Gems unit faces $200 million lawsuit from US developer

93-94 Second Development alleges that Gems NY terminated the contract three months after signing it in March on a pretext, putting it in breach.

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A New York property developer is suing a unit of Dubai’s Gems Education for allegedly breaching a tenancy contract in a US$1 billion deal to construct and lease its first school in the city.

93-94 Second Development has filed a US$200 million lawsuit plus fees and punitive damages against Gems Menasa Topco, a Cayman Islands-registered subsidiary of Gems, one of the world’s largest privately-owned school operators.

The Topco subsidiary Gems NY had agreed to rent for 40 years a 213,000 square foot site between Manhattan’s 92nd and 93rd Streets, which had originally been earmarked by 93-94 Second Development for a skyscraper, to be developed as a private school. The cost of construction was estimated at around $117m.

Termination of the contract resulted in a loss of $940.84m in rent over the period plus millions of dollars in fees and loss of business for the developer, 93-94 Second Development claimed in a partly redacted lawsuit filing dated last Friday with the New York State Supreme Court in lower Manhattan.

The developer, an affiliate of the New York-based real estate company Merchants Hospitality, alleges that Gems NY terminated the contract three months after signing it in March on a pretext, putting it in breach.

A Gems spokesman said that previous suits filed against Gems regarding the deal had failed to succeed. “The facts here are very simple: two judges, in just one week, have already rejected arguments based on these baseless allegations, period,” said Robert Ward, Partner at Schulte Roth & Zabel, the law firm representing Gems in New York.

The 93-94 Second Development suit says that because the named tenant was a new company with no assets, the deal required Topco, as guarantor, to maintain at all times an “enterprise valuation” of at least $1 billion and “liquidity” of $150m, according to the filing.

In late May, Topco informed the developer that it did not have the financial means to post an “irrevocable letter of credit” of $15m.

Instead it offered half the amount, saying a transaction would soon close with the UAE-based investor Fajr Capital, a sovereign-backed investment firm with ties to the Abu Dhabi Investment Council that would improve the company’s liquidity. The developer accepted the reduced amount on condition the remainder would be paid by the middle of last month. As of June 17, the outstanding amount had not been paid, the suit alleges.

The lawsuit claims that it later emerged that the Fajr transaction would “impair” rather than improve the firm’s financial position.

The transaction “if it closes, would leave Topco with debts beyond its ability to pay”, according to the filing. And the deal “would be made by the guarantor [Topco] with the intent to hinder, delay or frustrate the claims of the landlord [Second Development]”, it is claimed.

In May, Bloomberg reported that Fajr Capital and the private equity firm Investcorp were in discussions to buy a minority stake of 20 to 30 per cent in the parent group Gems Education which is valued at $1.5 billion to $2bn.

Yesterday, Fajr Capital and Investcorp declined to comment on the development.

The lawsuit alleges that a pretext was manufactured to allow the lease on the Manhattan site to be terminated. The filing quotes Denise Gallucci, the Gems Education Solutions for Americas president, as saying on June 14 that the educational company could use a contract clause to get back the money paid. It also asserts that the final agreement on the project architects was delayed by the tenant to force an automatic termination of the lease after June 16. The suit also claims that the tenant’s failure to negotiate “continuously and in good faith” on this matter constituted a breach of contract.

Gems Education runs more than 100 schools worldwide and had revenues of $500m, according to a separate court document.

Last month, Gems appointed Saeed Al Muntafiq as group chief executive to drive expansion plans. In January, it had said it expected to build six schools a year to tap into the UAE’s rapidly growing private education market.

To fund its expansion plans, Gems has been using loans and leasebacks.

In an acquisition leaseback deal in November, the real estate investment trust Emirates Reit acquired a long leasehold interest in a Gems school campus in Dubai.

Also that month, Gems issued a $200m perpetual non-call five hybrid sukuk, lower than the $500m expected.

Last year, it raised Dh2bn to refinance its investment in schools and to provide additional funds for expansion in the UAE and Middle East and North Africa region.

This month it opened its first school in Ras Al Khaimah, and last month started a $160m K-12 school in Chicago. In September, it will open a S$213m (Dh630.6m) school in Singapore, besides those in Malaysia, China and Egypt.

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