Get Signed Memorandum of Lease Termination Upfront

In today's leasing climate, you may be forced to give into a strong tenant's demand to sign and record a “memorandum of lease.” A memorandum of lease is recorded in governmental real property records to notify third parties of the lease's existence. Unless the lease says otherwise, this gives the lease priority over liens that may later be filed against the building.

In the August issue of CLLI (“Protect Yourself When Signing Memorandum of Lease,” p. 1), we explained how to protect yourself when agreeing to sign and record a memorandum of lease. One key protection was having the tenant agree to give the owner a signed memorandum of lease termination that the owner could record whenever the lease ended—in the same governmental real property records where the memorandum of lease was recorded.

This protects you against the risk that you won't be able to get a tenant to sign a memorandum of lease termination when the lease ends. Without proper signatures, you can't file the memorandum of lease termination; and without a properly filed memorandum of lease termination, the memorandum of lease will continue to appear on your building's title report—much like a lien, says Los Angeles attorney Nancy E. Grauman. It may become a hindrance when you try to refinance your mortgage or sell your property, she warns.

We'll tell you how to draft a memorandum of lease termination to protect yourself. And we'll give you a Model Form, on p. 3, that you can adapt and use. Plus, we'll tell you why you should get a letter from the tenant authorizing you to record the memorandum of lease termination, and what the letter should say. There's a Model Letter on p. 4 that you can adapt and use. We'll also explain how a title company may scrutinize a memorandum of lease termination and discuss whether you should get a new one if the tenant assigns its lease or becomes a different entity. For a Model Lease Clause that requires the tenant to sign the memorandum of lease termination upfront, see the August issue of CLLI.

Risks of Waiting to Get Tenant's Signature

It's important to get the tenant to sign the memorandum of lease termination upfront, rather than at the end of the lease, warns Los Angeles attorney Pamela L. Westhoff. Otherwise, you run the risk that:

Tenant might disappear before signing. It may be too late to get a memorandum of lease termination signed if you wait until you actually need it. The tenant may have moved out without leaving a forwarding address, dissolved, or gone out of business when the lease ends. So you may have a difficult time finding someone with the proper authority to sign the memorandum of lease termination on the tenant's behalf, says Westhoff.

Tenant may refuse to sign. If the lease ends while you and the tenant are in a dispute, the tenant may balk at signing the memorandum of lease termination—even if the lease requires it to do so, warns Westhoff.

Practical Pointer: Even if your lease requires the tenant to sign the memorandum of lease termination upfront, don't forget to actually get the tenant to do that. Having the requirement in the lease won't do you any good if you don't follow through on it.

What Memorandum Should Include

When drafting the memorandum of lease termination, use the following checklist. Make sure that it, like our Model Form, includes the following:

Cover Basic Information

Spell out basic information such as:

• Your and the tenant's name and address [Form, opening];

• The lease [Form, par. 1];

• The memorandum of lease [Form, par. 1]; and

• The address of the building or center [Form, par. 1].

Practical Pointer: Make sure the parties can sign it separately— that is, in “counterparts” [Form, par. 4].

* Confirm that Lease Has Ended

Say that the lease has ended, says Grauman. Then add that you and the tenant wish to confirm that the lease ended by recording the memorandum of lease termination, says Westhoff [Form, par. 2]. By doing this, you show that you intend the memorandum of lease termination to act as sufficient proof that the lease has ended, she explains.

Practical Pointer: It's not a good idea to leave a blank space in the memorandum of lease termination where you can fill in the actual termination date, Grauman and Westhoff say. You and the tenant may disagree on what that date is, they explain. And there may be a legal problem if you add information to the memorandum of lease termination after it's signed and notarized, Grauman adds.

* Get Tenant's Confirmation and Release

To add teeth, make the tenant separately confirm in the memorandum of lease termination that neither the lease nor the memorandum of lease is still in effect, Grauman says. And have the tenant release to you any interest that it had the space, she says [Form, par. 3].

