The Real Deal New York

Morgans Hotel Group battles to hold on to Mondrian Soho

Operator accuses Sapir, lenders of breach of contract
By E.B. Solomont and Kyna Doles | October 27, 2014 05:15PM

The operator of the Mondrian Soho has filed a lawsuit to keep the trendy hotel in its portfolio following the hotel’s foreclosure and subsequent sale.

Morgans Hotel Group, which has managed the hotel since 2011, claims it would be owed $110 million in fees if its 30-year agreement to manage the Mondrian SoHo isn’t honored, according to a lawsuit filed October 24 in New York State Supreme Court.

The suit names lender German American Capital Corporation, the U.S. subsidiary of Deutsche Bank, as well as the Sapir Organization, which paid $205 million for the hotel in June after German American foreclosed on the property,  located at 9 Crosby Street, last year. The suit also names Taconic Capital Partners, an investment firm that holds an interest in the hotel’s loans.

In its complaint, Morgans contends that its original agreement with developer Sochin Downtown Realty stipulated that Morgans would continue to manage the hotel even in the case of a foreclosure.

Sochin developed the 270-room luxury hotel, frequented by A-listers such as “Gossip Girl” star Blake Lively and rock legend Jon Bon Jovi, in 2007, with loans from CapitalSource Financing LLC. The loans were later bought and transferred to German American Capital Corporation.

According to the suit, Morgans inked a deal in 2007 to manage the hotel, and began doing so in 2011, when the hotel opened. Under its contract, Morgans was to operate the hotel for the first 10 years after opening, followed by two automatically renewed 10-year periods.

In November 2012, Sochin defaulted on approximately $217 in loans, prompting German American to launch foreclosure proceedings in January 2013, according to the suit.

“Sochin’s default was not attributable to Morgans,” the hotel operator states in the suit.

Representatives of defendants Taconic Capital and Deutsche Bank, parent company of German American, declined to comment. A call to the Sapir Organization wasn’t immediately returned.

Morgans claims it tried to negotiate the purchase of Sochin’s loans itself, according to the suit. But instead, German American negotiated the sale of the loans to Sapir Realty. Sapir’s $205 million bid came out on top, and Morgans claimed in the suit that it was “never given the opportunity to match or exceed Sapir’s offer.”

In addition to the $110 million in lost fees that Morgans said it is owed under its contract with Sochin, the hotel operator said the “loss of the Mondrian SoHo also would deprive Morgans of a flagship property in the Mondrian brand, harming Morgans in a host of ways while advantaging its rival operator, Sapir.”

Meanwhile, Morgans and Sochin have been waging a battle of their own. Last year, Morgans filed a lawsuit claiming that Sochin tried to terminate its contract, while Sochin claimed that Morgans’ management of the hotel was disastrous. The lawsuit was settled in May 2014, with Morgans agreeing not to pursue damages.

This past spring, Morgans indicated to shareholders that it may put the Hudson Hotel up for sale in an attempt to boost the company’s share price.