Real Estate Feast

Hidden leases–how to avoid trouble when buying income property

I’ve been working with an investor who buys small apartment buildings downtown near the civic center.  We identified one that he wanted, took a look at it and noted that it had a coin-operated laundry—one washer and one dryer on the premises.  My buyer says to be sure that the coin-operated laundry equipment comes with the building and that there is no lease.  So I put that in the contract, talk to the listing agent and am assured that the equipment comes with the building and that there is no lease.  We negotiate and arrive at a price.  The building passes inspection and a closing date is set.

Next thing a few weeks later, we’re all sitting around the closing table and the seller notices that the contract says that the coin-operated laundry equipment is included in the sale.  She says I don’t own that equipment so I can’t sell it to you.  Uh oh.  Pens stop scratching.  A silence settles.  But you signed the contract that says on the front page about what’s included, right?  Yes, but I didn’t notice that.  And is there any lease?  Well, I didn’t sign any lease, but there’s a guy who gives me a few dollars every other month or so.  Double uh oh.  More silence.

After a lot of discussion, we agree to postpone the closing until a determination can be made regarding lease or no lease.   My buyer doesn’t care about the laundry equipment; he doesn’t want to buy a building that is encumbered by a lease.

Turns out that the laundry equipment belongs to a guy named Pepe and after a few days he comes up with a lease signed by the previous owner of the building.  The lease perpetually renews.  There is no out.  And the lease runs with whoever owns the building.    Forever.  Unless you pay Pepe off and get a release from the lease.  Pepe and his really aggressive lawyer have done this before and have prevailed in court as well.  In Florida, these kinds of leases are legal.

Well, there’s a lot of angst by this point.  Seller wants to sell.  Buyer wants to buy.  Pepe and the sharky lawyer want many many thousands of dollars to go away and threaten a bazillion dollar lawsuit if anybody touches Pepe’s rusty old machines.

Contract deadline is extended and finally seller and Pepe reach a buyout agreement after my buyer agrees to help bear the cost.

We regroup and manage to close.  The title company says that have now changed their check-list to include determining whether or not there are any laundry leases on property.

You should too.   It could be a deal-breaker.

You can reach me at bishopric.r@ewm.com or 305-401-8058.

This entry was posted on Thursday, November 13th, 2008 at 4:38 am and is filed under Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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