The Importance of Recording Leases, Options, and Other Interests in Real Estate
by Michael B. Kent, Jr.
Do leases, options, and similar “non-ownership” interests in real estate need to be recorded with the register of deeds? The North Carolina Court of Appeals addressed this issue earlier this year in Greaseoutlet.com, LLC v. MK South II, LLC. The decision reinforces the importance of promptly recording real estate interests, including “non-ownership” interests like leases, options, and preemptive rights. A failure to do so can effectively result in the loss of such interests where subsequent third parties take rights in the same parcel. The decision potentially affects any buyer, seller, lessor, lessee, or lender of real estate.
The case involved a tenant who entered into a five-year agreement to lease industrial property for its business in 2016. A memorandum of lease, specifying the five-year term, was recorded in the county registry. A few months later, the tenant and its landlord amended the lease to grant the tenant an option to renew at the expiration of the lease’s original term. Neither party recorded a new memorandum evidencing this amendment, however. In 2019, the landlord sold the property, and the new owner informed the tenant that it would need to vacate the premises when the original term expired in 2021. When the tenant attempted to exercise its option to renew the lease, the new owner refused. Although it admitted to knowing about the option before it purchased the property, the new owner argued that it was not bound by the amendment.
The Court of Appeals agreed. Because the deed transferring the property made no mention of the lease, the new owner was not obligated by the express terms of conveyance. As a result, the lease could bind the new owner only to the extent provided by North Carolina’s recording statute, known as the “Connor Act.”
Originally enacted in 1885, the Connor Act requires certain interests in land to be recorded if they are to bind subsequent lien creditors or purchasers for value. These interests include not only actual conveyances but also options, rights of first refusal or first offer, and leases lasting more than three years. Significantly, as the Court of Appeals reaffirmed, “only actual prior recordation of an interest” will satisfy the statute. Even actual knowledge of an unregistered interest, “however full and formal” it may be, is typically insufficient to bind a subsequent purchaser who records his or her own interest in the parcel.
Applying these rules, the court determined that the new owner was subject to the original five-year lease because a memorandum evidencing that lease had been recorded prior to the new owner’s purchase of the property. The new owner was not subject to the amendment creating the renewal option, however, because no memorandum or other instrument in the chain-of-title indicated its existence. The fact that the new owner was aware of the amendment was irrelevant, as was the new owner’s acceptance of rent (which it later returned) for part of the renewal period. Additionally, the court rejected the tenant’s argument that language in the recorded memorandum making generic reference to future lease amendments was sufficient to provide legal notice of the particular amendment in dispute.
Envisage attorneys assist clients with a variety of real estate matters, including the negotiation, documentation, recordation, and enforcement of commercial leases. If you have questions about this alert or think we might be of assistance to you, you may contact us at (919) 755-1317.