CBRE Sued For $11.5M By Landlord Of 600K SF Private School That Won't Pay Rent
A New York-based real estate investor is suing CBRE for more than $11.5M in damages over a D.C. private school lease, claiming it failed to properly disclose that it was representing both sides, and that it misled the landlord on the financial health of the tenant.
The suit, filed Thursday by affiliates of the 601W Cos. in New York State Supreme Court, centers around a 600K SF sublease for private school Whittle School & Studios in a former Intelsat campus at 4000 Wisconsin Ave. NW.
"The issue with CBRE was we were dependent on them as the leasing agent for the property, and they represented Whittle, so they wore too many hats in the same transaction," 601W Managing Principal Mark Karasick told Bisnow Friday. "They’re conflicted, they had all kinds of different interests going on, and we’ve been suffering mightily."
The 30-year sublease was signed in August 2018 with a rent of $28M per year. After the sublease commenced in July 2019, The Whittle School paid the rent for nine months before defaulting on the rent payments in April 2020, according to the lawsuit. The private school, which has faced major financial issues, hasn't paid any rent since then, and it is now in default for over $27M, the suit claims.
601W, which acquired a long-term ground lease on the property from the federal government in 2012 and retained CBRE to sublease the building that same year, paid the brokerage firm $11.6M in commission fees when the sublease was signed in 2018, according to the suit. It said that was half of the total agreed-upon commission, and it is now withholding the second half and demanding the return of the initial $11.6M because of what it claims was wrongful conduct on behalf of CBRE.
The suit also said CBRE is now demanding the second half of the commission, despite the tenant not paying the rent and the sublease being terminated.
CBRE hasn't yet filed an official response since the suit was lodged Thursday, but a statement provided to Bisnow indicates it plans to dispute the claims.
“We believe our representation of the plaintiff was proper and we look forward to addressing this matter in the proper legal forum," a CBRE spokesperson told Bisnow in a statement.
While the $11.6M figure is the only specific dollar amount the plaintiff seeks in the suit, 601W is also requesting damages for other charges that could potentially add millions more if the court decides in its favor.
In the suit, 601W argues that its brokerage agreement with CBRE should be deemed unenforceable — and the commission should be returned — because CBRE didn't comply with a D.C. law that requires brokers to disclose when they represent both sides in a deal. This law was also the subject of a recent lawsuit involving JLL's representation of both sides in a D.C. coworking lease.
After CBRE signed its initial agreement to represent the 601W Cos., the brokerage firm became the exclusive worldwide broker for the Whittle School. It also brokered a deal on behalf of the school in Brooklyn that later fell through.
Karasick told Bisnow that CBRE was helping Whittle raise money for the Brooklyn expansion, an effort that hurt its ability to pay its rent for the D.C. sublease, at the same time it was representing his firm.
While he said that representing both sides is a common practice in commercial real estate and can sometimes work well, Karasick said that wasn't the case here.
"When it doesn't work well, you've got conflicts," he said. "And they've got big conflicts."
In its communications with 601W, according to the suit, CBRE provided descriptions of the Whittle School's finances that proved to be "false and misleading in critical respects."
"CBRE was motivated to continue to prop up and substantiate Whittle School’s financial strength because CBRE had been hired to expeditiously identify many more locations for further expansions of the Whittle School," the suit reads. "This created an inherent additional conflict of interest for CBRE since it was in a position to make much more money in commissions from Whittle School’s leasing of additional locations, despite the dampening effect on the Whittle School’s liquidity and ability to continue operations at its planned school in Washington, D.C."
The suit, signed by plaintiff's attorney Christopher Sullivan of Nutter McClennen & Fish LLP, specifically names CBRE Vice Chairman David Maurer-Hollaender, claiming he knowingly misrepresented and concealed facts surrounding the Whittle School's financial problems.
The suit also claims that Whittle School defaulted on payments owed to contractors and subtractors, leading to more than $22M in liens against the property. The suit said that 601W paid that $22M, plus an additional $10M to Turner Construction Co., which Whittle Cos. had failed to pay.
601W needed to pay these fees that Whittle had agreed to in order to refinance its $120M in debt on the property. Its initial lender, Ladder Capital, told the firm it no longer planned to provide the debt after learning about Whittle school's poor financial condition in 2019, the suit said. 601W was able to refinance the loan with a replacement lender, but it said securing the deal came at an "enormous cost."
The company later went into default on its debt after Whittle Cos. stopped paying its rent, and then its lender — Axonic Capital — began the foreclosure process earlier this year. A foreclosure auction was scheduled for March and then canceled for unclear reasons, the Washington Business Journal reported.
The 601W Cos. terminated the Whittle School sublease June 6 and filed eviction proceedings against the school. The school had just held its first graduation ceremony in May for its initial class of 14 students. It had enrolled nearly 130 students as of May, but it is unclear what will happen to their schooling following the eviction filing.
The plaintiff is demanding a jury trial in the case. Its claims include a violation of the D.C. dual representation law, a breach of fiduciary duty, fraudulent inducement, fraud and unjust enrichment.