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Understanding How A Memorandum of Lease Can Protect the Rights of Parties Involved in the Leasing of a Property

By Bernard B. Kolodner

Kleinbard’s real estate attorneys are occasionally involved in the negotiations for a Memorandum of Lease to be filed in the county where the property is located.  The terms of the lease and the location of the property (i.e., which state) are often the determining factors as to whether or not a Memorandum of Lease is a necessary part of the lease negotiating process.

Leased property may be sold and may be mortgaged without permission of the tenant.  In many states, if a buyer of the property does not know of the existence of a lease, the buyer may have rights to terminate the lease.  Similarly, a lender secured by a mortgage on the property executed after the lease may be able to terminate the lease if the lender forecloses on the property.     In either case, a tenant whose lease preceded the sale or mortgage would be subject to being wiped out.  Nevertheless, in some states, short term leases are still protected even if there is no Memorandum of Lease.  Longer term leases, which length varies from state to state, do not have that protection from a subsequent mortgage or sale of the property.

In Pennsylvania, possession of a property protects the tenant from the risk of being terminated as a result of a subsequent sale or foreclosure pursuant to a subsequent mortgage.  However, a statutory standard Memorandum of Lease form is available for tenants who want details of the lease to be of public record.  For example, if a tenant has an exclusive use, a Memorandum of Lease can outline that exclusive use so that existing tenants and any subsequent tenants know of the exclusive use upon signing their own lease.  Similarly, if the tenant has a right of first refusal or an option to buy the property, a Memorandum of Lease can include that provision which would make it a matter of public record, helping to protect the tenant’s interests.

The statute governing Memoranda of Leases requires at least the names and addresses of the parties, date of the lease, a description of the leased premises, the start and end dates or the provisions for how the start and end dates are determined, all of which would be expected.  In addition, the statute requires the Memorandum of Lease to include whether the tenant has a right of purchase of or refusal on the demised premises, and a statement of the term during which that right is exercisable.  See 21 P.S. Section 405.  And because the Memorandum is not limited to this name, date, and place information, a tenant could add its exclusive use to the filed Memorandum.

One common feature of Memoranda of Leases in any state is that a landlord usually protects itself by requiring the tenant to deliver, into escrow, a  fully executed and notarized Termination of Lease in proper form for recording in that state.  A Termination of Lease protects the landlord when the lease expires, when the lease is terminated as result of default, or even if the tenant terminates pursuant to any right under the lease (such as casualty or condemnation).  By filing the Termination of Lease under those circumstances, the landlord can clear its title, for subsequent sale, mortgage or lease purposes, by removing from the record all public notice of the fact that a lease exists.

Memoranda of Leases are usually short, easy documents to prepare and they can significantly protect the rights of the parties involved in a lease of property.  Feel free to contact Bernie Kolodner, 215.496.7226 or bkolodner@kleinbard.com, if you would like more information on this topic.