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Karen E. Abrams is a senior attorney at Meislik & Meislik in Montclair, New Jersey.
When you are negotiating a commercial lease for either a landlord or a tenant, you will frequently encounter a "memorandum of lease" or "short form lease" provision. Often glossed over as quickly as a boilerplate "gender" clause, in truth the memorandum provision deserves as much focus as other critical provisions in a lease, such as rent, lease term, renewal options, or other key clauses. Because the filing of a memorandum of lease can have potentially significant consequences, both financial and legal, the decision to include such a provision in a lease should not be taken lightly.
What Is a Memorandum of Lease?
A memorandum of lease or short form lease (MOL) is usually a very short document (one-to-five pages on average, depending on the complexity of the lease and the jurisdiction of the premises). The MOL typically contains only the most critical, but not confidential, provisions of a lease. Usual inclusions are a description of the premises, the term of the lease, renewal rights, rights of first refusal, and exclusive use clauses. An MOL is recorded wherever deeds are recorded, and the recording fees are typically paid either by the party designated in the lease or, if not so designated, by the party requesting the recordation of the MOL. Depending on the jurisdiction, the costs to record an MOL can be nominal or quite large.
The Purpose of a Memorandum of Lease
Documents are recorded to place the world, or, more precisely, subsequent parties to transactions involving the property, on notice of their existence. A mortgage, for example, is recorded to notify third parties that a property owner has borrowed money, that the loan is secured by that property, and that a lien or any other interest in the property acquired after the date on which the mortgage is recorded will be subordinate to the lender's lien. Whether or not a subsequent taker of an interest in the property has actual knowledge of a prior, validly recorded interest in that property, the subsequent taker is bound by the prior interest, as shown in the public records. This type of notice is referred to as "constructive" or "record" notice. An MOL, like any other document placed of record, is executed and recorded to put third parties on notice of the existence of the lease and, more particularly, of the critical terms that are typically recited or summarized in the MOL.
Some might argue that an MOL is unnecessary because third parties can see, and therefore should be aware of, a tenant's possession and the possible rights that might attach under its lease, but this argument is weak. Possession of premises inconsistent with record title merely provides a prospective purchaser, lender, or tenant with inquiry notice, which imposes on the purchaser a duty to investigate. Inquiry notice, however, is not the same as constructive notice to a subsequent taker. Simple inquiry of a record owner is insufficient to apprise third parties of the extent of a tenant's rights under a lease. It is only through recording of an MOL that a third party can actually be charged with having constructive notice of the most critical provisions in the lease.
Constructive notice and inquiry notice are confusing concepts. Subsequent purchasers are held responsible for what they would have learned from a diligent search of the public records. This is properly referred to as constructive, or record, notice. Inquiry notice (or implied notice) arises from actual notice of certain circumstances (such as possession by other than the record owner) that would lead a reasonable person to further inquiry, which, if pursued with due diligence, would lead the inquirer to learn the nature of the possessor's interest in the property. See George Lefcoe, Real Estate Transactions 276 (1997).
The tenant's need for an MOL is particularly important because the tenant's possession may not be seen by a third party. For example, if a lease is signed, but the tenant does not open for business with the public for several months or even years, then without an MOL most third parties would have no knowledge of the lease. In such a situation, recording an MOL is necessary to protect the tenant's rights as to third parties during the period after the lease is signed and before the tenant can actually be seen in the premises. Similarly, an MOL is important when a tenant moves out of its premises, continues to pay rent, and the lease remains binding on both the landlord and the tenant. Under these circumstances, the tenant cannot physically be seen in the premises; however, the lease, together with any rights, restrictions, and concessions, remains in full force and effect. In fact, in such a situation one could argue that the tenant's decision not to record an MOL could be considered a decision to accept the risk of having its lease disregarded by third parties that obtain a subsequent interest in the property.
In Universal Container Corp. v. Cambridge, 278 N.E.2d 727, 729 ( Mass. 1972), the lease provided for damages to the tenant's leasehold interest in the event of a taking for public use. The tenant recorded a notice of lease in the statutory form. The city took a fee interest by eminent domain and, in so doing, paid full value for the real estate to the fee owner. The tenant was not made a party to the transaction and received no compensation for the taking of its leasehold interest. The Cambridge court held that the recorded notice of lease was sufficient to give the city constructive notice of the tenant's interest in the property, and the tenant was entitled to recover the value of its interest from the city, regardless of its rights against the fee owner-lessor.
Although most jurisdictions do not actually require the recordation of an MOL, there are those that do require the recording of either a lease or an MOL under all or certain circumstances. In Louisiana, for example, a lease will be considered invalid as against claims by third parties if the lease (in its entirety or in a short form that, in Louisiana, is called a notice of lease) is not recorded. La. Rev. Stat. Ann. § 44:104; La. Civ. Code art. 3338. In Connecticut, an MOL (or the lease itself) must be recorded if the lease has a term of longer than one year. Conn. Gen. Stat. §§ 47-19, 47-20. In Maine, recordation is required if the term is longer than two years. Me. Rev. Stat. Ann. tit. 33, § 201. Otherwise, the lease is binding only on the parties to the lease and not on innocent third parties who would have otherwise benefited from the recording of such a document. In Alabama, a lease with a term of less than 20 years (which includes the initial term and any options to extend) does not need to be recorded to be enforceable against third parties; however, if the lease term is more than 20 years, that portion of the lease that is longer than 20 years is void unless the lease or an MOL is recorded within one year after lease execution. Ala. Code § 35-4-6. Because of this variation in recording requirements, each state's statutes and case law must be carefully examined whenever a tenant considers whether to record a lease or MOL.
