Wednesday, March 07, 2007

“Unclean hands”? Judge raps Boymelgreen, Ratner in AY lease dispute

A state judge has backed charges that developer Forest City Ratner has “unclean hands” in a dispute over property in the planned Atlantic Yards footprint.

For months, Henry Weinstein—who owns some key properties in the proposed Atlantic Yards footprint—has protested in state court that his tenant, developer Shaya Boymelgreen, improperly assigned leases to a Pacific Street building and adjacent parking lot to an affiliate of Forest City Ratner. And that assignment, he argued, allowed the Empire State Development Corporation (ESDC) to deceptively portray—since October 2005—that Forest City Ratner “controlled” the land, thus suggesting a lesser need for eminent domain.

Weinstein called it “unclean hands,” and though State Supreme Court Justice Ira B. Harkavy didn’t use those words, he has agreed with Weinstein’s case, ruling that Boymelgreen’s lease assignment to Ratner violated the terms of the original leases with Weinstein, which required the landlord’s “written consent,” and declaring the latter leases “terminated.” (The decision.)

Now Weinstein, who’s also a plaintiff in the federal eminent domain case organized by Develop Don't Destroy Brooklyn (DDDB) challenging the project, will move to evict Boymelgreen and other tenants in the six-story building on Pacific Street just east of Carlton Avenue. They had leased back the space from AY 535 Carlton, a Forest City Ratner affiliate.

[Updated] Boymelgreen will appeal, according to a statement from a Forest City Ratner attorney, posted on the New York Observer's blog, The Real Estate.

More costly condemnation?

The ruling can't stop the state from using eminent domain to take the properties. But it might make it more costly. Boymelgreen had argued that Weinstein is using the legal fight to shore up his negotiating position with Ratner, while Weinstein responded that Boymelgreen’s deal with Ratner would diminish the value of his property.

Weinstein claimed that Forest City Ratner executive Jim Stuckey made a verbal offer to buy his property but wouldn’t put in in writing, and threatened that if no agreement was reached, the state would use eminent domain. FCR denied making any threats or raising the issue of condemnation, according to Harkavy’s decision.

DDDB, in a statement, observed that Forest City misled not only the ESDC but also the Public Authorities Control Board by claiming control of Weinstein's properties. DDDB charged, "By acquiring Mr. Weinstein's leases - which run until 2048 - FCRC likely hoped to claim that the properties had little value beyond the leases themselves. With full control restored to Mr. Weinstein, however, the cost of acquisition has likely increased ten-fold." There's no citation for those numbers, however.

The state’s willingness to portray the properties as “controlled” by Forest City Ratner may be used in the federal eminent domain case to argue that the developer has benefited from favoritism. (According to the ESDC, the asterixes indicate: FCRC has closed on an option to take by assignment the lessee's interests under the ground leases for these properties. However, the property owner has objected to such assignments.)

The properties at stake

Companies controlled by Weinstein own the six-story yellow former manufacturing building at 752-766 Pacific Street, as well as two adjacent lots, used as a parking lot. They make up about one acre of the proposed 22-acre site.

The leases between Weinstein and Boymelgreen, for just under 49 years, were signed in October 1999, long before the Atlantic Yards plan was contemplated, and about six months after Boymelgreen bought the nearby former Daily News printing plant, which was subsequently converted to the Newswalk building of luxury condos. (Boymelgreen also sold the Ward Bakery, seen as a potential hotel, to Forest City.)

The leases provide that the tenants may assign their leases with the consents of the landlord, which “shall not be unreasonably withheld or delayed.” At issue was whether Weinstein unreasonably withheld the lease.

Around 3/31/05, Boymelgreen and Ratner agreed on a one-year option for Ratner to acquire Boymelgreen’s lease. (That was about the same time that Boymelgreen agreed to sell two nearby properties to Ratner for $44 million.) On 2/16/06, they asked Weinstein by letter to consent to the agreement, according to Boymelgreen’s complaint. Weinstein didn’t reply, so on 3/2/06, two weeks later, they closed the transaction, believing there was no reasonable basis to any objection.

The wrong address

But Weinstein said that, back in 2000, he had given Boymelgreen an address on Long Island, rather than Brooklyn, for all business mail, and Boymelgreen had been sending rent to the correct address. However, the lease request was mailed to Weinstein's outdated Brooklyn address. (Boymelgreen and Forest City called it an excusable error.)

Weinstein’s lawyer questioned the assignments, asking for financial information about AY Carlton, the Forest City affiliate. While AY Carlton initially declined to provide that, in legal papers, the developer asserted that AY Carlton is financially responsible, as it’s affiliated with Forest City Ratner and the parent Forest City Enterprises.

In oral argument 11/15/06, Weinstein’s lawyer, David Brody, called the affiliate a shell and claimed, “The people spent considerable time negotiating the amount of the litigation fund that Forest City Ratner would provide for the Boymelgreen organization.”

Defense lawyer John Sheridan said that “this case is all about greed,” arguing that Weinstein in 1999 “was thrilled to get a tenant, any tenant,” but now sees the value of his property rising given the Atlantic Yards project. (Weinstein has said he had plans to develop the property himself.)

Sheridan also argued that the absence of a financial guarantee from the Ratner affiliate wasn’t important, since the previous guarantee from Boymelgreen had already expired.

Clear decision

In his decision, dated 3/1/07 but released on Tuesday, Harkavy wrote:
The leases in question here clearly and unambiguously required tenants to “first” obtain the written consent of the landlords before any assignment of the leases. Notwithstanding that provision, the tenants chose to execute the assignments to AY Carlton, even though they had not received the written consent of the landlords. Indeed, the tenants chose to execute the assignments less than two weeks after sending their letter requests, before they received any response from the landlords, without trying to contact the landlords. The tenants’ assignment was clearly not permitted by the leases.

As for whether Weinstein’s withholding consent was unreasonable, Harkavy wrote:
However, according to the clear terms of the leases, plaintiffs were required to obtain consent prior to assigning the leases, regardless of the reasonableness of withholding consent. Additionally, it is not clear that the landlords’ withholding was unreasonable as a matter of law.

Moreover, even after plaintiffs responded, they refused, among other things, to provide specific financial information about AY Carlton itself, instead simply asserting that AY Carlton is “affiliated” with larger companies. Similarly, the proposed use of the premises—namely, demolition—would constitute a material change in use.

Had the tenants believed Weinstein was unreasonably withholding consent, Harkavy wrote, the leases provided for them to go to court to seek such consent. However, he wrote:
The tenants chose not to utilize that option and so they cannot now try to cure their default in another matter.

[Updated] Still, as with the pattern of legal disputes regarding Atlantic Yards, the case will get another hearing in appellate court.

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