Unfortunately, New York is a very litigious town,” notes Mark Edelstein, the New York chair of San Francisco-based law firm Morrison & Foerster’s real estate finance practice. That’s certainly true within the real estate industry, where litigation runs the gamut from residential and commercial foreclosures to landlord-tenant suits, contract disputes between buyers and developers, and courtroom clashes involving rivals or former business partners.
In the last year, some of those fights have been resolved. For example, last month, 10 Trump Soho buyers agreed to a 90 percent refund on their deposits in a suit alleging that the building’s sponsors — Bayrock Group and the Sapir Organization — misrepresented sales figures at the condominium tower.
Moreover, last December, developer Jacob Chetrit won a $2.45 million judgment against his former investment partner, Bonjour Capital’s Charles Dayan, in a dispute over payments for a defaulted construction loan at 5 Beekman Street.
But plenty of cases are still in full swing.
This month, The Real Deal looked at the legal landscape of the New York City real estate world, from the biggest brewing court battles (see “NYC’s biggest real estate battles”) to an elite group of land-use attorneys working behind the scenes at some of the most complex and controversial developments in the city (see “NYC’s elite land-use attorneys”) to a pending decision on a lawsuit against a Prudential Douglas Elliman broker who represented both the buyer and seller of a Park Avenue co-op (see “A house divided”).
Real estate litigation has seen its fair share of changes since the 2008 crash. For one, the number of residential foreclosure suits across the state has skyrocketed, spiking almost 43 percent in 2010 to 77,815, up from 54,591 in 2009. The most recent numbers, from November 2010, show that residential foreclosures accounted for almost 29 percent of all pending cases in New York state trial courts, according to a report from the state court system.
Also, as The Real Deal has reported, the last few years have seen the rise of suits brought under the Interstate Land Sales Full Disclosure Act, or ILSA, where condominium buyers have relied on technical provisions of that 1968 law to escape sales contracts.
On the whole, however, attorneys say the down market has largely kept litigation in check, as apprehensive lenders and developers refrain from pressing their interests in court.
Since developers are not trying to clear tenants out of existing apartments to make way for new development, there are fewer landlord-tenant suits than before 2008, says Joseph Burden, a litigator and cofounder of New York real estate law firm Belkin Burden Wenig & Goldman.
Likewise, commercial foreclosures have not surfaced in the same volume as the previous downturn in the late 1980s and early 1990s, attorneys say.
“In the last few years, there hasn’t been the volume of real estate litigation you would expect,” notes Greg Yates, a New York bankruptcy attorney at the Chicago-based firm Seyfarth Shaw, who focuses on commercial real estate. “Lenders have not really pushed the borrowers, either to take the property back or to force bankruptcies or other ligation fights.
“They extend and pretend.”
That’s partly because this time around, the process of foreclosing is more complicated, involving the owners of different tranches of securitized debt as well as mortgage holders, each of whom may have disparate motivations for foreclosing or holding on to a property, attorneys said.
In some instances, borrowers are using litigation as a stalling tactic — filing preemptive suits to buy time to negotiate alternative financing or wait for market conditions to improve, says Jodi Kleinick, a litigator at Paul Hastings who works with real estate clients.
“If [lenders] can work with borrowers to resolve things, that’s always better, particularly when you have a huge backlog in the court system that’s creating huge delays in getting to a decision,” she says, noting that cases that formerly would take a year and a half (“tops”) now drag on for two or three years.
Looking ahead, real estate attorney Carl Schwartz of Herrick Feinstein does not anticipate a litigation boom, since much of the debt has been worked out and the market is tentatively coming back. However, others say litigation involving borrowers and lenders has already started to rise.
“People were hoping the market would turn around much quicker, and an increase in the market would save people, but that doesn’t look like it’s happening,” says Seyfarth Shaw’s Yates, forecasting an increase in these kinds of suits over the next 12 to 18 months.
Additionally, as lenders become more aggressive, the number of lender liability suits — where borrowers blame lenders for failing to fund a project and contributing to its downfall — will proliferate, attorneys say. Kleinick says she’s already seen “a lot more” of these types of cases.
In the residential arena, litigator Warren Estis, cofounder of New York real estate firm Rosenberg & Estis, is seeing a significant uptick in suits from developers seeking to take possession of development sites, as they start planning for future projects.
“They see the daylight at the end of the tunnel in terms of building and going ahead with their projects that have been on hold for a number of years,” Estis says.