D.C. TOPA Ruling Has Ground Lease Implications for Multifamily Properties

The decision in Foster House Tenants Association v. New Bethel Baptist Church Housing Corporation, Inc., et al., No. 20-CV-635 (D.C. 2022), issued on May 26, 2022, concerns whether a ground lease or transaction that includes something less than an absolute transfer of title of multifamily property, is considered a "sale" under the District of Columbia Tenant Opportunity to Purchase Act, D.C. Code § 42-3404.01 et seq. (TOPA). The District of Columbia Court of Appeals affirmed that rights created under TOPA "shall be determined by examining the substance of the transaction or series of transactions" to conclude if the transaction is actually a sale. The Court stated that the definitions of the terms "sell" and "sale" under TOPA apply broadly pursuant to the 2005 amendments to TOPA.

TOPA requires that "[b]efore an owner of a housing accommodation ("apartment" or "building") may sell the housing accommodation or issue a notice to vacate for purposes of demolition or discontinuance of a housing use, the owner shall give the tenant an opportunity to purchase the accommodation at a price and terms which represent a bona fide offer of sale." See DC Code § 42-3404.02(a). The District of Columbia Court of Appeals noted in Foster House that "under TOPA as revised over the years, a 'sale' of property is a term of art that extends beyond the immediate, absolute transfer of title." TOPA states, and the Court reiterated, that "the terms 'sell' and 'sale' include but are not limited to, the execution of any agreement pursuant to which the owner of the housing accommodation agrees to some but not all, of the following:

1. Relinquishes possession of the property;
2. Extends an option to purchase the property for a sum certain at the end of the assignment, lease, or encumbrance and provides that a portion of the payments received pursuant to the agreement is to be applied to the purchase price;
3. Assigns all rights and interests in all contracts that relate to the property;
4. Requires that the costs of all taxes and other government charges assessed and levied against the property during the term of the agreement are to be paid by the lessee either directly or through a surcharge paid to the owner;
5. Extends an option to purchase an ownership interest in the property, which may be exercised at any time after the execution of the agreement but shall be exercised before the expiration of the agreement; and
6. Requires the assignee or lessee to maintain personal injury and property damage liability insurance on the property that names the owner as the additional insured."

See D.C. Code § 42-3404.02(b).

Rooted in Appeal

The case centers around the Foster House Tenants Association (Tenants Association) appealing the grant of summary judgment in favor of New Bethel Baptist Church Housing Corporation Inc. (New Bethel) and Evergreen 801 RI Apartments LLC (Evergreen) (collectively the Developers) alleging that a 104-year ground lease entered into by New Bethel and Evergreen constituted a sale to a third party and that the tenants were not provided a TOPA offer of sale, which violated the tenants' rights under TOPA. During the initial stages of the litigation, after the lawsuit was filed, New Bethel belatedly provided a TOPA offer of sale and sought a motion to dismiss or, in the alternative, summary judgment on the grounds that the Tenant Association's claims were moot. The Court, inter alia, rejected that basis for granting summary judgment in favor of the Developers.

The ground lease pertained to a plot of land in the District of Columbia on which the Foster House Apartments complex (Foster House) is located. Evergreen agreed to pay an upfront fee of $2.15 million and subsequently pay a gradually escalating rent to New Bethel six years into the lease. In return, Evergreen would receive 1) a leasehold of the entirety of the land, excluding Foster House where tenants reside, and 2) a right to obtain a leasehold in the additional property (the apartments) for the remainder of the 104-year ground lease term, "upon the occurrence of certain contingent conditions (the nature and probability of which are not clear[.])" The Court also remarked several times in its opinion that the relationship between New Bethel and Evergreen was unclear, as well as who the actual parties to the ground lease were.

The Court held that the lower court's ruling was factually and legally unsupported and reversed and remanded the case back to the Judge in the Superior Court of the District of Columbia so that the parties could proceed with discovery and further litigation. Specifically, the Court ruled that terminating the case evidenced a misunderstanding of TOPA by the lower court Judge and demonstrated "[the ruling] was also premised on an incomplete set of facts that did not permit a thorough analysis of the substance of the transaction at issue." The Court went on to state "[t]hat [although] the ground lease transfers only a leasehold interest rather than absolute title does not prevent it from constituting a sale under TOPA, see § 42-3404.02(c)(including master leases within the definition of a sale), nor does the fact that Evergreen's interest in Foster House is contingent upon a future event. See § 42-3404.02(b)(2), (b)(5)." The Court also commented on the lack of evidence included in the record and provided a specific list of items that the record should include on remand.

Conclusion and Considerations

When structuring transactions that involve residential or mixed-use buildings with a residential component, the substance of the transaction with respect to TOPA must be evaluated. This opinion makes clear that when reviewing a TOPA challenge, District of Columbia courts are tasked with scrutinizing the underlying actions that create the TOPA transaction for not only a traditional sale, but ground leases. TOPA is a very nuanced statute that can be complicated to navigate without the proper guidance.

For assistance navigating TOPA, please contact Holland & Knight Senior Counsel June L. Marshall.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.