The “95-5” Litigation

A prominent aspect of Tycko & Zavareei LLP’s housing practice has been its representation of tenants’ associations and individual tenants in the District of Columbia in lawsuits challenging so-called “95-5” sales of apartment buildings.

Since 1980, tenants in the District of Columbia have been protected by the D.C. Rental Housing Conversion and Sale Act. A part of that law gives tenants certain rights when the apartment building they live in are sold, including the right to negotiate for the purchase of the building and a “right of first refusal” on any third-party contract. In other words, the tenants have the right to buy the building on the same terms that it is offered to other purchasers. This part of the law is often referred to as the Tenant Opportunity to Purchase Act, or TOPA.

Starting in the late 1990s, certain owners of apartment buildings started attempting to circumvent tenants’ rights under TOPA by engaging in transactions that were the economic equivalents of outright sales of apartment buildings, but that the owners claimed were not “sales” covered by TOPA. These transactions took a variety of forms, but one of the most popular was for the owner to sell a 95% interest in the apartment building, and to retain the other 5% interest for some period of time. (This is how the transactions came to be known in the D.C. real estate industry as “95-5” sales.)

One reason that these 95-5 sales occurred was that the owners and their lawyers were able to obtain “comfort letters” from an office of the Department of Consumer and Regulatory Affairs (“DCRA”). These “comfort letters” – which purported to exempt the transactions from TOPA, but which actually had no legal force – were issued by the DCRA office without any investigation into the actual substance of the transactions, and without any notice to the tenants. The first major challenge to 95-5 transactions came in 2003. Our firm (along with our co-counsel at the law firm of Mehri & Skalet, PLLC) was retained by the Twin Towers Plaza Tenants’ Association, a tenants’ association representing tenants at two large apartment buildings located at 101-103 G Street, S.W., and 201 I Street, S.W. Those buildings were sold in a 95-5 transaction in October of 2002. The tenants only learned of the sale after-the-fact. A lawsuit asserting the tenants’ TOPA rights (and making other related claims) was brought in D.C. Superior Court in early 2003. On November 24, 2003, Judge Melvin Wright issued a ruling in which he held that the 95-5 transaction was a “sale,” that the tenants’ TOPA rights had been violated, and that the DCRA “comfort letter” was wrong and not binding on the Court. To read the ruling, click here. The defendants also challenged the lawsuit on technical “standing” grounds, and Judge Wright later dismissed the lawsuit on those grounds. Both sides appealed to the District of Columbia Court of Appeals. That appeal – which will likely decide many of the key legal issues involving 95-5 transactions and the tenants’ rights to challenge those transactions – was argued on November 16, 2005. To hear that oral argument, click here. The Court of Appeals has not yet issued its ruling.

In addition to the Twin Towers Plaza case, our firm has been hired by tenants and tenants’ associations at a number of other properties to bring challenges to 95-5 transactions. Currently, we are involved in ongoing litigation over such transactions at the following properties:

• 3737 Legation Street, N.W. 933 L Street, N.W. The Waterside Towers & Townhouses, 901-947 6th Street, S.W. The Alcazar, 1841 Columbia Road, N.W. 4840 MacArthur Boulevard, N.W.

• 1823 Newton Street, N.W.

In early 2005, the D.C. City Council considered – and ultimately passed – legislation aimed at stopping the 95-5 sale abuses. The Committee on Consumer and Regulatory Affiars (Chaired by Jim Graham) conducted extensive public hearings, and issued a report that criticized the 95-5 sales and DCRA’s role in issuing the “comfort letters.” To read that report, click here. To read the Bill that was then passed by the Council, titled the Rental Housing Conversion and Sale Act Amendment Act of 2005, click here. For more information about the “95-5” litigation, or about TOPA issues more generally, please contact Jonathan Tycko.