Things seem to just keep getting worse for WeWork.
CEO Sandeep Mathrani recently departed, followed by the chief financial officer. Analysts are questioning whether the company is sustainable, as are investors: WeWork shares are in penny stock territory.
Now, a lawsuit in New York could lead to even more problems. New York landlord Sapir Organization alleges WeWork’s parent company deliberately undercapitalized its tenant company, leaving it unable to pay its bills, and breached its lease at Sapir’s 261 Madison Avenue.
The landlord alleges WeWork is essentially playing a shell game. It’s seeking $17 million in damages.
This summer, a judge found validity in Sapir’s argument. His ruling puts Sapir a step closer to going directly after WeWork instead of a shell company.
“The plaintiff (Sapir) has sufficiently pleaded facts that, if true, would support, or could support, piercing the corporate veil,” Judge Joel Cohen said at a hearing in late June.
If Sapir succeeds, other office landlords reeling from lease terminations could go after WeWork proper, rather than special purpose entities that sign leases with landlords on the company’s behalf.
WeWork’s spectacular rise, fall, and attempted recovery has taken its landlords along for the ride. Its 2019 IPO attempt imploded, co-founder and CEO Adam Neumann was kicked out and Mathrani was brought in to cut costs.
To that end, the company has exited spaces across the country — and not always in accordance with its leases, lawsuits allege.
In 2021, WeWork ditched its lease at CIM’s Hollywood office complex, where it was renting three-quarters of the space. WeWork also appears to have exited two floors at 25 West 45th Street in Midtown Manhattan. In Chicago, WeWork left a 112,000-square-foot lease on a Loop building in late 2022, according to BisNow.
WeWork’s attorneys noted during a hearing on the Sapir suit that the case had “broad ramifications for commercial entities contracting in New York.”
Sapir’s lawyers, Oved & Oved’s Terrence Oved, Darren Oved, Andrew Urgenson, and Andrew Kincaid, said they have already been contacted by other landlords that used to have WeWork as a tenant.
“We agree with WeWork’s opening statement to the Court that ‘this case has broad ramifications for commercial entities contracting in New York’; it means they should honor their obligations and pay their debts,” the attorneys said in a statement.
Sapir claims WeWork only learned about WeWork’s decision to surrender the remaining seven years on its 44,000-square-foot lease from a January 2021 article in The Real Deal. Neumann was named as a defendant because he signed a “good guy guarantee” on the lease.
Sapir sued in 2021, alleging that a WeWork affiliate breached its lease. Sapir then added WeWork as a defendant, claiming the parent company made a strategic move to default on certain leases.
WeWork argued, however, it was not liable for damages because Sapir signed a lease with a special-purpose entity, not WeWork itself. That could limit the landlord’s ability to collect on a judgment. WeWork’s attorneys also accused Sapir of trying to extort Neumann and WeWork.
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But Sapir’s attorneys allege WeWork entities commingle funds and are not independent. They point to examples where the parent controls centralized operations that manage all payments for independent WeWork entities.
As Sapir seeks damages, it has sought documents and information from the co-working company through discovery. WeWork’s attorneys claim it has produced over 4,100 pages of documents, but Sapir’s attorneys claim some requests remain outstanding.
“Defendants have continued to stall discovery at every turn,” they wrote, citing “boilerplate responses and objections” from WeWork.
The Sapir Organization bought 260 and 261 Madison Avenue in 1997. It put the buildings on the market in March 2022, seeking $600 million, and refinanced them with a $326 million loan in late 2022.