Litigation Gone Sour: A Failed Landlord Lawsuit

By Manuel Fishman, Shareholder, Buchalter Nemer

A recent published article on a failed landlord lawsuit serves as a good teaching point for real estate executives and lawyers. The bottom line is that a real estate executive that seeks “outcome-driven” legal advice proceeds at his or her peril, and lawyers should tell a client when his or her strategy is not well thought through.

As reported, Equinox, an upscale fitness club chain, had been operating in a mixed-use building in Lower Manhattan for close to 15 years. A new developer purchased the building in which Equinox operated in late 2014. In January 2016, the new owner served Equinox with a notice of default under the lease asserting various non-monetary defaults relating to excessive noise and vibration, demanding the defaults be cured by mid-February 2016 and electing to terminate the lease.

What did Equinox do in response? Within two weeks it filed a lawsuit against the new owner seeking a stay of any default periods under the lease, an injunction against the owner in enforcing the lease provisions in question, a hearing to obtain a court ruling that Equinox was not in default under the lease and a demand for $8 million in damages from the owner.

What went wrong here? Most experienced real estate professionals can read between the lines and see that a speculative developer purchased a New York mixed-use building and determined the rents being generated from the Equinox space, approximately 27,000 square feet, were under market, and with two five-year options to extend still in the lease at fixed increments, the tenant could tie up the space for a long time for a use the developer thought was incompatible with the higher rents it wanted to achieve at the property. Seeking legal advice (or even worse, trying to get outcome-driven advice), the real estate executive got the advice he or she wanted to hear: Find some defaults in the lease and pressure the tenant to move.

It was a bad business strategy compounded by getting the wrong legal advice. Even assuming the legal advice disclosed the risks of declaring a default under the lease for non-monetary conditions that had arguably existed for several years prior to the fitness club’s operations, this was clearly a business strategy driven by an attempt to spin facts into an unreachable outcome, and the result was a pushback by a well-financed tenant, resulting in a greater downside to the owner than the perceived benefits of the business strategy.

Sometimes lawyers need to tell clients when their strategy is not achievable. While there are always lawyers that will say “yes” to a business strategy (protecting themselves with the proper disclosures of the risk), in my view having the relationship with legal counsel that you trust is worth much more than the blowback and expense you’ll most likely get by following outcome-driven legal advice (and the bad press that has clearly been focused on both the real estate developer and the lawyer who provided the ill-fated advice). As to this case, Equinox will likely get a pretty improvement allowance to drop its lawsuit and preserve its leasehold in the building, further complicating the ROI to the new ownership.