Renting retail space in a shopping center? An office in downtown Boston? A parcel of land for development in the suburbs? For many commercial tenants in Massachusetts, a fully executed lease may not be enough to protect long term interests and investments in the property without also recording a Notice of Lease. For commercial landlords, a recorded Notice of Lease can interfere with future plans for the property by creating a cloud on title. What follows is a brief introduction to Notices of Lease and actions each party can take to better protect itself.
What is a Notice of Lease?
A Notice of Lease (or Memorandum of Lease) briefly summarizes some of the key terms of a lease and is recorded (or registered) at the same Registry of Deeds in which Landlord’s deed is recorded. A Notice of Lease should contain the following information:
- the execution date of the lease;
- the commencement date of the lease term;
- the length of the lease;
- all extension/renewal rights;
- notarized signatures of all of the parties to the lease;
- a description of the leased premises matching the description in the lease; and
- if applicable, a description of any additional areas over which Tenant has an expansion option.
The Notice should not include details about the amount of rent, operating expenses payable under the lease, or other information usually kept confidential.
Although not required, a prudent Tenant should also reference any rights of first refusal, options to purchase, restrictions, or exclusive use provisions contained in the Lease. References to these provisions need not go into great detail at the risk of accidentally limiting the effectiveness of the Notice as to these additional rights.
Why record a Notice of Lease?
In Massachusetts, if the lease term is for more than seven years and title to the property changes hands (e.g. Landlord conveys the property; a lender forecloses on the property) in most situations, the subsequent owner is not obligated to recognize the existing lease and is not held to the terms of the lease unless the subsequent owner had prior “actual notice” of the lease. Proving actual notice of a lease in a court is often very difficult and expensive. The Tenant seeking to enforce its lease has the burden of proving that the new owner was aware of the lease before taking title to the property. Surprisingly, it may not be enough that the new owner saw or was aware that Tenant was using or occupying the premises. After all, Tenant may only be operating under a license or a month-to-month tenancy. For the same reason, it may not even be enough that the new owner was aware that an actual lease existed if the owner did not also know the duration of the term of the lease.
Recording a Notice of Lease is notice to the world of the existence and term of the lease. With a Notice of Lease on record, the law presumes that the new owner was aware of the lease prior to taking title. Moreover, the law presumes that the new owner had knowledge of all of the terms of the lease, not only the terms contained in the Notice. Tenant is protected and the new owner must recognize Tenant’s lease.
What if the Original Term of the Lease is for Seven Years or Less?
If the original term of a lease is for seven years or less, but contains either:
- an extension period that renews the lease automatically; or
- an option to extend or renew that does not require Landlord’s consent (e. if Tenant has the unilateral power to extend the term or allow the lease to terminate),
resulting in a potential lease term greater than seven years, then a Notice of Lease should be recorded. Example: If the original term is for six years and Tenant has an option to extend for another three years, a Notice of Lease should be recorded.
If the original term of a lease is seven years or less and is later amended to extend the term, a Notice of Lease should be recorded if the term of the lease will continue (or if Tenant has the unilateral option of extending) for more than seven years from the date of the Amendment. Example: If the original term was for six years and in the fifth year of the term the lease is amended to run for another three years, a Notice of Lease does not need to be recorded.
If the original term of a lease is seven years or less and Tenant cannot extend without Landlord’s consent, it is not necessary to record a Notice of Lease. Any new owner is bound by the terms of the lease regardless of whether it was aware of the lease when taking title to the property.
In all cases, if Tenant intends to record a Notice of Lease it should insert a provision in the lease explicitly requiring both parties to sign a Notice of Lease and allowing Tenant to record the Notice at the appropriate Registry.
What Precautions Should a Landlord Take?
If Tenant has the right to record a Notice of Lease, a forward thinking Landlord should add provisions to the lease designed to protect its title. Otherwise, if the lease is terminated early (e.g. Tenant defaults; or Tenant exercises an early termination right), the Notice of Lease will remain as a cloud upon Landlord’s title until the original term and any extension periods have expired.
To prevent such a result, a Landlord should insert provisions into the lease:
- prohibiting Tenant from recording a Notice of Lease if the term of the lease cannot continue for more than seven years without Landlord’s future consent; and
- requiring Tenant, at the time the lease terminates, to execute and record a termination of the Notice of Lease and granting Landlord a power of attorney to do so on Tenant’s behalf should Tenant refuse (with such provision surviving the termination of the lease).
There are other factors to consider that are beyond the scope of this post, including:
- What if the lease is amended after the Notice of Lease is on record?
- What action should be taken by an assignee or sublessee of an existing tenant?
- What if Landlord assigns or transfers its interest in the lease?
The above discussion is intended to summarize the factors and importance of a recorded Notice of Lease and to provide familiarity with the concepts to enable an informed discussion with legal counsel.