Dubai-based private school operator GEMS Education claims that officials from Merchants Hospitality made false representations about the firm’s stake in an Upper East Side land parcel that is at the center of a $940 million lawsuit.
As The Real Deal first reported, Merchants, a Manhattan-based real estate hospitality firm run by Abraham Merchant, filed suit against GEMS on June 27 alleging that the education company backed out of a 40-year triple-net lease agreement to develop a private school on Second Avenue between 93rd and 94th Street.
Merchants, which initially planned to build a residential condominium tower on the site, entered a deal to develop a 213,000-square-foot building that would house one of GEMS’ schools. The U.A.E-based GEMS runs dozens of private schools in major cities around the world, but does not have one in New York City.
But lawyers for Merchants are asking Supreme Court Justice Jeffrey Oing for a restraining order against GEMS, amid allegations that the firm misrepresented its debt load and may try to dispose of assets prior to the conclusion of the case.
In court papers filed late yesterday, lawyers for GEMS Education stated that Merchants’ representative in the deal, Adam Hochfelder — a consultant and former high-flying real estate star in the 1990s — made false claims about the ownership of several land parcels at the site.
“During negotiations, prior to execution of the lease, Adam Hochfelder represented to me that plaintiff already acquired title to three of the six parcels of land,” said Denise Gallucci, chief executive of GEMS Education, in a sworn affidavit. Gallucci claims Hochfelder showed her a map with shaded parcels and stated that the developer owned three sites that were shaded. “I later learned that this was not true, and in fact that plaintiff had not acquired any of the parcels of land.”
Hochfelder declined to comment. But Y. David Scharf, attorney for Merchants, sent an email to The Real Deal stating: “Ms. Gallucci’s accusations that Mr. Hochfelder misrepresented that status of the parcels is contradicted by the Lease signed by Ms. Galluci in early March 2014 which states that MHI was not the owner but rather in contract, as a contract vendee for the parcels and air rights. GEMS expressly acknowledged that status and that it was not relying on any other statements and that it made an independent investigation as to its status.”
Lawyers for GEMS pushed back on claims that they approached Merchants Hospitality on the deal through a broker. According to an affidavit from Venkata Saibaba Tata, chief of finance and business at GEMS, the firm was first approached in October 2013 about a build-to-suit site by a broker named Alan Friedman, a senior managing director at ABS Partners Real Estate.
Friedman was not immediately available for comment. But Robert Ward, a spokesman for GEMS, informed The Real Deal in an email that the judge on Tuesday “denied plaintiff’s motion for order of attachment and denied plaintiff’s motion for summary judgment on the guarantee.”
According to court documents filed by GEMS, the lease called for the developers to acquire all six parcels of land and demolish existing properties on the site. Merchants, however, claims that GEMS used a dispute over which architect would design the school as a pretext to back out of deal.
GEMS acknowledges that there was a dispute over the architect for the project. But the company claims the absence of any architectural agreement means the lease was not in effect.
Correction: The original version of this story erroneously stated that GEMS was seeking a restraining order from Merchants.