A lawsuit accuses German co-living firm Quarters of “opportunistically” bailing on an $8 million lease in Brooklyn just as New York City became the global epicenter of the coronavirus pandemic.
Entities controlled by Mark Tress of Cedar Holdings, a New Jersey-based real estate investor, owner and developer, sued Quarters in federal court May 4. The suit claims Quarters began using construction delays as grounds to terminate its 10-year lease at 251 DeKalb Avenue “only after it became clear that Covid-19 was spreading rapidly through New York City.”
Cedar also alleges the co-living firm proposed a “fraudulent conspiracy” scheme.
“Quarters promises property owners ‘partnership from start to finish,’” the developer says in its complaint. “[But] in the midst of the current public health emergency, Quarters is not living up to its own lofty language. Instead, it has sought to pull back on its commitments to expand and provide housing in New York City.”
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Quarters has 5,000 beds under management in Europe and North America, and claims to maintain 97 percent occupancy across its portfolio. It also launched a $300 million push into the U.S. market last year to develop 1,500 units around the country.
Quarters operates two Manhattan locations, both on the Lower East Side, with a combined 111 beds, and is building three Brooklyn locations totaling 290 beds. The 251 DeKalb property was to house 46 of them.
A spokesperson for Quarters called Cedar’s allegations “entirely meritless” with “no basis in fact or law.”
“We look forward to proving our case in court and promptly disposing of this lawsuit,” the spokesperson said in a statement, declining to comment further.
According to the complaint, filed in the United States District Court for the Southern District of New York, Quarters’ assertion of a lease default relates to the developer’s failure to complete construction by a November 30 deadline. Cedar admits to the delays, but claims that Quarters maintained that it “fully intended” to occupy the building regardless and “pressed” Cedar to continue renovations.
Cedar claims it did over $1 million in renovations at 251 DeKalb since December in accordance with the co-living firm’s custom requirements. The developer acquired the three-story building in 2016 for $5.8 million and public records show a $7 million mortgage on the property.
The landlord said the first sign of trouble came when it requested on March 12 that Quarters provide an estoppel certificate so Cedar could secure fresh financing to finish construction.
In court documents, Cedar says it did not hear from its tenant until March 17 — right after New York Gov. Andrew Cuomo banned mass gatherings, shuttered dine-in bar and restaurant services and financial markets “went into freefall.”
When Quarters sent Cedar the certificate, it was marked up to note that the landlord was in default for not delivering the building by the November deadline.
Cedar alleges that it protested and that in a phone call between the parties, Quarters solicited “outright bank fraud” by proposing to sign the certificate “stating there were no uncured defaults” only “if Cedar would sign a ‘side letter’ stating the opposite.”
Cedar noted in its complaint that it rejected the alleged offer. In mid-April, Quarters sent Cedar official notice that it was abandoning the lease.
Cedar’s suit seeks more than $8 million, the value of Quarters’ lease. The developer notes that it is now stuck with an incomplete building that’s highly customized to its former tenant’s specifications and that social-distancing rules forbid physically showing the property.
“It is disappointing that, in this difficult time, Quarters is walking away from a project our clients have invested significant time, energy, and money in,” said Nathaniel Kritzer, a partner at Steptoe & Johnson LLP who represents Cedar in the dispute.
Lawsuits claiming parties have unjustly used the pandemic to leverage certain positions are now routinely cropping up.
Write to Erin Hudson at ekh@therealdeal.com