Get Control Over Content in 'Short-Form Lease'

If you own a shopping center or office building and have financial difficulties, you may be dealing with one, or even several, liens filed against the property. A savvy tenant knows that if it doesn’t have priority if you become bankrupt, it could be dramatically affected, up to and including having to move out of its space. That’s why it might demand that you agree to sign a “memorandum of lease” when you sign the lease with it. A memorandum of lease, also known as a “short-form lease,” typically includes only a few of the lease’s provisions. But by recording the memorandum of lease in governmental real property records, the tenant notifies third parties of the lease’s existence—giving the lease priority over liens later filed against the building. A memorandum of lease is also helpful for a tenant that wants to use the lease as collateral for a loan.

A tenant—especially a strong tenant or one with a very long lease term—may insist on having a memorandum of lease in exchange for it signing the actual lease. But you still have some leverage: A memorandum of lease is very valuable to the tenant because it puts it ahead of other creditors in line and could also help it secure a loan. So, if you give in to this demand, don’t forget to insist on your own limits in the lease’s memorandum of lease clause. Here are the limits to use and how to draft them.

Understand Need for Protection

Don’t let the potentially serious drawbacks of a memorandum of lease hurt you. Protect yourself by negotiating the five protections in our Model Lease Clause: Minimize Risk in Memorandum of Lease, and by drafting your own form of memorandum of lease, like our Model Form: Keep Memorandum of Lease Information to the Point, so that you can control its contents.

Be wary if you must satisfy a tenant’s demand that you sign a memorandum of lease. A memorandum of lease provides multiple benefits to a tenant. Besides helping it fulfill a lender’s demands, a memorandum of lease can benefit a tenant because it provides notice of the lease. If a tenant mentions special lease rights and options in the memorandum of lease, it can stop another tenant or potential buyer of the property from arguing that it had no knowledge of those special rights or options. That’s particularly useful if the tenant needs to take legal action against the other tenant or buyer for thwarting its rights or options.

The biggest drawback for you is that a memorandum of lease muddies the title to your property; it’s tantamount to having a lien filed against your property, and you want to keep your title as clean as possible so that you won’t face any obstacles if you try to sell your property or refinance your mortgage.

Also, it may be hard to cancel the memorandum of lease once it’s recorded. If the tenant defaults or dissolves and moves out early, or if you decide to terminate the lease, the tenant may be unwilling or unable to cooperate with you to sign the necessary documents to remove the memorandum of lease from your title. An even bigger drawback is that the lease’s provisions become part of the public record. That could be a big problem because they’re available to prospective tenants that you negotiate with in the future.

Draft Five Protections in Clause

When negotiating a lease with a tenant that’s demanding a recorded memorandum of lease, make sure your lease includes a clause with the following five protections:

Protection #1: Limit contents of memorandum of lease. Spell out precisely what information the memorandum of lease will contain. Make sure that you first check your local laws, though. They might set requirements for the form or contents of a memorandum of lease. Keep in mind that the less information you put into the memorandum of lease, the less information will be made public. And don’t include any confidential information you don’t have to. For example, third parties shouldn’t be privy to the economic terms of your lease—such as the amount of minimum rent, additional rent, and other fees. This information could hurt your lease negotiations with future tenants or other tenants in the building or center. But expect the tenant to demand that the memorandum of lease refer to any special right or option you’ve given it—such as an extension option, right of first refusal or first offer, or exclusive use [Clause, par. a]. And, to avoid disputes over the contents of the memorandum of lease, attach a form of memorandum of lease as an exhibit to your lease [Clause, par. a].

Protection #2: Get memorandum of lease termination at same time. As a condition for your consent to recording a memorandum of lease, insist on getting a signed “memorandum of lease termination” from the tenant. This is the memo that must be recorded when the lease ends to notify third parties that the lease and memorandum of lease are no longer in force. You’ll promise to hold onto the memorandum of lease termination while the lease is in effect [Clause, par. a]. By getting the memorandum of lease termination up front, you’ll avoid the hassle of dealing with a tenant down the road, when it may be unwilling or unable to cooperate with you to cancel the memorandum of lease. Attach a form of memorandum of lease termination to your lease as an exhibit so that there are no disputes as to its contents [Clause, par. a].

Protection #3: Get right to record memorandum of lease termination. Make the tenant agree in the lease that you’ve got the right to record the memorandum of lease termination when the lease terminates or expires [Clause, par. a]. This avoids your having to rely on the tenant to record the document at the necessary time. (Be aware that a title company may require additional proof of the lease termination to clear the lease from a title policy.)

Protection #4: Have tenant agree to sign modification agreement. Make the tenant agree in the lease that it will sign a “memorandum of lease modification,” in a commercially reasonable form, if the lease is ever modified [Clause, par. b]. A memorandum of lease modification is a recorded document that officially modifies the contents of the memorandum of lease. This is important because you and the tenant might eventually amend the lease in a way that involves the special rights or options or other lease provisions mentioned in the memorandum of lease. The public record should reflect the latest lease provisions, not outdated ones.

Protection #5: Make tenant pay recording costs. Since the tenant is requesting the memorandum of lease, make it agree in the lease to be responsible for paying any fees for recording it [Clause, par. a]. Otherwise, it might claim that you’re responsible for those fees.

What to Include in Memorandum of Lease

Like our Model Form, your memorandum of lease should:

Cover this basic information:

• Set out your and the tenant’s name and address [Form, opening];
• Give the address of the space [Form, par. 1];
• Refer to the lease [Form, par. 2];
• Follow the content restrictions that you agreed to in the lease [Form, par. 3]; and
• Allow the parties to sign it separately—that is, in “counterparts” [Form, par. 6].

Incorporate lease terms into memorandum of lease. As a key protection, say in the memorandum of lease that the lease’s terms “are incorporated by reference” into it [Form, par. 4]. With this language, the lease effectively becomes part of the memorandum of lease. So you’re indirectly recording all of the lease’s provisions—you get the benefit of recording the lease without actually disclosing all of its provisions.

Bar memorandum of lease from amending lease. It’s also important to say in the memorandum of lease that it won’t modify, amend, limit, or affect the lease in any way. So the tenant can’t use the memorandum of lease as a way to amend the lease. Also, add that if there’s any inconsistency between the memorandum of lease and the lease, the lease prevails—and must be followed [Form, par. 5].