Real estate firm failed to include breach protections in lease, lawsuit says

A property developer is accusing its former real estate law firm, Crosbie Gliner Schiffman Southard & Swanson LLP, of professional negligence for allegedly failing to include protections in a build-to-suit lease agreement which the tenant breached.

The plaintiff, 2221 Park Place Partners LLC, says in the complaint that it spent about $60 million in building a 90,000 square foot office complex in El Segundo for a WeWork subsidiary which was to pay $5 million per year in rent. In order to protect its investment, CGS3 negotiated with WeWork a security package that included a letter of credit in the amount of $2.43 million; and a surety bond in the amount of $9.72 million.

According to the complaint filed Wednesday by Jennifer L. Keller of Keller/Anderle LLP, Park Place wanted the tenant to deliver the surety bond at the signing of the lease. The complaint said that WeWork asked that the tenant deliver the surety bond after Park Place delivered the premises in order to avoid paying a premium while the premises were being built, and claims against the bond could not occur until the premises were delivered.

“Given WeWork’s request to delay delivery of the surety bond, and because tenant was a single-purpose entity that WeWork could undercapitalize or bankrupt at will, Park Place was concerned about its ability to collect against tenant if the bond was not delivered, if tenant breached the lease before delivery, or if Park Place could not collect on the bond,” Keller wrote in the complaint.

“In other words, Park Place was concerned that tenant was ‘judgment proof.’ To address those concerns, WeWork and Park Place began negotiating a corporate guaranty,” Keller continued. 2221Park Place Partners LLC v. Crosbie Gliner Schiffman Southard & Swanson LLP, 24STCV02516 (L.A. Super. Ct., filed Jan. 31, 2024).

CGS3 partners Thomas Crosbie and Craig Swanson did not respond to emailed requests for comment and the name of the firm that will represent them in the matter.

CGS3 was instructed to draft a guaranty that would have WeWork guarantee the value of the surety bond until the tenant delivered one that complied with the lease, and after delivery in case Park Place could not collect on it, the complaint stated. But the document that was executed in February 2019 triggered WeWork’s obligations only if the surety bond did not make a payment to Park Place, Keller wrote.

“What CGS3 should have done — and what similarly situated lawyers would have done — is include in the guaranty an express trigger if tenant did not deliver a surety bond when required to do so and/or if tenant breached before delivery of the bond,” Keller wrote.

In February 2020 the tenant allegedly said it would not accept the possession of the premises, and did not deliver the surety bond as allegedly contemplated in the lease, the complaint stated. Park Place sued the tenant four months later based on the lease, and WeWork based on the guaranty.

“After Oct. 1, 2020, Park Place discovered the injury from CGS3’s professional negligence when WeWork claimed that the as-executed Guaranty language meant it was contractually off-the-hook because its obligations never materialized due to tenant never delivering the surety bond,” according to the complaint.