Partnerships crumbled, billion-dollar condo plans collapsed and commercial bankruptcies climbed.
While there’s never a shortage of conflicts in a business built on big money and bigger egos, the pandemic made 2020 exceptionally catastrophic when it came to real estate litigation.
Of course, even in a good year, the industry is renowned for dramatic lawsuits.
But stay-at-home orders and social distancing brought a flood of new and unexpected legal problems for landlords, developers and their investors and lenders.
For many of the projects and partnerships on the edge prior to March — whether because of softness in the luxury condo market, long-running headwinds in retail or business relationships gone sour — the pandemic was a complicating factor, if not a nail in the coffin.
In other cases, the rapid spread of Covid was the direct cause of legal confrontations. And more disputes are likely on the way, as the full extent of the fallout becomes more clear and moratoriums and other temporary fixes run their course.
“Nobody ever imagined that the whole world would be under this pestilence, where nothing is normal,” said commercial real estate attorney Joshua Stein. “You thought you had done an allocation of risks — and all of a sudden along comes this risk that nobody had ever thought of.”
With the start of the new year, The Real Deal looked at some of the largest and most intriguing lawsuits to come out of the real estate world in 2020.
Here’s what we found:
Condo crunch time
Many were pointing to Manhattan’s oversaturated condo market as a sector that was particularly vulnerable to distress in the event of a downturn even before the coronavirus took its toll.
So perhaps it’s no surprise that many of last year’s biggest lawsuits involved luxury condo developers and their lenders.
The most glaring legal mess of all surrounds HFZ Capital Group, Ziel Feldman’s high-flying development firm.
As TRD has extensively covered in recent months, HFZ’s investors and lenders have sued to collect hundreds of millions of dollars. The recent flood of lawsuits includes one this month from the Children’s Investment Fund, which provided a $1.25 billion construction loan on HFZ’s XI condo and hotel project in West Chelsea.
Disputes over several other New York City condo projects — though perhaps less talked about, given the enormous stakes at the XI — could prove to be even more complex.
At RFR Holding’s 100 East 53rd Street, for example, Aby Rosen’s firm has accused partner Vanke US of orchestrating an improper “backdoor deal” that put it “on both sides of the borrower-lender relationship.” In 2014, RFR teamed up with Vanke US, a subsidiary of China’s biggest residential developer, with the goal of leveraging its “sales and marketing channels overseas” to attract buyers.
But that foreign buyer pipeline has since dried up due to capital controls and geopolitical turmoil, and a $360 million loan from the Industrial and Commercial Bank of China is now in default.
Vanke, for its part, claims Rosen is seeking an exorbitant buyout for its 7 percent stake in a scheme that had allegedly begun before the pandemic. RFR has moved to dismiss Vanke’s counterclaims, and the motion is set to be heard in court in late January.
Meanwhile, at the former “Ground Zero mosque” site in Lower Manhattan, Sharif El-Gamal’s Soho Properties is fighting off a consortium of overseas lenders for his 43-story condo project at 45 Park Place.
In a seemingly bizarre twist of events, the lenders allege that the developer threatened to undo a 2016 zoning lot merger — a move that would shave 40,000 square feet of development rights from the nearly completed tower and drastically reduce its value. El-Gamal has denied this, saying his firm no longer controls both parcels of land. The foreclosure suit, brought by Malayan Banking Berhad and other lenders this past March, is ongoing.
Christopher Delson, a partner at the global law firm Morrison & Foerster based in New York, said the status of projects and their finances pre-pandemic will play a big part in determining their fate.
“With projects that were in trouble before Covid, lenders are going to say: ‘Unless you have a new solution, we need to move on,’” he noted in a recent interview. “With projects that are hurting just because of Covid, I think lenders are going to be much more willing to try and work those out.”
The reason, as Delson put it: “Who’s to say the lender’s really going to do any better?”
With luxury condo developments, specifically, the laws of supply and demand are causing major ripple effects when it comes to pricing in the New York market. And not all sponsors can afford to take the hit.
“If someone has owned a site for 20 years, had a parking lot on it and finally decided to develop it, their cost basis is so much lower than someone across the street who bought their site in 2015,” Delson said. “The developer across the street can’t lower their prices because then it gets into their profits and then their equity.”
The Covid era’s new normal has also led to the rise of entirely new genres of lawsuits.
Since the start of the crisis, countless commercial tenants — from apparel retailers like the Gap to rock-climbing gyms like Brooklyn Boulders — have come to the legal conclusion that the pandemic “frustrated” the purpose of their leases, allowing them to walk away without penalty.
For the most part, the courts have not shared this view.
“The way leases traditionally are drafted, tenants unfortunately have an uphill battle,” said Delson. “There certainly are exceptions, and there’s a million leases out there, and there are cases where you read the litigation and go, wow, that’s a very tenant-friendly clause.”
Along with their leases, business operators have also been taking a closer look at their business interruption insurance policies, in hopes of finding something to persuade courts to rule in their favor.
“You have these sporadic cases where the insured wins, whether it’s because of unusual terms in their policy, or they got lucky in their choice of a judge, or there’s just some special circumstance,” said Stein.
But those cases are almost always exceptions.
“The general view is that business interruption insurance doesn’t cover Covid risks, and if it did, it would probably put the insurance industry out of business,” Stein noted.
Others have their grievances with the city and state governments for imposing what they view as unreasonable restrictions.
These began to pile up in the fall as some businesses were forced to remain closed while others began reopening. In one suit, a Brooklyn ale house lampooned Covid curfews, observing that the virus “does not behave as a vampire, infecting others only when the moon is out.” Religious groups in second-wave hot spots also filed several suits last year challenging new city and state restrictions.
