Harry Macklowe to go head-to-head with subtenant over eviction at former Drake site

By David Jones | October 06, 2010 02:00PM

Harry Macklowe and 38 East 57th Street

A State Supreme Court judge ordered developer Harry Macklowe to face off in arbitration against a retail subtenant that filed a $20 million lawsuit to block an eviction at 38 East 57th Street, a parcel at the site of the former Drake Hotel.

The subtenant, luxury watch seller Franck Muller Retail, filed suit Sept. 24, alleging Macklowe and his Los Angeles-based partners, CIM Group, served a bogus eviction notice as a pretext to empty the building and proceed with their controversial hotel and condominium project.

Macklowe bought the former hotel site at Park Avenue and 56th Street for $418 million in 2006, and planned to demolish several buildings to convert the site into a hotel, with retail space and condominiums.

In November 2008, Macklowe paid $5.35 million to buy out the building lease from Sovereign Partners, which leased out the entire building. Franck Muller originally signed the sublease for the ground floor and mezzanine space in 2005, and the sublease is not scheduled to expire until 2018, according to court documents.

Macklowe also faced foreclosure from Deutsche Bank after defaulting on his loans at the site, leading him to eventually sell the lease and the property to a CIM affiliate and bring CIM in as a partner.

“Like Brer Rabbit in the Briar Patch, there is nothing Macklowe and his partner CIM would welcome more than being able to invent a ‘default’ which would in turn provide pretextual grounds for a wholly consensual ‘eviction,’ and related wrongful termination of plaintiff’s sublease,” wrote Alexandra Wald, attorney for Franck Muller.

Wald said the retailer has spent more than $1.25 million to renovate the space since moving in, and made it more attractive for customers.

Wald said the retailer received a letter dated Sept. 17 stating that it had failed to pay more than $462,000 in rent since April 2010. The letter states the amount of the rent owed is based on appraisals by the landlord. The retailer claims that the landlord has conspired with Macklowe and CIM not to pay the rent, according to court records.

“Upon information and belief, either CIM’s principals or their business partner Macklowe have caused the landlord, an affiliate of CIM, not to pay the purportedly demanded rent increase on the ground lease to manufacture a sham and consensual default by the landlord,” lawyers wrote in the complaint. “CIM and/or Macklowe will then cause the [owner of the ground lease] to seek to terminate the ground lease and landlord’s subleases [including plaintiff’s lease].”

Attorney Richard Claman, representing CIM and Macklowe, argued that Franck Muller signed a lease for rent that was well below market and knew, or should have known, that the lease agreement called for a substantial increase in the ground lease payments in 2010.

He said that based on two new appraisals by Jerome Haims Realty and Cushman & Wakefield, the fair market rent for the space is $1.4 million per year.

“FMR cannot properly insist that the net lessee remain in business, at a loss for the next eight years, just to protect FMR’s below market rent,” Claman wrote.

Macklowe declined to comment.