ABCD … ROFR and SLL June 2022 – The highlights of the right of first refusal | Cadwalader, Wickersham & Taft LLP

On March 30, 2022, the Supreme Court of the State of New York, County of New York (the “Court”) decided in Times Square JV LLC v Walber Broadway LLC[1] that a tenant of the ground lease who is in default under the ground lease for failure to pay the landlord’s rent does not in itself invalidate the tenant’s right of first refusal under the lease to purchase from the landlord the land on which the rented premises are located.

The Crowne Plaza Hotel in Times Square, located at 1605 Broadway, New York, New York (the “Hotel”) was built in 1987[2]. The hotel, the flagship of the Crowne Plaza brand of the InterContinental Hotels group, contains 795 hotel rooms and is housed in an approximately 843,000 square foot building of mixed-use ownership. The entire building was constructed on a parcel of land totaling approximately 41,000 square feet, of which the portion of land where the hotel was located totaling approximately 11,000 square feet (the “Premises”) and was owned by Walber Broadway LLC, a New York Limited Liability Company (the “Owner”). Times Square JV LLC, a Delaware limited liability company (the “Lessee”) held a fee interest in the remainder of said land, which totaled approximately 30,000 square feet.[3] The rights and obligations of the Tenant and the Owner vis-à-vis the Premises were governed by this specific lease agreement, dated March 1, 1987, between the Owner, as successor lessor, and the Tenant, as tenant successor.[4] (lease”).

Under the lease, the tenant had a right of first refusal (“ROFR”) to purchase the premises if the landlord decided to offer the premises for sale[5]. In other words, if the landlord decided to market the premises, the landlord was then required, under the lease, to notify the tenant by delivering to him a proposed contract of purchase and sale containing the conditions under which the landlord would be willing to sell the premises (such a notice, the “ROFR Notice”). If the tenant agrees to the terms of the ROFR notice, the tenant would exercise his ROFR by delivering to the landlord the signed agreement of purchase and sale within 15 working days from the date of this ROFR notice and simultaneously paying the landlord the applicable purchase price deposit.[6].

In 2018, Lessee and its affiliated operating company (the “Hotel Lessee”) entered into a mortgage agreement with certain lenders (collectively, the “Mortgage Lender”), pursuant to which Lessee and Lessee of the Hotel have received a loan in the amount of up to $80,000,000.00 (the “Mortgage”). Separately, the respective parent entities of Lessee and Hotel Lessee (collectively, the “Mezz Borrower”) have entered into a mezzanine loan agreement with certain mezzanine lenders (collectively, the “Mezz Lender”), pursuant to which the borrower Mezz received a mezzanine loan in the maximum amount of $80,000,000.00 (the “Mezz Loan”) secured by, among other things, a pledge agreement which gave Mezz the lender a security interest and a lien on all the rights and options of Mezz borrower on the tenant. Under the said mezzanine loan agreement, a default by the tenant and the hotel tenant under the mortgage loan constituted an immediate event of default under the Mezz loan.

In March 2020, local and federal mandates COVID-19 ceased all hotel operations resulting in no revenue from the hotel. Claiming to have suffered financial hardship resulting from such closings due to COVID-19, the Tenant ceased to pay rent to the Landlord from December 2020 and thus defaulted on its obligations under the lease for failing to pay the amounts then due and due under it. Additionally, in June 2020, the Tenant and Hotel Tenant failed to pay the Mortgage Lender the full amount of principal then due and payable under the Mortgage on its maturity date. Such default under the Mortgage Loan automatically triggered a default under the Mezz Loan, which resulted in the Mezz Lender exercising its right to control the Tenant pursuant to the Mezz Loan Agreement.

Subsequently, the Owner entered into an agreement with 1601 Broadway LLC, a Delaware Limited Liability Company (“1601 Broadway”) for the purchase and sale of the premises on August 25, 2021. On August 26, 2021, the Owner provided the tenant with an ROFR notice, together with a draft agreement of purchase and sale (“PSA”), and offered the tenant the option of purchasing the premises for $121,000,000.00, payable in the form a deposit of $30,000,000.00 due upon signing the contract, the remainder being due upon closing[7]. On September 1, 2021, the tenant delivered the signed PSA to the owner and wired the required contract deposit in accordance with the ROFR notice. On September 3, 2021, the Landlord notified the Tenant in writing that the Tenant’s acceptance of the ROFR Notice was allegedly invalid due to the Tenant’s ostensible failure to disclose its corporate structure and to prove that its signatory was authorized to bind the tenant under the PSA.

On September 16, 2021, the tenant filed an action against the landlord for breach of contract, claiming that the landlord breached its contractual obligations under the lease by selling the premises at 1601 Broadway despite the tenant’s proper acceptance of the lease. relevant ROFR notice. The tenant subsequently asked the court to grant summary judgment.

The Court granted the tenant’s motion for summary judgment and found that, as a matter of law, the landlord breached the terms of the lease by effecting the sale of the premises at 1601 Broadway after the tenant properly exercised his right of first refusal to purchase the premises in accordance with the lease. In so deciding, the Court held that where there was no genuine dispute of a material fact in question and considering all undisputed facts in a light more favorable to the landlord, the tenant’s failure to pay to the Landlord the Tenant’s monetary obligations due under the Lease alone did not prevent the Tenant from exercising its ROFR pursuant to the Lease and was not decisive in determining the Tenant’s ability to purchase the Premises under of the ROFR Notice, a material question of fact that would preclude summary judgment.

This case highlights the powerful nature of rights of first refusal, apparently enforceable regardless of a material defect under the underlying document in which the ROFR is contained.

[1] Times Square JV LLC v Walber Broadway LLC655450/2021.

[2] https://nypost.com/2022/02/16/crowne-plaza-hotel-in-times-square-entangled-in-legal-battle/.

[3] Amended Verified Complaint dated October 18, 2021, Index No. 655450/2021 (Dkt No. 65).

[4] The Tenant was the successor in interest of the original Tenant, Broadway 48th-49th Street LLC, by this certain Assignment and Assumption of Lease, dated March 9, 2020, and Assignment and Assumption of Ground Lease, dated November 21, 2006.

[5] Lease § 24.01(a).

[6] Lease § 24.01(a).

[7] Amended Verified Complaint, ¶ 37, p. 13.