As case regarding McDonald's and its landlord at 840 Atlantic (at Vanderbilt) moves closer to trial, pre-trial rulings lean toward tenant.

About a year ago, I provided an update (link) on the long-running lawsuit by McDonald's, tenant of a drive-through restaurant at the corner of Vanderbilt and Atlantic avenues, against its landlord Vanderbilt Atlantic Holdings (VAH), which would build an 18-story residential tower at the site--if it could get its tenant out.

U.S. District Court Dora Irizarry denied VAH's motion to dismiss and motion for summary judgment, pointing toward a bench trial on whether each party failed to act in good faith in the fair market value appraisal process.

More recently, the judge handed McDonald's another procedural victory. In a pre-trial ruling Sept. 30, the court denied the landlord's motion to preclude testimony and documentary evidence related to appraisals conducted prior to April 15, 2019, which is when McDonald's told VAH they couldn't agree on the fair market value. 

The court. which earlier cited "credibility concerns" regarding the landlord's conduct, granted a motion by McDonald's to exclude testimony by Anthony Musto, their original landlord, who later leased the property to VAH.

The court also offered a split decision on a motion by McDonald's to exclude the testimony of an expert witness.

Perspective

As I wrote last year, the delay in building at 840 Atlantic has nothing to do with the advisability of constructing a denser building at a key crossroads, one that, upon the entry of McDonald's in 1999, was not ripe for development.

It's directly across the street from the eastern boundary of Atlantic Yards/Pacific Park, announced in December 2003, though that parcel, known as B10, remains unbuilt and requires an expensive platform over the railyard below. 

Meanwhile, in the past decade, landlords and developers have explored developing parcels east of Vanderbilt Avenue shackled by outdated manufacturing zoning, getting spot rezonings and a pending area rezoning.

Rather, the delay has to do with the price of getting McDonald's to leave. That price presumably will rise with court decisions that favor their case.

The background

McDonald's and Musto signed a lease for 20 years, beginning April 9, 1999, with the tenant having the right to up to four five-year extensions. On 11/30/17, Musto's M.M.B. Associates entered into a 99-year ground lease with VAH, which then became the restaurant's landlord.

Under an Option Rent Addendum (ORA), which governs how rent is set, McDonald's was to pay either an annual rent of $192,391, or an annual rent equal to 80% of the Fair Market Rental Value (FMV) of the property

The two parties couldn't agree on rent, so the ORA’s dispute resolution process began, in which each party appoints an appraiser. If the two appraisals are within 15% of each other, then they can be averaged. If not, the two appraisers are supposed to appoint a third appraiser. They never got there, given that they charged bad faith.

Earlier appraisals

While VAH sought to preclude testimony and documentary evidence relating to appraisals conducted before the FMV process commenced on April 15, 2019, when Plaintiff sent notice to Defendant that the parties were unable to agree on the FMV, the "inquiry into whether there was good or bad faith in the FMV process necessarily begins when the bad faith purportedly started, not at the technical start of the FMV process," wrote the judge.

For example, Defendant’s appraiser, Tom Tener, did testify that his earlier appraisals may have been related to the FMV process, Irizarry wrote.

Musto as witness

McDonald sought to exclude the testimony of Musto because VAH never included him as a potential witness in its disclosures and made representations that Musto had no relevant information, according to the judge.

Irizarry noted that VAH moved to quash a subpoena aimed at Musto. "Defendant insisted that Musto had no relevant information to provide in this litigation and vehemently opposed Plaintiff’s subpoena," wrote the judge."Defendant cannot have it both ways."

Excluding an expert

VAH seeks to call as an expert witness Michael P. Hedden to testify about his review of Tener's work. While McDonald's contends that Hedden didn't perform any independent research or analysis, the judge noted that he "was retained to conduct an appraisal review, as opposed to an independent appraisal."

"Plaintiff’s challenges are 'better left for cross-examination rather than exclusion,'” the judge wrote, quoting another case.

Though McDonald's sought to preclude Hedden’s testimony that Tener “correctly concluded” that a new building would be most valuable, the judge similarly said that could be challenged at trial.

As to Hedden’s testimony about the purpose and role of a neutral third party appraiser, Irizzary noted that the topic was not within the scope of his appraisal review, so it could be precluded.