It’s been rough going for WeWork. The co-working company’s bonds are at junk status, its losses are eye-popping and its cash reserves are alarmingly low.
WeWork has tried to reassure investors by saying it continues to cut costs by shedding leases. But getting out of deals can be difficult.
Witness the battle it has had to wage with an affiliate of the Sapir Organization, its former landlord in New York, for breaking a lease at a Midtown office building.
For over a year, the Sapir entity has been suing a WeWork affiliate and co-founder Adam Neumann after WeWork bolted from 261 Madison Avenue. Sapir is alleging breach of contract and seeking about $17 million.
Things got hairier recently when Sapir’s company proposed adding WeWork, the parent company, as a defendant. The move would allow Sapir to pierce WeWork’s corporate veil to go after the firm itself, not just the affiliate that signed the lease.
Sapir’s legal team argued that the parent company deliberately undercapitalized its tenant company, leaving it unable to pay its bills, and that WeWork entities commingle funds and are not independent, but are instead controlled by WeWork.
Sapir’s attorneys essentially claimed that WeWork was playing a shell game.
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WeWork “deployed a strategy of directing corporate shell entities to default on contractual obligations to landlords,” Sapir’s lawyers alleged.
WeWork’s attorneys fought back, saying WeWork isn’t liable because Sapir signed a lease with a special purpose entity. The attorneys denied WeWork undercapitalized its tenant entity, claiming it is common in real estate to use special purpose entities, or SPE.
“Landlord’s feigned surprise that tenant was a thinly capitalized SPE completely lacks credibility,” wrote attorneys for WeWork 261 Madison LLC (the tenant) and Neumann in a heavily redacted filing.
A judge this week allowed Sapir to proceed with its amended complaint, meaning it can go after WeWork directly, which has more resources than the tenant entity.
“The court’s decision sends a message to WeWork that it cannot hide behind shell entities to avoid its contractual obligations,” said Sapir’s legal team of Terrence Oved, Darren Oved and Andrew Urgenson.
Darren Oved and Terrence Oved
Sapir’s company filed the suit in August 2021, claiming it only learned from an article in The Real Deal that WeWork surrendered the seven years remaining on its 44,000-square-foot lease. It further alleged that WeWork failed to remove its property and repeatedly returned to the premises after giving it up.
Neumann was named as a defendant because he signed a “good guy guarantee” on the lease.
In October 2021, WeWork filed a response denying the allegations. It also accused Sapir and its CEO, Alex Sapir, of having a “long history of underhanded conduct and mismanagement of their real estate holdings.”
WeWork argued the Sapir Org was struggling financially and “resorted to questionable practices in order to extort WeWork and Neumann.” Sapir’s attorneys denied the allegations.
Neumann, for his part, acknowledged that he guaranteed the lease, but alleged WeWork properly vacated it, thereby voiding the guarantee. The co-founder, who was pushed out as CEO in 2019, noted Sapir reached a deal to lease the space to rival co-working firm Industrious, mitigating damages from WeWork’s departure.
The lawsuit remains pending.
The Sapir Organization bought 260 and 261 Madison Avenue in 1997 and, facing a deadline this year to refinance them, put them on the market in March, seeking $600 million. But this month it was able to refinance them with a $326 million loan.
The company was founded by Alex Sapir’s father, the late Tamir Sapir, a billionaire who partnered with Donald Trump on the former president’s Trump Soho hotel.
WeWork declined to comment. Neumann’s representatives did not return a request for comment.