Vornado wins appeal in $90M lease dispute with Regus over SF offices

UPDATED FEB. 7, 10:30 PM: 

A California Court of Appeals panel has ruled in favor of Vornado Realty Trust over the lease Regus signed in 2109 but then terminated at 345 Montgomery Street without ever occupying the space, the San Francisco Business Times reported.

The decision by the three-judge panel means that IWG, a British holding company that owns the Regus brand, is entitled to costs on appeal.

Regus filed the appeal in 2021, claiming a trial judge had improperly interpreted its lease agreement with Vornado for the 78,000-square-foot building, known as The Cube. Vornado, a New York-based real estate investment trust that owns the complex, had sued Regus seeking to enforce the terms of its 15-year lease.

Regus has argued that it was allowed to terminate the lease because the city had rejected its plans to install exterior signs.

San Francisco Superior Court Judge Harold Kahn ruled against Regus, saying the city had not made a final decision on the matter and was actually moving toward approving the signs. The appellate opinion, written by First District Court of Appeals Judge Sandra Margulies, upheld that ruling.

The court said proper interpretation of the lease allowed Regus to terminate its agreement only if it had either received a formal written rejection of the sign application from the city’s Planning Department, or if it hadn’t received approval by the date on which the offices were to be completed in September 2021.

Regus moved to terminate its lease on Sept. 26, 2019; approval for the signs was issued on Oct. 2.

Vornado invested $50 million in building improvements after the lease was signed, according to its lawsuit. The New York company said it first leased the 78,000-square-foot building to Spaces, a subsidiary of Regus, in July 2018.

Regus, which signed on to be the guarantor for the lease, filed for bankruptcy in Luxembourg in 2020.

Margulies of the appeals court said the landlord’s investment was “evidence of substantial effort and expense on Vornado’s part in anticipation of Regus’s occupancy,” suggesting that the parties “did not intend that Regus would have a unilateral right to terminate the lease agreement at any time before the delivery date simply because the signage had not yet been approved by the city.”

The COVID-19 pandemic proved especially difficult for the flex office market, the fast-growing commercial real estate sector that critics and supporters have long asserted had to prove it could weather an economic downturn.

And 2020 proved to be the ultimate test for some of the biggest players.

Regus — the largest and longest-running company in the space — filed for bankruptcy in the United Kingdom in September 2020 and threw more than 100 locations in the U.S. into Chapter 11.

This month, Vornado wrote down the value of its real estate portfolio by $600 million, mostly on account of its Midtown properties in New York.

CORRECTION: The previous story incorrectly said that the original and appellate coiurts ordered Regus to pay the $90 million in lease obligations to Vornado. In fact, they ruled the lease was in effect, while future litigation will determine damages. This correction follows the updated story in the Business TImes.

— Dana Bartholomew