Imagine signing a five-year lease at the perfect location for your business and investing tens of thousands of dollars into an upfit to ensure the space meets your needs for many years to come. Now, fast forward a year or two… your business is thriving, your customers know you and have become accustomed to your location. You feel secure and comfortable knowing that you will have this space to operate your business for the life of the lease, so long as you abide by the lease terms. Then, one day, you hear that your landlord is selling your building; the lease will protect your investment, right?
MEMORANDUM OF LEASE
Unfortunately, this assumption of protection is not always the case. If you, or your attorney, did not take the necessary steps to protect your lease when it was signed, you could find yourself looking for a new commercial real estate space much sooner than you anticipated if the property is sold to a third party purchaser. However, if you have recorded a memorandum of lease (or your attorney has), then in most cases you can rest easy knowing that you are, in fact, protected.
A note about lease terms
According to North Carolina G.S. § 47-18, a tenant who is leasing space for a term of more than three years should ensure that a memorandum of lease be executed and recorded in the office of the register of deeds in the county where the property is located. One very important item to note regarding the statutory language of a lease of “more than three (3) years” is that this refers to all leases for which the initial term combined with any renewal options exceeds three years. For example, a lease with a one year initial term with two additional two year options to renew the lease must also be recorded to protect the tenant from a third party purchaser for value as the total length of lease term is for more than three years.
A simple process for peace of mind
The memorandum is a short document outlining only certain parts of the lease and does not disclose confidential or proprietary information pertaining to the financial aspects of the lease. The memorandum simply needs to state the parties involved, the property description, and the length of term of the lease, which includes all renewal options. While the lease, if not recorded, will remain enforceable against the current landlord, the tenant can be quickly evicted by a third party purchaser for value if the property is sold. Additionally, if the lease is not recorded, then the tenant could be evicted in a foreclosure by a lien creditor of the current landlord. If no memorandum of lease is on record, then such a third party purchaser is not required by law to recognize the lease if they choose not to, regardless of if such purchaser knew about the lease or the tenant.
Different laws apply to leases for a term of three years or less and therefore it is important to discuss these nuances and protective measures with your real estate professional prior to signing any lease.
Hopefully this quick overview helps give you an idea of steps you need to take when signing a long term lease so you can rest easy if the property is sold! And if you are a building owner, make sure to check out this post to ensure you stay protected too!