When the net lessee/tenant of a lucrative commercial net lease sued the net lessor/owner of the subject property – two substantial parcels of commercial property directly in the heart of Astoria – for, among other things, $7 million in lost profits from a proposed sublease to which the owner allegedly unreasonably withheld its consent, the owner retained Adam Leitman Bailey, P.C. to defend its interests. Concurrently with the lawsuit, the tenant filed a lis pendens – a notice to potential buyers and lenders, as well as the general public, of a claim involving the property – in an effort to frustrate the client’s ability to transfer the property.
The tenant’s immediate goal was to get a ruling from the court declaring that client unreasonably withheld its consent to its proposed sublease, along with an injunction absolving tenant from paying ongoing rent during the pendency of the case. Ultimately, the tenant wanted to financially suffocate the client in the hope that it could purchase the property at a significant discount.
A. The Lease’s Subletting Provision
The parties’ lease contained a specific clause permitting the tenant to sublet portions of the premises on certain conditions and only with the client’s prior consent. Critically, ALBPC’s review and analysis of the lease showed that while the lease explicitly set forth a date of ten days after the tenant’s sublease application was submitted by which the owner needed to respond to a sublet request, it was silent as to a date by which the owner was required to actually grant or deny its consent to the sublet. Adam Leitman Bailey, P.C. further performed extensive research on the prevailing case law to show that where a commercial lease is silent as to the time within which an owner must approve a sublease or assignment, the custom and usage within the industry may be used to establish a reasonable period of time. Notably, Adam Leitman Bailey, P.C. found that ten days was not a reasonable time period for a commercial owner to make a definitive decision on whether to approve a sublet request, as it would potentially eviscerate an owner’s ability to adequately complete its due diligence review of the proposed sublet.
B. Adam Leitman Bailey, P.C.’s Due Diligence In Proposed Sublease Transaction
Following the departure of its anchor tenant, a well-known national grocery store chain that occupied the larger of the client’s two parcels, the lessee immediately sought the owner’s consent to approve a sublease to another grocery store tenant. At the outset, while doing its due diligence into the financial stature and business reputation of the tenant’s proposed sublessee, Adam Leitman Bailey, P.C. discovered that the proposed sublessee was not a national chain, demonstrated poor financial backing and lacked any meaningful presence within the grocery store retail industry. Adam Leitman Bailey, P.C. also learned that there were some incomplete applications for proposed sublets, and importantly, that none of them contained reasonably reliable disclosures of the proposed sublets’ financial health. Accordingly, Adam Leitman Bailey, P.C. demanded additional documentation from the tenant in order to allow client to properly vet the proposed sublessee, which tenant, at all relevant times, failed and refused to provide. Instead, the tenant sued the client alleging that under the parties’ underlying lease, the client was somehow required to approve the sublessee in a mere ten days, and the client’s failure to do so amounted to a breach of the lease greatly damaging tenant.
Simultaneously with the filing of its lawsuit, the tenant moved by way of Order to Show Cause seeking a declaration that the client breached the lease by unreasonably withholding its consent to the proposed sublease, together with an injunction relieving tenant from paying rent going forward, as a result of such breach. The tenant, apparently aggrieved over the fact that it was not going to be receiving the income from its proposed sublet, moved by way of an emergency order to show cause, seeking to enjoin owner during the pendency of the lawsuit, from commencing a summary eviction proceeding in order to recover possession based upon the tenant’s failure to pay rent.
Essentially, the tenant was seeking to have its rent completely forgiven by the court while its lawsuit was ongoing, which if granted, would have significantly strained the owner financially. However, Adam Leitman Bailey, P.C. had speedily crafted an impenetrable defense to the lawsuit, that the tenant’s attempt to rewrite the parties’ lease to in an attempt to advance the date of consent, was not only barred by the lease’s very own terms, but by precedential authority, as well, thereby placing client in a position to win the case on the merits.
A. Argument on Tenant’s Emergency Application
During oral argument in opposition to the tenant’s Order to Show Cause, ALBPC noted that together with its summons and complaint, the tenant also slapped a lis pendens on the property, effectively reducing the market value of the property to zero, which caused owner to lose at least one potential purchaser who was interested in buying the property. More importantly, the lis pendens, which is a cloud on title, protected the tenant by ensuring that there would be sufficient funds to pay tenant to the extent that the tenant was subsequently awarded any damages by the court. Accordingly, Adam Leitman Bailey, P.C. argued that it would be inequitable to relieve the tenant from its rental obligations under the lease while the case was litigated, particularly since it was clear that the client did not breach the subject lease.
Secondly, Adam Leitman Bailey, P.C. showed the court that although the tenant’s existing subtenants were paying their monthly rent, the tenant had failed to satisfy its rental obligations to owner. Beyond that, the tenant had likewise failed to pay its water and sewer bills which resulted in liens upon which the City was threatening to foreclose on. Through a diligent and thorough investigation of real estate publications, online sources and other public information, Adam Leitman Bailey, P.C. was also able to prove to the court that the tenant falsified its alleged precarious financial position, thereby impugning the tenant in the eyes of the court. Specifically, Adam Leitman Bailey, P.C. discovered that the tenant’s principal owned Fifty-One of the largest pancake franchises in the Tri-State area, and certainly wasn’t in a bad place financially. To add the icing on the cake, Adam Leitman Bailey, P.C. also located an e-mail that the tenant’ principal sent to the owner wherein the tenant threatened to withhold its rent and tax payments on the property unless the owner approved its grocery store sublease, even though substantial documentation concerning the proposed sublet was missing. The court agreed with all of Adam Leitman Bailey, P.C. ’s arguments in categorically denying the tenant’s emergent application.
Next, after handily defeating the tenant, Adam Leitman Bailey, P.C. immediately went on the offensive by bringing its own emergency Order to Show Cause for an order directing the tenant to turn over to owner all rents that the tenant received from its existing subtenants for purposes of exerting additional financial pressure upon the tenant. Again, the court concurred with Adam Leitman Bailey, P.C.’s arguments in directing the tenant to pay all of its rents paid by existing subtenants over to the owner forthwith and continuously thereafter for the remainder of the lawsuit. Having resoundingly defeated the tenant on the merits in court, while contemporaneously providing owner with financial security for the duration of the lawsuit, Adam Leitman Bailey, P.C. turned its sights to selling the property for owner at the highest possible price.
Since the owner had entered into a brokerage agreement with a broker whereby it agreed to only list the property with the broker if it decided to sell, Adam Leitman Bailey, P.C. had to carefully guide the owner in the sale process to ensure that owner would not be in violation of the exclusive listing provision in its agreement with the broker. Without actually listing the property for sale in order to circumvent the exclusive listing provision of the brokerage agreement, Adam Leitman Bailey, P.C. courted several unsolicited offers from potential buyers, and orchestrated a bidding war which drove up the purchase price several times, and ultimately inflated the price by more than $4 million dollars. Once Adam Leitman Bailey, P.C. notified the tenant of the offer pursuant to the parties’ lease, which provided the tenant the right of first refusal, the tenant decided to elect its right of first refusal to purchase the property for $14.5 million. By consummating the sale transaction with the net lessee instead of another purchaser, Adam Leitman Bailey, P.C. was also able to end the ongoing multi-million dollar litigation with the tenant with prejudice by entering into a comprehensive settlement agreement whereby the parties mutually released each other from any and all liability.
Adam Leitman Bailey, P.C. partner Dov Treiman, handled the litigation, and Adam Leitman Bailey, P.C. transactional attorney, Jacques Erdos, closed the deal.