Memorandum of lease. What is it, why does your North Carolina business care, and what should you do about it. That’s what we’re talking about today.
What Is a Memorandum of Lease?
In North Carolina, a lease holder may record the fact that it has a lease on a property, if that lease is for a term of longer than three years. The three year period includes potential renewals.
That’s the “what” of a memorandum of lease
Buy Why?
Simple answer is that there is a very specific statute in North Carolina which states that a subsequent purchaser of a property does not have to honor a lease on the property, if that lease is for a term of longer than three years, unless that lease or the memorandum of lease is recorded with the local register of deeds.
One thing I always tried to teach in law school is the “why” of any statute. What kind of scenario are they trying to avoid by adopting this statute. I can think of several.
For one, imagine if your Uncle Bob told you “Nephew, you will always have the right to farm my land for the next 30 years, if you pay me $500.” Maybe you farm it one year, maybe you take a few years off to live in Alaska. Then Uncle Bob passes away and his land is sold by his family, who doesn’t know about the promise he made to you. Yes, that promise is a “lease” of the land. Now imagine a buyer comes along not knowing about this promise, purchases the land to build houses on, and three years later you show up to farm the land.
Who wins? Who is right here? Well, both parties are “right” from their own point of view. You as the nephew thought you had the right to farm the land. The buyer didn’t know this, and bought the land in good faith for another purpose.
And If the Memorandum of Lease Was Recorded?
You can see how this entire dynamic would change if a potential buyer had done a title search that revealed your memorandum of lease giving the terms of the lease. The value of the property as a new housing development, so long as you are alive, is zero. In fact, the buyer could not use the property for anything until that 30 year period is over, the way the statute is written. The purchase value of the property is dramatically decreased. Your lease stays on the property until it expires.
Another But Why?
You’re leasing a commercial space out in the outskirts of town on a ten year lease. You got into the space when rents were way low. Your business fell on hard times. You stopped using the space but kept paying rent because you knew you would recover in a year or so; or you might be trying to sub-let it so you want to hold on to the low rent. The property appears vacant to a purchaser.
The property owner, trying to get clever, tell a prospective buyer that there is no lease on the property, the tenant vacated and hasn’t paid rent. The buyer relies on this assertion and purchases the property.
Had the memorandum of lease been on file with the register of deeds’ office, the buyer would have seen it, and investigated further, and hopefully discovered your current, paid up lease. Now the buyer has to honor the remainder of your ten year, low rent lease.
What Can You Do About Recording A Memorandum of Lease?
First, read your lease. Make sure it does not restrict your right to record the lease.
Second, consult with me. I can help get the memorandum of lease on file with the local register of deeds. The memorandum of lease needs to have some specific terms in it, but it’s otherwise fairly simple.
Contact me if you have any questions on creating and filing a memorandum of lease or any other business transaction. In western North Carolina, Asheville, Waynesville, Hendersonville at (312) 671-6453.
Email me at: palermo@palermolaw.com.
Be sure to check out my other blog posts HERE. Be sure to listen to my podcasts with Matt Mittan at BizRadio.US