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Commercial Division Enforces Strict Compliance With Change-of-Control Notice Requirement

In GSMC II 2006-GC6 Bridgewater Hills Corporate Center, LLC v. Lexington Realty Trust, Case No. 653117/2015, 2016 BL 378261 (N.Y. Sup. Ct. Nov. 2, 2016), Justice Jeffrey K. Oing of the Commercial Division denied a motion to dismiss an action to recover a loan guaranty on a defaulted loan of $14,805,000.[1]

In 2006, the borrower, NK-Bridgewater Property LLC, entered into a term loan agreement with Greenwich Capital and signed a promissory note and a mortgage to secure the loan. NK-Bridgewater’s 100% owner, Newkirk Master Limited Partnership also signed a guaranty of recourse, would become effective only upon the occurrence of certain conditions.[2] Newkirk Realty Trust, the sole general partner of Newkirk Master, was a key principal in the loan agreement.[3]  In 2006, Newkirk Realty Trust merged with Lexington Realty Trust (“Lexington”), and Lexington assumed the obligations under the NK-Bridgewater guaranty.[4]  Lexington is a real-estate investment trust (“REIT”) with over $600 million in assets.[5]

Under the NK-Bridgewater financing, Newkirk Master (and later Lexington), were to be fully liable in the event of: (i) NK-Bridgewater’s fraud, physical waste, misappropriation of security deposits, or failure to pay taxes, or (ii) in the event of certain defaults under the agreement.[6]  In 2015, after NK-Bridgewater had failed to make several mortgage payments, GSMC II 2006-GC6 Bridgewater Hills Corporate Center, the successor lender of the loan, initiated an action against NK-Bridgewater to foreclose on the mortgage and simultaneously brought an action in the Commercial Division against the guarantor, Lexington.[7]

 The lender, GSMC, argued that the Newkirk-Lexington merger had resulted in a change of control over the borrower and amounted to an event of default under the loan agreement, triggering Lexington’s guaranty obligations under the loan. Lexington argued that the merger was a “permitted transfer” under the loan agreement and was not an event of default, and that in any event, GSMC could not point to the merger as an “event of default” more than nine years after the merger took place.

Justice Oing partially accepted Lexington’s first argument, concluding that the “permitted transfer” provision of the loan agreement applied to both direct and indirect transfers of control.  The Commercial Division reasoned that although the Newkirk-Lexington merger diluted Newkirk Master’s control over NK-Bridgewater and increased Lexington’s indirect interest over NK-Bridgewater above 49%, such a transfer was allowed under the loan agreement because Lexington had sufficient assets. [8] The Court, however, proceeded to focus on another requirement of the “permitted transfer” provision: i.e., notice.  Under the agreement, to engage in a “permitted transfer,” the borrower was required to “give Lender notice of such Transfer together with copies of all instruments effecting such Transfer no less than 10 days prior to the date of such Transfer.”[9]  The Court noted that NK-Bridgewater had never given GSMC notice of the merger.  

Lexington offered several reasons why the lack of formal notice should be excused or should not provide grounds for triggering Lexington’s guaranty obligations. First, Lexington unsuccessfully argued that GSMC had received actual notice of the merger because the merger was widely reported in the press and disclosed in SEC filings. The Court concluded that Lexington’s documentary evidence showing the lender’s knowledge of the merger was “at best[] circumstantial” and was insufficient, at a motion to dismiss stage, to defeat GSMC’s allegation that it failed to receive actual notice until January 2015.[10]

 Second, Lexington argued that noncompliance with the notice requirement should not serve as a ground for default and urged the Court to excuse the failure to comply with a provision that was otherwise not a material part of the loan agreement. Justice Oing refused to excuse Lexington’s noncompliance with the notice requirement because notice was styled as a condition precedent: i.e., a transfer could only be considered a “permitted transfer provided that” notice was given. [11]  The Court also rejected Lexington’s argument that the lender should be equitably estopped from asserting the guaranty because it had failed to inform Lexington of the alleged default and continued accepting payments from the borrower for nine years following the alleged event of default.

The GSMC II decision is a reminder of the need to follow contractual notice particularly where the availability of contract rights turns on providing prior notice.

By Gabriela Bersuder and Stephen P. Younger



[1] GSMC II 2006-GC6 Bridgewater Hills Corp. Ctr., LLC v. Lexington Realty Tr., Case No. 653117/2015, 2016 BL 378261 (N.Y. Sup. Ct. Nov. 2, 2016)

[2] Id. at *1.

[3] Id.

[4] Id.

[5] Lexington Realty Trust, 2015 Annual Report, available at

[6] GSMC, 2016 BL 378261 at *5; see also Nexbank, SSB v. Soffer, No. 1782, 2016 BL 375546, at *1 (N.Y. App. Div. Nov. 10, 2016) (explaining that a guaranty requires the guarantor to “compensate the lenders in the event they or the Borrower engage in certain acts that could harm the lenders’ interest in the collateral or the lenders’ ability to enforce their rights under the loan agreement”).

[7] GSMC, 2016 BL 378261 at *3.

[8] Id.

[9] Id. at *3-*4.

[10] Id. at *4.

[11] Id. at *4-*5.