In North Carolina, the “race” to the local register of deeds still exists, and as some litigants know, that lesson can be an expensive one.
Many commercial leases represent a substantial investment for tenants. Some of those leases have terms that last for decades. However, it is not unusual for commercial buildings to be bought and sold during that time. What happens to the tenants when the building is sold?
Well, in North Carolina, a tenant who is considering leasing space for a term exceeding three years should negotiate with the landlord to include a requirement in the lease that a memorandum of that lease be executed and recorded in the office of the register of deeds in the county where the property is located in accordance with N.C. Gen. Stat. §47-18. The memorandum does not have to give any of the financial terms of the lease, but does have to state the exact term of the lease, including renewal options. If a tenant fails to do this, the tenant can by evicted by a purchaser for value of the real estate or by a foreclosure by a lien creditor of the landlord. A purchaser, either from the landlord or at a foreclosure sale, will not be required to recognize the lease, even if the purchaser knew about the lease or knew that a tenant was occupying the space.
If no memorandum of lease is recorded and the building is sold to a third party who does not recognize the lease, then generally, the tenant’s only remaining remedy is to sue the landlord for a breach of the promises in the lease, (i.e., failure to provide possession for the stated term). A lease is, in effect, a contract with a landlord to occupy the landlord’s property for a certain period of time. If the tenant sued the landlord, it could only recover monetary damages; it could not recover occupancy of the space from the new purchaser.
It is important to remember that the “more than three (3) years” language in N.C. Gen. Stat. §47-18 includes renewal options, so that a lease for a two (2)-year term with one (1), two (2) year option to renew the lease must be recorded to protect the tenant from a purchaser for value.
The other side of this coin is, if the tenant has a lease of less than three (3) years, and the tenant is clearly in possession of the space or property, or the purchaser for value knows there is a lease with a term of less than three (3) years (whether or not the tenant is occupying the property), or there is evidence that the purchaser should have known the property was leased, the purchaser must recognize the lease and the tenant cannot be evicted based on the failure to record a memorandum of lease (although the landlord may still evict tenants based on breaches of the lease itself).
For more insight on the importance of recording documents like these, which affect title to property, contact Allman Spry’s experienced commercial real estate practice section.