A recent decision by the North Carolina Court of Appeals serves as a stark reminder to commercial real estate professionals to record all lease amendments. In Greaseoutlet.com, LLC v. MK South II, LLC, 892 S.E.2d 68 (N.C. Ct. App. 2023), the North Carolina Court of Appeals held that a new landlord was not required to honor a five-year renewal option provided in an unrecorded lease amendment executed by tenant and the new landlord’s predecessor in title, even though the new landlord had actual knowledge of the amendment.
Some jurisdictions require a landlord to record a memorandum of lease to put the world on notice of a tenant’s interest in real property. In “race notice” jurisdictions, priority of title is granted to the party that records its interest in real property first. This is known as the “first in time, first in right” rule, which is generally applicable provided that a subsequent purchaser for value also lacked notice of prior unrecorded claims on the same property.
North Carolina is a race notice jurisdiction and applies a state law known as the Connor Act. Under the Connor Act, a memorandum of lease or similar document must be recorded for leases lasting more than three years. If a lease is not recorded, it is not enforceable, and it does not matter if a subsequent purchaser had actual knowledge of the lease or extension. The Greaseoutlet.com court held that simply including language in a recorded lease that incorporates “any amendments entered into by the parties subsequent to this Memorandum” is insufficient to put the world on notice of a subsequent lease amendment or extended lease term. Catchall language cannot be used to bootstrap an amendment into the recorded memorandum of lease. Likewise, estoppel arguments, such as that the new owner has knowledge of the lease amendment, only matter where the deed to the property includes language that the subsequent purchaser is taking subject to an existing, unrecorded interest. It is not enough for the deed to merely refer to a lease.