Minimize Risk in Memorandum of 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.

For example, you should limit contents of the 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.

For four more protections you can negotiate to minimize the risk of giving your tenant a memorandum of lease, and a Model Lease Clause with language you can adapt, see, “Get Control Over Content in 'Short-Form Lease,’” available to subscribers here.