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The Race to Record: North Carolina Court Rejects Unrecorded Lease Renewal

David Marmins and Jordyn Simon

Summary

  • Greaseoutlet.com is a good reminder to check if you are in a “race notice” jurisdiction, as well as to check if you are required to record a memorandum of lease or similar document. 
  • If you are, you must immediately record a memorandum of lease or document putting the world on notice of a tenant’s interest in real property every time you enter a lease and every subsequent amendment to the lease.
The Race to Record: North Carolina Court Rejects Unrecorded Lease Renewal
Sam Sefton via Getty Images

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.

In Greaseoutlet.com, the former owner/landlord recorded a memorandum of lease prior to the operative amendment that stated the lease’s term expired on April 30, 2021, and that “[t]he provisions set for the [sic] in the Lease and any amendments entered into by the parties subsequent to this Memorandum between the Current Owner and Tenant are hereby incorporated into this Memorandum by reference.” (emphasis added by the Greaseoutlet.com court). However, a new memorandum of lease providing for the renewal option was not recorded. Holding that, “only actual prior recordation of an interest” will satisfy the statute, the court rejected the application of the amendment to the new landlord.

Greaseoutlet.com is a good reminder to check if you are in a “race notice” jurisdiction, as well as to check if you are required to record a memorandum of lease or similar document. If you are, you must immediately record a memorandum of lease or document putting the world on notice of a tenant’s interest in real property every time you enter a lease and every subsequent amendment to the lease.

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