SL Green is latest to sue over failed UES school project

Merchants Hospitality, Dubai-based GEMS traded lawsuits this summer

Aug.August 29, 2014 03:15 PM

In yet another lawsuit tied to a failed school project on the Upper East Side, SL Green Realty claims it was snubbed following an agreement that it would locate a site where it would build the school and then lease it to the global educational group GEMS.

SL Green, the city’s largest office landlord, says it signed a memorandum of understanding last year stipulating that it would find and build the site, or if a third party found one, SL Green would have a right of first refusal to participate in the project, according to a lawsuit the landlord filed yesterday in New York State Supreme Court.

Instead, the Dubai-based GEMS, let by Sunny Varkey, moved forward with Merchants Hospitality as the developer. That deal, however, collapsed, with each side suing the other.

An attorney representing GEMS, disputed SL Green’s version of events.

“GEMS Education provided the notice required under the contract,” Robert Ward, a partner at the law firm Schulte Roth & Zabel, said.

SL Green’s action is the third lawsuit over the failed plan to build a 213,000-square-foot school at 1802-1810 Second Avenue and 303-305 East 93rd Street under a 40-year triple-net-lease.

Developer Merchants Hospitality filed the first in June 27, seeking $941 million, which is the value it ascribed to total lease payments over 40 years. That same day, GEMS sued Merchants, claiming the contractual time to finalize the lease had expired, and so the Merchants’ suit had no merit. Those cases remain ongoing, court records show.

SL Green, led by CEO Marc Holliday. is seeking $500,000, which it says is the agreed-to damages figure due if it was shut out of a deal through a breach of contract.

The trio of lawsuits underscore the risks companies new to the market face when wading into the complex development world of New York City.

“It’s an insiders game, and they partnered with one of the biggest commercial landlords in Manhattan. But they somehow ended up abandoning that partnership. Then the deal [collapsed],” Stephen Meister, a partner with the law firm Meister Seelig & Fein, said. He is representing SL Green. “Who knows if they had come to SL Green, maybe there would be a school there now.” SL Green declined to comment.

SL Green says it signed the memo of understanding in October 2013 with GEMS, and began searching for a site.

Then in December, executives at SL Green were surprised to receive an email from a debt advisor who suggested SL Green provide financing for the Second Avenue school deal between Merchants and GEMS. That was the first the landlord had heard of the deal, despite the contractual obligations that GEMS notify SL Green about any potential deals, the complaint says.

SL Green confronted GEMS, and the school suggested it reach out to Mechants. But a January 9 deadline was looming, at which time SL Green’s contract would expire.

Despite repeated attempts, Merchants and GEMS never provided any substantive information on the deal, and so SL Green waived its rights to invest under the agreement.

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