Desperate to rid itself of a rent-stabilized apartment building, L+M Development Partners is suing its lender for refusing to take the keys.

The Westchester-based landlord filed a complaint against Santander Bank in New York County Supreme Court Thursday alleging that the lender has improperly declined to accept the deed in lieu of foreclosure at 320 St. Nicholas Ave.

In court records, L+M said that the option to walk away from the Harlem property is in loan documents, while Santander is looking to seize other assets to recoup possible losses from the mortgage.

L+M and Santander both declined to comment on the court filing, which was first reported by PincusCo.

In 2019, L+M borrowed $12M from Signature Bank to finance the conversion of four rent-regulated units at the building that would split them into 12 apartments.

However, in 2023, New York state made amendments to the Housing Stability and Tenant Protection Act of 2019 that eliminated landlords’ ability to generate a new first rent for reconfigured units.

In the complaint, L+M said the changes had an “immediate deleterious impact” on rent-regulated apartments. The owner stopped work and warehoused the apartments, removing them from the market, alleging that the regulations made the renovations illegal.

When Signature Bank collapsed in March 2023, Santander bought a 20% stake in a portion of the failed institution’s loan book, backed by rent-stabilized and rent-controlled housing in New York City and elsewhere. That transferred control of L+M’s loan to the Boston-based institution.

L+M isn't alone in asserting that the legislation intended to protect low-income tenants has quickly backfired, making the upkeep of rent-regulated units an economic challenge that could drain housing stock and spark foreclosures. The Securities and Exchange Commission has already begun examining the impact of the resulting distress on banks, according to a Bisnow analysis of public records.

On June 24, Santander notified L+M that it was in default and demanded payment, according to the complaint. In September, L+M offered to turn over the deed to the property, as well as pay transfer taxes, the cost of a title insurance policy and other expenses that would be incurred.

In response, attorneys for Santander told L+M that the loan documents don't require the bank to accept a deed-in-lieu, according to conversations quoted in the complaint. L+M’s counsel wrote back that it is implicit, comparing it to the fact that there is no provision that states that the lender will accept payments for the loan.

“It would be silly,” L+M’s lawyers wrote to Santander, according to the complaint.

But Santander isn’t letting L+M off the hook. The lender sent a default notice Jan. 22 asserting that the loan is recourse to the borrower.

Mortgage agreement documents filed in court specify that the loan is nonrecourse — but L+M is also constrained to a bad boy guarantee, which carves out that the bank can go after its other assets under certain conditions, including fraud, willful misconduct, abandonment and physical waste of the property.

“The Guarantor is liable for all losses incurred by the Lender with respect to waste to the Mortgaged Property, which includes the intentional act of failing to make units available for occupancy at the Mortgaged Property,” according to the default notice, which was also filed in court.

As the value of rent-stabilized buildings in New York plummets, the scramble among owners and lenders to minimize losses has spread. Lenders have previously said that newly originated loans are structured around personal guarantees and other recourse provisions to ensure that borrowers can't offload their underwater assets on their financiers.

Signature’s loan book is also causing tension elsewhere in the city. A venture called Community Stabilization Partners, which bought a stake in a large portfolio of rent-stabilized loans, recently filed its first foreclosure actions against its borrowers, with more expected.