The fight over a ground lease on Billionaire’s Row will not play out in court, at least for now.
A state court judge on Monday handed another victory to land owners Ruby Schron and David Werner, throwing out the Carnegie House co-op board’s lawsuit seeking to halt negotiations over a new ground lease and overhaul certain rent-stabilization codes.
In his order, Judge Arthur Engoron agreed that the board’s challenge was “premature” given that the parties haven’t finished arbitration yet to determine the new ground rent.
The ground lease at Carnegie House, a 324-unit cooperative at 100 West 57th Street, expired March 15. The lease was renewed — but the land owners, a joint venture tied to Schron‘s Cammeby’s International Group and David Werner Real Estate, and the co-op board have yet to agree on a new rent.
The two parties have been at odds specifically over the rent price increase. In initial discussions, the owners indicated that arbitration would likely result in a new rent of about $40 million, 10 times the current rate. The board came back with $5.4 million and then increased the offer by $50,000, according to court filings. The owners then pitched $25 million.
The board and Georgetown 57, an LLC that controls the building’s retail space, filed a lawsuit in September asking the court to temporarily halt ground lease negotiations. The complaint argued that the state must first sort out the board’s rights if the co-op is ultimately converted into rent-stabilized housing. Under state rules, if the co-op is dissolved or a new lease is approved but the residents are unable to pay the new rent, the building is converted to rent-stabilized apartments. The lawsuit alleged that state codes for setting initial rents allow for “unsustainable and unconscionable levels” and should be changed.
In November, the judge declined to issue a preliminary injunction to stall arbitration and indicated that he didn’t think the lawsuit would survive scrutiny. Now, he has dismissed the case, agreeing with the owners that the lawsuit was challenging hypotheticals.
“Plaintiff’s do not have standing to challenge a rent regulation that to this point, and no doubt not for several future points, if ever, has or will cause them any concrete harm,” Engoron wrote. “Thus, the instant case is premature and asks for an impermissible advisory opinion.”
The judge also cited a 2005 decision that established that the effect of rent stabilization should not be considered when calculating rent for a ground lease. The judge in that case stated that “economic hardship is not a reason to rewrite a lease made between two sophisticated commercial entities.”
The board could appeal the decision, though it did not reveal its next moves.
“Our fight isn’t over until all ground lease co-ops are protected from predatory landowner practices,” Richard Hirsch, president of the board, said in a statement.
The co-op’s shareholders have also been lobbying for state legislation that would cap rent increases on ground leases and guarantee renewals. Sen. Liz Krueger and Assembly member Linda Rosenthal reintroduced their versions of the measure in January, and have indicated that the bills are a priority this session.
The Real Estate Board of New York has said the effort would “legislate a windfall for some of the wealthiest New Yorkers while throwing contract law into chaos.”
An attorney for the co-op board said Monday’s decision underscores the importance of such legislation.
“The decision magnifies the arbitrary nature of the current code, and highlights the need, in the absence of judicial relief, for legislative action as soon as possible,” Tim Collins, an attorney for the board, said in an interview.
Collins was disappointed by Monday’s decision, but was heartened by the judge’s acknowledgement that conversion of the co-op building “would restore the units to rent regulation, but would allow [the] owner to offer initial leases at [unmodest] market rates,” which the lawsuit argued was anathema to the point of rent stabilization.
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