Covid and the courts: New lawsuits target busted real estate deals

In suing to break its lease, a rock-climbing gym contends its business plans for a New York location were “completely destroyed” by social-distancing measures.

One lender’s answer to a developer’s lawsuit seeking to avoid foreclosure called the filing “a shameless attempt to use the global pandemic.”

And in trying to exit a multibillion-dollar luxury hotel portfolio purchase, a massive investment firm last week charged breach of contract, saying the seller had “failed to continue the operation of the hotels.”

The coronavirus was officially declared a pandemic two months ago and already the real estate-related lawsuits and legal actions are piling up. Attorneys say in addition to the court cases, there has been a jump in consultations about issues like force majeure clauses and insurance policies.

But despite the cases that have emerged, legal experts say far more had been expected.

“What’s been interesting to me, as someone who was very active in post-2008 real estate-related litigation, is there has not been a flood of litigation around this yet,” said Gregg Weiner, co-chair of the global litigation and enforcement practice group at Ropes & Gray LLP. “You’re starting to see some cases, but they’re pretty isolated.”

He attributes the relative “hesitation around litigation” to the speed at which the coronavirus upended the economy. The crisis “is so unusual, and its scope and duration difficult to predict,” he said.

Many of the lawsuits so far have focused on busted deals in the name of Covid-19.

Acquisition anxiety

One of the most high-profile disputes involves China’s Anbang Insurance Group and South Korea’s Mirae Asset Global Investments, two multinational giants. This month, Mirae pulled out of its deal to pay $5.8 billion for 15 of Anbang’s U.S. luxury hotels.

In canceling the agreement, Mirae noted that Anbang “failed to continue the operation of the hotels in accordance with contractual requirements” during the coronavirus pandemic. That came at a time when most states had stay-at-home orders in place, essentially locking down the economy nationwide. Anbang claims Mirae had “buyer’s remorse” because it was unable to secure financing for the deal, and is suing to enforce the terms of the agreement.

Several smaller sales have also resulted in lawsuits with coronavirus as the stated reason. In Los Angeles, developer Pacific Collective sued ExxonMobil to get out of a $4.2 million purchase agreement for a 120-acre vacant lot, claiming that California’s stay-at-home order constitutes a force majeure — or “act of God” — event.

In New York City, investor Shulem Herman has sued the sellers of two apartment buildings. He is alleging they took advantage of the pandemic to back out of the $6 million purchase and keep his deposit. The sellers deny his claim, arguing Herman still had time to close the deal if he actually wanted to.

Lease litigation

Some of the most common coronavirus-related suits have been over lease agreements, as tenants have faced pressure amid the economic downturn and have struggled to pay rent.

In Manhattan, the landlord for the Gap’s Midtown store is suing the retailer for over $500,000 in unpaid rent. In Chicago, Robert Morris University is facing a lawsuit for $1 million in unpaid rent at its Loop office building, which the university vacated with four years left on its lease. In that case, the landlord itself has missed two months of debt service payments and has begun marketing the building to avoid foreclosure.

In other court cases, tenants have sought to terminate leases altogether.

Urban rock-climbing company Brooklyn Boulders has sued its Williamsburg landlord to exit a lease, alleging coronavirus has “completely destroyed” its business plans for the location. Also in Brooklyn, a landlord is suing German co-living firm Quarters for “opportunistically” bailing on an $8 million lease during the pandemic.

Meanwhile, a group of WeWork’s tenants in Los Angeles, Washington, D.C., and New York has threatened the co-working giant with legal action if it continues to collect fees, even though stay-at-home orders prevented them from using the space.

When dealing with such Covid-related disputes, courts are likely to focus on the specific circumstances of each deal to avoid setting far-reaching precedents.

“As a general principle, absent unique contractual language, courts are reluctant to upset and unsettle existing contracts and transactions when the claimed basis is something that has a very broad potential application,” said Ropes & Gray’s Gregg Weiner.

Debt and defaults

Real estate lenders and borrowers have also become entangled in lawsuits arising from coronavirus-related complications — though many of the loans involved were already facing difficulties before the outbreak.

In early May, hotel developer Hidrock Properties sued 54 Madison Partners, alleging the mezzanine lender was taking advantage of social-distancing rules to rig a foreclosure auction and become the sole bidder for a hotel development in Midtown Manhattan.

In response, the lender called Hidrock’s suit “a shameless attempt to use the global pandemic” to deflect attention from the fact that it has “mismanaged this project for years.”

And in one of the more unusual cases, investment firm Ashkenazy Acquisition has filed an involuntary Chapter 11 petition to force a 190-key hotel on Manhattan’s Upper East Side into bankruptcy. The Surrey hotel has missed ground rent payments because coronavirus halted operations, and Ashkenazy — the lender on the property — says the landlord and hotel are working to break the lease. Ashkenazy risks seeing the collateral for a defaulted $45 million loan wiped out if the ground lease is terminated. It called bankruptcy court “the only available forum for relief at this time as the New York State courts are closed to commercial disputes.”

With most courts around the nation still closed or operating at limited capacity, parties various real estate disputes have been finding ways to avoid legal proceedings.

“What we’re seeing on the transactional side right now is short-term solutions, to get us through what everyone hopes is a temporary disruption in the market, albeit a very significant one,” said Dan Stanco, co-chair of Ropes & Gray’s real estate investments & transactions group. “If this continues to be a prolonged economic impact, we’ll likely see performance issues that will lead to litigation.”