10 Tips for Negotiating Your Site's Laundry-Room Service Contract
Having a well-maintained laundry room at one's site is a definite plus for owners and households. Owners can benefit from ancillary income, and households don't have to find off-site laundromats, where they may have to spend hours waiting for machines. But a laundry room can quickly turn into a management headache if machines break down, service calls are ignored, and residents start complaining.
In a typical contract with a laundry vendor, an owner agrees to allow an outside vendor to install and maintain coin-operated washers and dryers in exchange for a percentage of the laundry room revenues. Even though you keep all of the revenue if you own your machines, this can be offset by increased maintenance and staff costs. As a result, engaging a service provider to handle your site's laundry facility may be a good way of getting extra revenue for the site, while leaving the maintenance to the vendor.
If you're seriously considering contracting with an outside vendor to provide laundry services at your site, make sure your negotiations with the vendor are thorough. We'll give you tips to help you through this process. The contract should outline the expectations of both parties during the time period of the contract, including maintenance, service, and payment. Also, we'll tell you how to avoid problems with HUD in situations where you may be contracting with an identity-of-interest (IOI) laundry vendor, one that has close ties to the site owner or managing agent.
10 TIPS FOR NEGOTIATING CONTRACTS WITH LAUNDRY VENDORS
Don't just accept the terms of the contract the vendor offers. It's likely to be a standard contract that favors the vendor. Instead, be prepared to negotiate some clauses and cross out others.
Tip #1: Avoid Giving Vendor a Lease
Don't sign an agreement “leasing” space to a laundry service vendor. Instead, give the vendor a “license” to use the space, says attorney Edward L. Schiff. It makes no practical difference whether you call a laundry contract a lease or a license. In either case, the vendor pays a fee, or more likely a portion of the revenue, to use space for the washers and dryers. But from a legal standpoint, a lease is much harder for an owner to terminate than a license, says Schiff. Vendors know this and may try to lock you into an unfavorable arrangement. So, to preserve your flexibility, you should insist on calling the agreement a license.
Also, avoid certain terms that can make the agreement resemble a lease (some of these would also violate HUD rules). Terms to avoid include:
Words associated with leases. These include “lease,” “landlord” or “lessor,” “tenant” or “lessee,” and “rent.” Instead, use terms commonly found in a license agreement, such as “licensor,” “licensee,” and “fees,” or neutral terms like “contract” or “agreement,” “owner,” and “vendor.”
Right to exclusive use or control. Leases give laundry vendors “exclusive use or control” over the space. Instead, say you're giving the vendor “permission” to use the space, says Schiff. This is an especially important point when you consider that you may be forgoing other potentially profitable activities in the laundry rooms if you give the vendors exclusive use or control.
When residents spend time in the laundry room, they may get hungry and thirsty. Or they may get bored waiting and may want to buy a newspaper or a paperback. Of course, there are vending machines that will satisfy these residents. If your service contract grants the laundry company unrestricted use of the laundry room, you may not be allowed to participate in these potentially lucrative activities.
Right to assign the contract to third parties. Don't give the vendor a right to assign its rights and duties under the contract to another vendor—you want to know whom you're going to be dealing with for the whole contract.
Right to bind future owners of the site to the contract. Don't give vendors the right to hold any future owners to the terms of the contract. Some courts might take this type of contract term as evidence of a lease, says Schiff. Plus, HUD rules forbid you from entering into contracts that bind future owners to contracts.
Recording of contract as a document affecting title. This is another common lease-like provision you should avoid, says Schiff. And because recording or filing a copy in the local real estate records could make a future owner subject to the contract, you'll violate HUD rules if you agree to permit the vendor to record the contract. Make sure the contract doesn't let this happen.
Tip #2: Don't Accept Overly Long Contract Periods
Typical leases offered by vendors run five to 10 years in length. But don't accept a contract that lasts for more than three years. Many site managers follow a rule of thumb that continuing contracts should be bid out every three years. This ensures that your site will get the most competitive terms and will give you more flexibility to change vendors later.
Tip #3: Ensure Sufficient Number of Machines
New York-based property manager John Rheinstein warns that the laundry-room service company may want to reduce its initial capital outlay by installing fewer machines. The operator may offer you a higher percentage of the gross if he puts in fewer machines. While this may give you an immediate benefit, it's not a good idea for the building in the long term. With too few machines, residents will eventually get fed up with waiting for machines and take their laundry elsewhere. Also, these machines will wear down faster. This will create more of an inconvenience to you and your residents due to increased service calls from malfunctioning machines.
It's important to have the correct ratio of equipment to residents. This will depend on both the size of your site and its resident profile. Working-class families and families with children may do five or more loads of wash each week, while elderly residents, who are less active, may do only one load of laundry per week.
Rheinstein suggests having an average of one washer and one single-load dryer per 15 to 18 units. A site with mostly senior citizens can probably get away with one washer and one single-load dryer per 30 units.
