installing new flooring and sometimes doing extensive construction or retrofitting work in laundry rooms.
Blatt points out that because of this often hefty investment, laundry services companies usually don't see a profit on any single building for several years. This accounts for the long-term nature of most contracts. What we found in the right of first refusal was the opportunity to do good for both the properties and the company, says Blatt. Let's assume you sign a seven year contract that includes a new floor, tile ceiling and the construction of a wall in the laundry room, and it costs us $25,000.
Now you're in your fifth year, Blatt adds, and the room needs a new paint job or a new floor or the replacement of equipment. We're more apt to put in those improvements knowing that at the end of the contract we have the right to meet the bid of one of our competitors. Because in essence what we've done is paid up front for that additional improvement. This argument makes sense, and it explains a lot about how the laundry services industry operates. But what about service? Our contract has a default provision for inadequate service, says Blatt.
Eddie Kwitko, vice president of Hicksville, New York-based Hercules, which services the metropolitan New York area and also has the right of first refusal clause in their contract, agrees. The right of first refusal clause is really to protect our investment and give us a chance to continue. The clause is negotiable, like any other clause in the contract.
Enforcing the Clause
Negotiable, yes. But only when a property is willing to consider continuing with their current laundry services provider. Properties canand dofind themselves in court to fight the right of first refusal when they want to go elsewhere and aren't able to show a default of service. They often find that the jury is out regarding the enforceability of the clause.
Scott Konner is founding partner of Konner, Teitelbaum LLP, a Manhattan-based law firm that represents about a dozen New York City co-ops and condos and also serves as special counsel in cases related to the right of first refusal. We're currently involved in about five litigations in which we're trying to bust the right of first refusal, says Konner. The case law is not settled because it's not always clear whether a laundry service contract is a lease or a license. It's easier to terminate a license agreement. In the case of a lease, it's much more difficult. Either way, in my opinion the clause should never be in this type of service agreement.
According to Robert Tierman, senior partner in the Manhattan law firm of Salon, Marrow & Dyckman, LLP, which represents about 50 metropolitan co-ops and condos, The right of first refusal is fairly common in real estate-re ffb lated contracts, so I don't think it could be considered unenforceable for that reason. But I suspect that one dissent that the properties are putting up is that the clause is an unreasonable restraint and alienation of the rules against perpetuity. However, there are a whole bunch of exceptions to these rules.
Can The Clause Be Stricken?
Many management company principals demand that the clause be stricken as a stipulation for laundry contractors to work with their properties. We cross out all the clauses that are one-sided in favor of the laundry company, says Mike Cantor, president of Brooklyn-based Cantor Real Estate, which manages 82 properties throughout the five boroughs. We haven't had any contractor come back with a problem about that. But, adds Cantor, two of the properties he manages are now involved in lawsuits commenced by a laundry service provider demanding enforcement of the right of first refusal.
Similarly, Marcia Taranto, president of Taranto and Associates, a Manhattan-based management firm serving about 40 co-ops and condos in Manhattan, says, We absolutely advise boards against signing contracts that include a right of first refusal clause. We took over one property where they were in the midst of looking for a new contractor and they had this clause in the old contract and there was an incredible lawsuit. We were able to settle it, but the building still had to pay their attorney. For companies that are willing to enforce the right of first refusal, it seems that the bottom line is money. But it seems to me that a company should be willing to walk away from a property where they're not wanted.
Sometimes a property gets lucky and the laundry company does walk away. Others are not so fortunate, and find themselves embroiled in costly litigation. We litigate, explains Blatt of Coinmach, to protect our rights within our contract. Coinmach will retain the clause, but that doesn't mean that our contracts can't be negotiated. We do approach it with an attitude of flexibility.
Keeping Your Eyes Open
Boards may be well advised to take advantage of this flexibility and willingness to negotiate. If you have the right of first refusal in your existing contract, advises Brian Kronick, vice president of Gordon & Thomas, who is also an attorney, document your dissatisfaction throughout the course of the lease and make certain to terminate the lease in accordance with the termination provision. If it's a new lease, think twice before you sign. The right of first refusal is negotiable, and it should come out.
Attorney Konner agrees, adding, Your attorney should be involved, and you should also know the history of the company you're getting involved withnot only the type of machinery they're going to install, but also the attitude and the nature of the people you're dealing with. It's not just about the dollars. It's also about service, reputation and the inclination to litigate.
Ms. Dershowitz is a Contributing Editor for The Cooperator.