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Landlord Defeats Commercial Tenant’s Attempt to Block Sale of Building by Claiming Sham Right of First Refusal

A commercial landlord had mistakenly given two of its commercial tenants a right of first refusal to purchase the landlord’s building. When the landlord received an offer to purchase the building from a third party, the landlord hired Adam Leitman Bailey, P.C. to handle the transaction. When Adam Leitman Bailey, P.C. discovered the landlord’s error, Adam Leitman Bailey, P.C. advised the landlord to notify both tenants of the third-party offer in accordance with their respective lease terms.

One of the commercial tenants, who was actually in violation of its lease and owed thousands of dollars in back rent, then used the prospective sale as an excuse to bring three related lawsuits (over a span of more than two years) – a “Yellowstone” action to forestall eviction proceedings, a “fraud” action, and an action for “specific performance” — to prevent a sale of the leased premises and to avoid eviction for long-term lease violations. A meritless appeal extended the litigation for at least one additional year.

In each of the three actions, the tenant attempted to create a sham legal dispute with the landlord, based upon the right of first refusal contained in the parties’ lease agreement, so that the tenant could file a notice of pendency and prevent the landlord from completing sale of the premises. In both the “Yellowstone” and “fraud” actions, the tenant claimed that the landlord had fraudulently attempted to deprive the tenant of its right to purchase the leased premises by entering into a sham contract to sell with a third party. The tenant also sought to enjoin the purported “fraudulent” sale based on the alleged violation of the tenant’s right of first refusal. However, the New York County Supreme Court found, in both actions (a) that the landlord had fully complied with its lease obligations concerning the tenant’s right of first refusal, and (b) that the tenant could not substantiate, in any meaningful way, that it was ready and able to exercise the tenant’s first refusal option.

Following dismissal of the “fraud” action, the tenant then commenced the “specific performance” action. In that action, the tenant claimed that, upon its offer to “match” the terms of the contract of sale with the third party, the landlord delivered a contract that contained “material differences” between its terms and the terms of the third-party contract. Upon that basis, the tenant sought to compel the landlord to convey the premises to it upon the same terms and conditions stated in the third party contract. The New York County Supreme Court dismissed the “specific performance” action on the ground that the tenant had had “more than one full and fair opportunity to litigate the issue of the exercise of its right of first refusal,” and it was, therefore, “barred from relitigating the issue.”

On appeal, the Appellate Division, First Department, unanimously affirmed the dismissal of the tenant’s complaint, concluding that the “specific performance” action was barred on the ground of res judicata “as no reason appears why the issues [tenant] seeks to raise [in the “specific performance” action] could not have been raised in [the “fraud” action].”

Adam Leitman Bailey and John M. Desiderio handled this matter on behalf of the firm throughout all court proceedings at both the trial court and appellate levels.

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