Tip #4: Get Speedy Service Commitment
The biggest complaint you're likely to get from residents about your laundry room is that the machines break down too often. Since breakdowns are inevitable, the length of time it takes the company to respond to your repair call is crucial. In negotiating a laundry-room contract, a solid maintenance and service agreement is more important than the amount of revenue you'll receive. According to Rheinstein, typical response times on service calls range from 24 hours to 72 hours. He recommends that you don't settle for less than a 48-hour response time.
Your contract should contain a clause defining “satisfactory” service in terms of response hours and specifying what action you should take if this time isn't met. If the time isn't met, give the company notification of a default of the contract by certified mail. The end result should be that you have the ability to cancel the contract if the service company doesn't meet the specified terms.
Tip #5: Negotiate for Rate Control, Refunds
One thing that may seem small but is a great source of annoyance to residents is losing money in the washer or dryer and having to wait three weeks to get a check for $1.50 from the operator. The operator should give the site manager the authority to make on-the-spot refunds to residents on his behalf.
You'll also want some control over cost increases to the residents. Most laundry-room service companies will want total control over this provision, but you can ask for a mutual-consent clause. The operator will then have to get your approval before he increases prices on the machines.
Tip #6: Get Paid Monthly
Frequency of collection is also important. Some laundry-room service companies won't formally agree to a specified frequency of payments and may even try to pay you rent only once a year. Rheinstein suggests they pay rent every month, since collections are made at least that frequently.
Beware of any contract provision that suspends rent payments to you if collections fall below a set dollar amount per machine per day. Since you're giving a laundry-room service company the privilege of using your space on a continuous basis, it should pay you regularly, without interruption.
Tip #7: Require Adequate Liability Insurance
Make sure the operator carries liability insurance over and above what's provided for in your site's insurance policy. If the laundry-room equipment malfunctions and causes a flood, you want to be sure you're fully compensated for damages that may have occurred to your building's structure.
Tip #8: Beware of Automatic-Renewal Trap
Most laundry-room service contracts contain automatic-renewal clauses. With these clauses, unless, before a specified deadline, you notify the operator that you don't want to renew, the contract is automatically renewed. Your notification usually must be received a certain number of days or months before the contract is set to expire.
The problem with such “negative option” arrangements is that you're likely to overlook the deadline. As a result, you're trapped into an automatic renewal. That may be for one additional term. Or, in some contracts, automatic renewal can recur indefinitely, term after term, as long as you keep forgetting to say no by each successive deadline. Obviously, if you're dissatisfied with your laundry-room service company, or just want the freedom to get competitive bids, automatic renewal is a big problem.
To complicate matters, some operators will seek not only automatic renewal, but also a right of first refusal. Thus, even if you do prevent the contract from renewing, the operator has the right to continue providing laundry service for another contract term if it can match any competitive bid you may have obtained from another company.
If you do agree to an automatic-renewal provision, make sure it gives you ample opportunity to cancel service before the contract ends. Give yourself at least 30 to 90 days to find another laundry-room service company with which you can do business.
Tip #9: Credit Laundry Revenue to Site Accounts
To avoid problems with HUD and to ensure proper handling of laundry service revenue, make sure payments by vendors are made payable to site accounts rather than directly to the owner or managing agent. If the contract pays the revenue percentage directly to the owner or the managing agent, rather than into site accounts, HUD could very well consider this arrangement to be a form of kickback or fee-splitting, which can subject you to criminal prosecution under federal anti-kickback laws.
Tip #10: Add Clause to Contract if Negotiating with IOI Vendor
If a site owner or managing agent is also a partner or officer in the laundry vendor's company or owns over 10 percent of that company, HUD is likely to scrutinize your site's operations and financial records more carefully. And HUD has several rules you must follow when contracting with IOI vendors to make sure that the site owner or managing agent isn't unfairly profiting by overcharging the site or by funneling business to vendors the owner or manager controls.
Your laundry-room agreement must include language requiring the IOI company to open its records to HUD on request. Owners and managing agents promise in the Management Agent Certification that any contract entered into with an IOI contractor will include the following Model Language:
Upon request of HUD or [insert name of owner or managing agent], [insert name of contractor] will make available to HUD, at a reasonable time and place, its records which relate to goods and services charged to the project. Records and information will be sufficient to permit HUD to determine the services performed, dates the services were performed, the location at which the services were performed, the time consumed in providing the services, the charges made for materials, and the per-unit and total charges levied for said services.
Other than including that language in the contract, HUD also requires you to follow these rules when doing business with IOI vendors:
Disclosing names of IOI vendors on the Management Entity Profile (Form HUD-9832);
Listing all IOI vendors you used during the year in the site's annual financial statements; and
Documenting the cost and getting competitive bids from other unrelated laundry service vendors to prove to HUD that the fee you're getting for the laundry service is reasonable when compared with an arm's-length transaction with an unrelated laundry service company.
John Rheinstein: Property Manager, Douglas Elliman Property Management, 675 3rd Ave., New York, NY 10017; www.ellimanpm.com.
Edward L. Schiff, Esq.: Senior Partner, Hartman and Craven LLP, 488 Madison Ave., New York, NY 10022; www.hartmancraven.com.
Search Our Web Site by Key Words: service contracts; contract negotiations; IOI vendors