Protect Yourself When Signing Memorandum of Lease

During lease negotiations, a strong tenant may demand that you agree to sign a “memorandum of lease” when you sign the lease, especially if the lease will last a long time. A memorandum of lease, also known as a “short-form lease,” typically includes only a few of the lease's provisions. The tenant wants to record the memorandum of lease in governmental real property records to notify third parties of the lease's existence. This gives the lease priority over liens later filed against the building, unless the lease says otherwise.

You may have to give into this demand if you want to sign the lease. If the tenant wants to use the lease as collateral for a loan, it may argue that its lender will refuse to lend it the money it needs unless a memorandum of lease has been recorded.

But a memorandum of lease can have serious drawbacks for you. That's why Los Angeles attorneys Nancy E. Grauman and Pamela L. Westhoff suggest that you add certain protections to your lease if you're negotiating with a strong tenant that's demanding a memorandum of lease. There's a Model Lease Clause on p. 3 that includes the recommended protections. You should also draft your own form of memorandum of lease so that you can control its contents, Grauman and Westhoff advise. There's a Model Form on p. 4 that you can adapt and use for this purpose.

Drawbacks of Memorandum of Lease

Why will a tenant press for a memorandum of lease, and why should you be wary if you must satisfy its demands?

Benefits to tenant. Besides helping the tenant fulfill a lender's demands, a memorandum of lease can benefit a tenant because it provides notice of the lease, says Westhoff. 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, she explains. That's particularly useful if the tenant needs to take legal action against the other tenant or buyer for thwarting its rights or options, Westhoff says.

Drawbacks for you. A memorandum of lease has a big drawback for you—it muddies the title to your property, warns Westhoff. It's like having a lien filed against your property, she explains. Why is that bad? Because 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, says Grauman. 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, she explains.

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.

Five Protections for Your Lease

When negotiating a lease with a tenant that's demanding a recorded memorandum of lease, make sure that your lease includes a clause, like our Model Clause, with the following five protections:

* Limit Contents of Memorandum of Lease

Spell out precisely what information the memorandum of lease will contain, says Westhoff. (Make sure that you first check your local laws, advises Grauman. They might set requirements for the form or contents of a memorandum of lease, she explains.) 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, Westhoff says. 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, Westhoff says [Clause, par. a].

Practical Pointer: To avoid disputes over the contents of the memorandum of lease, attach a form of memorandum of lease as an exhibit to your lease, Westhoff advises [Clause, par. a].

* 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, says Westhoff. 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, says Grauman.

Practical Pointer: Attach a form of memorandum of lease termination to your lease as an exhibit so that there are no disputes as to its contents, advises Grauman [Clause, par. a].

* 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, says Westhoff [Clause, par. a]. This avoids your having to rely on the tenant to record the document at the necessary time, she explains.

Practical Pointer: Be aware that a title company may require additional proof of the lease termination to clear the lease from a title policy, says Grauman.

* 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, says Westhoff [Clause, par. b]. A memorandum of lease modification is a recorded document that officially modifies the contents of the memorandum of lease, she explains.

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, Westhoff says.

* 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, says Grauman [Clause, par. a]. Otherwise, it might claim that you're responsible for those fees.

What to Include in Memorandum of Lease

When drafting the memorandum of lease, it, like our Model Form, should:

* Cover 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, says Westhoff [Form, par. 4]. With this language, the lease effectively becomes part of the memorandum of lease, she explains. 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 Law 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, says Westhoff. So the tenant can't use the memorandum of lease as a way to amend the lease, she explains. Also, add that if there's any inconsistency between the memorandum of lease and the lease, the lease prevails—and must be followed, Grauman says [Form, par. 5].

CLLI Sources

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

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

Sidebar

* Record Memorandum of Lease, Not Lease

If the tenant demands that you agree to record a memorandum of lease—but you balk—the tenant, as a bargaining ploy, might demand that you agree to record the entire lease instead. You're typically better off agreeing to record a memorandum of lease rather than a lease, says Los Angeles attorney Pamela L. Westhoff. A memorandum of lease gives you and the tenant some privacy regarding key provisions of the lease—such as the amount of rent, she explains.

It's also less expensive to record a memorandum of lease than a full lease. Fees for recording documents are often charged based on how many pages you record, Westhoff explains. The more pages you want to record, the higher the fee will be. A memorandum of lease may be a couple of pages long, but a lease is typically much longer, she notes.