What Tenant's Authorization Letter Should Say

When you get the tenant to sign the memorandum of lease termination, also get the tenant to sign a letter addressed to you authorizing you to record the memorandum of lease termination, say Grauman and Westhoff. You'll then hold on to this letter along with memorandum of lease termination until the lease ends.

The tenant should willingly give you this authorization letter because it's protection that you won't use the memorandum of lease termination improperly. The authorization letter, like our Model Letter, should cover these three points in our checklist:

* You'll Hold Memorandum ‘in Trust'

Say that the tenant is giving you the memorandum of lease termination to hold “in trust” for your benefit until the lease terminates or ends, says Grauman. That means that although you're benefiting from getting the memorandum of lease termination upfront, you've got a special responsibility to ensure that it's properly handled, she explains.

* You're Authorized to Record Memorandum

Agree that you've got the right to record the memorandum of lease termination when the lease ends, says Westhoff. This avoids your having to rely on the tenant to record the document at the necessary time, she explains.

* You Sign Acknowledgment

Include a signature line at the bottom of the letter, in which you acknowledge and confirm that you'll hold the memorandum in trust and record it only when the lease ends. Without this acknowledgment, a tenant probably won't agree to give you the memorandum of lease termination upfront, says Westhoff.

Practical Pointer: Some tenants may be uncomfortable with the notion of your holding the memorandum of lease termination. To make them more comfortable, suggest that a third party—such as your attorney or an escrow company—hold the memorandum of lease termination “in escrow” and release it to you only when the lease ends, says Westhoff.

Why Title Company May Want More Information

A strategy of getting a memorandum of lease termination signed upfront has been successful, Grauman and Westhoff have found, because title companies typically accept these memoranda without question. But there's always a chance that a title officer will notice that the memorandum of lease termination was signed on the same day as the memorandum of lease—and raise questions. This is likely if you've terminated the lease and are filing the termination document long before the lease would have otherwise expired, Grauman says.

At worst, the title officer may require that you provide additional proof, says Westhoff. But that should be relatively easy to do: One solution may be to sign an affidavit verifying that the lease has ended, Grauman says. Even if a title officer asks for this additional proof, with the memorandum of lease termination you're still in better shape to prove the lease ended than you would be without one, say Grauman and Westhoff.

Practical Pointer: Other “red flags” may spur a title company to ask for more proof that the lease has actually ended, says Grauman. For instance, if, when reviewing the memorandum of lease termination, a title company hears that the tenant named in it is still occupying the space in the building or center, it's likely to require evidence that the tenant has moved out and that the lease ended, she says.

Should You Get Memorandum from Tenant's Assignee or Successor?

If the tenant later assigns its lease or is taken over by another entity, should you ask the assignee or successor to sign a new memorandum of lease termination? It depends, say Grauman and Westhoff. If the memorandum of lease wasn't modified, you're probably fine with the original tenant's signature on the memorandum of lease termination, Westhoff says. If the lease sets out the terms of the memorandum of lease and that you're holding on to it, and the assignee or successor assumes the lease (that is, steps into the tenant's shoes), the assignee or successor is legally deemed to know about the memorandum of lease termination, says Westhoff. So if you record the memorandum of lease termination at the end of the lease, the assignee or successor would have a tough time arguing that it's invalid, she says.

But if you've recorded a memorandum of lease modification that indicates that the assignee or successor is the new tenant under the lease, then you should get a memorandum of lease termination and authorization letter from that assignee or successor, says Westhoff.

CLLI Sources

Nancy E. Grauman, Esq.: Piper Rudnick LLP, 1999 Ave. of the Stars, 4th Fl., Los Angeles, CA 90067-6022; (310) 595-3055; Nancy. Grauman@piperrudnick.com.

Pamela L. Westhoff, Esq.: Partner, Piper Rudnick LLP, 1999 Ave. of the Stars, 4th Fl., Los Angeles, CA 90067-6022; (310) 595-3053; Pam.Westhoff@piperrudnick.com.