Even in those jurisdictions that impose a duty on subsequent parties to inquire of a tenant in possession, it may be possible for an inquiring party to make an inquiry and receive incomplete information. Ultimately, the MOL is preferable because it avoids litigation that might arise to prove or disprove knowledge that was gained from the inquiry. Therefore, even if case law protects a tenant or other interested party if an MOL is not recorded, recording an MOL will always provide stronger protection to the tenant, at least for what is clearly and accurately stated in the MOL. Advice? Record an MOL, in every instance unless the benefits of recording the MOL are substantially outweighed by the cost of doing so.
Recording a Memorandum of Lease Instead of the Lease Itself
There are several reasons why recording the MOL is the preferred option. First, although the cost of recording an MOL in certain jurisdictions can be quite high, often based on the number of pages that will be recorded, the majority of commercial leases contain many more pages than an MOL. Recording the actual lease, therefore, will increase the cost significantly.
Second, recording the lease itself would disclose to the world various terms and conditions that one or more of the parties to the lease would prefer remain confidential, such as the amount of the rent, allowances, and concessions. Disclosing such terms provides an easy way for prospective tenants to take advantage of confidential information and negotiate new leases to their advantage. Recording an MOL in which those terms can be referenced but not disclosed prevents third parties from using such confidential information.
Benefits to Both Landlord and Tenant
It is commonly thought that an MOL generally benefits only the tenant. Tenants, especially those with heavily negotiated lease rights (such as exclusive use rights, construction restrictions, or restrictions on the use of the rest of the landlord's overall property), want their leases recorded to make sure that the public knows of those protected rights, therefore ensuring the viability of their businesses. In addition, an MOL is generally required by leasehold lenders or for a leasehold title insurance policy to establish lien priority.
Landlords often are indifferent to the recording of an MOL, but often will agree to record one to ensure that the lease itself will not be recorded, again for fear of disclosing sensitive information related to concessions that it has granted to the tenant. Some landlords prefer to avoid recording even an MOL because it can become a cloud on the title. For example, if the lease is terminated before the expiration date set out in the MOL by surrender or by court proceedings (particularly in the lower courts where the court records may be unavailable), a landlord may have a difficult time proving that the lease is no longer effective and clearing its record title to the property. One way to protect a landlord from this problem is to provide a discharge or cancellation of lease, in recordable form and fully executed by the tenant simultaneously with the tenant's signing of the lease and the MOL, to be held in escrow by the landlord's attorney pending expiration or early termination of the lease in accordance with the terms of the lease.
Provisions in the Memorandum of Lease
At a minimum, the MOL should set forth the names of the parties, a description of the premises (almost always including a legal description of the entire property), the term of the lease (including, when known, the exact commencement and expiration dates), and lease options (including options to renew, options to purchase, rights of first refusal, and so on). Some states have statutory requirements for contents that must be included in the MOL to achieve certain legal effects. E.g., Del. Code Ann. tit. 25, § 158. Often, other critical provisions also will be seen in an MOL, such as a tenant's exclusive use rights or radius restrictions and restrictive covenants. Ideally, the MOL should accurately summarize (or, preferably, quote verbatim) those key provisions that could affect or be affected by outside parties. It should be noted that there is disagreement among the states about whether a third party is deemed to have notice of those items in a lease that are not included in a recorded MOL. See Friedman on Leases § 31:2 (Milton R. Freidman & Patrick A. Randolph Jr. eds., 5th ed. 2008).
Lease Provisions Regarding the Memorandum of Lease
The right to record an MOL is a valuable tool and should be addressed in the lease. This is especially true if provisions in the lease are important to the tenant or the landlord that, if violated, could significantly harm the tenant's or landlord's business. A lease should typically state that the lease itself will not be recorded, but that an MOL will be recorded either simultaneously with the execution of the lease itself or later, at either party's request. The lease also should set forth who will pay to record the MOL, particularly if the recording fees to record such documents are steep or recordation taxes apply. In a heavily negotiated lease, the form of MOL to be signed and placed of record also will often be an exhibit to the lease. An example of lease language follows:
Lease Modifications After Recordation of the Memorandum of Lease
In some states, such as New York, an agreement that modifies a lease that has already been recorded (either in full or via an MOL) is ineffective against a subsequent innocent purchaser for value, and therefore the tenant's possession is insufficient to provide the innocent party with notice of the modification, unless the modification agreement (or a memorandum of same) is recorded. See N.Y. Real Prop. Law § 291-cc(1). Therefore, before a tenant modifies its lease, it should be aware of the state's laws. If a tenant does not comply with the state's laws, it risks losing important rights that it just negotiated through the modification agreement if the premises are later acquired by a third party who does not know of those rights and who cannot discover them even through diligent investigation.
Commercial leases, at a minimum, should provide for the right to record an MOL. They should provide when and if an MOL will be recorded, summarize the information that will be included, and specify who will pay the recording fees. In more complicated or heavily negotiated leases, attaching a form of the MOL to the lease is a wise decision. Alternatively, the parties may negotiate the MOL simultaneously with the negotiation of the lease and have both documents signed simultaneously. In the end, both parties will be well served.Return To Issue Index