The pandemic has also given rise to more novel disputes, including an Upper East Side clothing store suing over a neighbor’s outdoor dining setup and developer SL Green alleging that picketers from Local 79 risked spreading the virus with their “saliva-spewing whistles” and lack of masks.
At the same time, many landlords and commercial tenants in precarious situations have held off on going to court for now.
“The smart landlords are working with their tenants to the extent that they can,” Delson said. “They’re being realistic and saying if I throw this tenant out — which in New York you can’t do right now anyway — what’s the reality of me getting a new tenant?”
Still, a growing number of property owners have to make high-pressure decisions on when to pull the trigger and go to court.
“There’s [commercial] tenants that can pay, and they’re just choosing not to — they’re trying to beat the system,” said industry attorney Adam Leitman Bailey.
“There’s tenants that can’t pay, and have no shot of keeping the lease. And then there’s tenants in the middle that want to stay and are having a tough time,” Bailey added. “Those are the tenants we want to work with.”
With government constraints on commercial evictions and foreclosures still in effect in New York, some of the most heated disputes between borrowers and lenders have been at the mezzanine level.
Uniform Commercial Code foreclosures, which can usually bypass the courts, are not subject to the same restrictions given that the collateral at stake consists of the rights to an entity that owns the real estate, rather than the real estate itself.
And the rising number of cases are just “the tip of the iceberg,” auctioneer Matthew Mannion — who has conducted at least eight public sales tied to UCC foreclosures since March — told TRD last month.
Soon after New York courts reopened in May, for instance, Hidrock Properties accused Henry Silverman’s 54 Madison Partners of trying to take over its Midtown hotel development at 12 East 48th Street, for which Silverman’s firm lent $30 million. Hidrock referred to the foreclosure effort as an “improper and shameless attempt to capitalize on the Covid-19 pandemic.”
Silverman’s firm announced an in-person “public” auction of the entity that controls the property at the MetLife Building on May 1 despite the ban on nonessential gatherings in effect at the time, according to the suit.
Two weeks later, a judge ruled that mezz loans were not subject to the state ban on foreclosures. The auction went forward soon after, but Hidrock filed a new suit in July, arguing that it was a “sham” and “commercially unreasonable.”
Indeed, the requirement that UCC foreclosure sales be “commercially reasonable” has proven to be a key factor in these disputes.
“In theory if you’re very ‘commercially reasonable,’ there will be other bidders coming out of the woodwork,” Stein said. “But in the real world, the lender is probably going to end up taking the collateral, so it’s all sort of silly.”
In other disputes, the Covid crisis fueled bad blood among business partners in more complicated ways.
The Gindis, the family that founded department store chain Century 21, are passive investors in seven of Ben Ashkenazy’s North American properties, according to two recent lawsuits.
Ashkenazy alleges that the family refused to meet a contractual obligation to invest millions in the properties to stave off a bankruptcy. He further claims the Gindis damaged his reputation by telling other real estate players that he stole money from them.
The Gindis, for their part, say Ashkenazy threatened to “go nuclear if I need to because you destroyed my business.”
At the same time, several of last year’s biggest lawsuits would have likely occurred even if the pandemic had not, though it certainly didn’t help matters.
The long-running legal feud between Alex Sapir and Rotem Rosen saw some new twists in 2020, for example, as the former business partners and brothers-in-law traded lawsuits a week apart in late July.
Sapir and his family firm first brought a $100 million suit against Rosen and his brother Omer, accusing them of conspiring to steal documents and trade secrets from the family. Rosen responded with a suit alleging that Sapir defaulted on a $60 million promissory note.
“For over a decade, Rotem Rosen rode the Sapir Organization’s coattails, taking advantage of the Sapirs’ trust and generosity to siphon tens of millions of dollars, misappropriate proprietary information and violate the contractual terms of his ouster from the Sapir family and its business,” Sapir’s attorney said in reference to the new suit.
But Rosen’s attorney has dismissed the Sapir suit as “a meritless retaliatory action” and part of “a campaign of personal destruction” meant to distract from Rosen’s claims against his former partner.
Michael Shvo and his former business partner and best friend, Turkish real estate mogul Serdar Bilgili, had their own legal battle this fall. Bilgili claims Shvo and another partner cut him out of their $3 billion spending spree on trophy properties in New York, California, Chicago and South Florida.
Far from over?
That evokes some of the big legal showdowns from previous years, prior to Covid, as disputes and partnership splits have long been par for the course in the real estate world.
Many in the industry are holding their breath for a return to those times — when it was more enjoyable to be a spectator — and with multiple vaccines now approved in the U.S. and other countries, there may finally be a faint light at the end of the tunnel. Ongoing infection surges, vaccine distribution hiccups and reports of even more contagious Covid variants could complicate things, however.
And as far as legal fallout from the crisis is concerned, the worst is yet to come, legal sources say.
“As a practical matter, a lot of foreclosures and evictions are just on hold whether they technically qualify for a moratorium or not,” Stein noted. “Then the trend is going to be a massive flood of this sort of litigation, and it’s going to be a disaster — but we’re not there yet.”
The lingering uncertainty in the U.S. economy may be encouraging some potential litigants to hold off for a bit longer.
“We’re still in the middle of this,” Delson said. “To some extent you need to wait until there’s an end or almost an end, just to be able to see where things are going to shake out.”
“Once you hit bottom,” he added, “you can figure out exactly what you’re suing over.”