Imagine
the following scenario. You are the principal of a growing business that has
been operating in space within a suburban office
"Any
commercial tenant who signs a lease with a term longer than seven years should
be sure to record a notice of lease."
Two
years later, market circumstances have changed dramatically. Scientists have
developed a vaccine for COVID-19; downtown business activity has returned to
robust levels; and the market for Downtown Boston commercial leasing space has
not only recovered but has gone into a white hot upcycle. Your landlord is now
commanding rents in your building at rates 150 percent higher than the rates
you locked into a couple years earlier. You have beautifully navigated the
capricious Downtown Boston commercial leasing market, and are feeling like a
genius. Then, out of the blue, you receive a letter from an attorney for some
LLC that you have never heard of. The letter advises you that the LLC you have
never heard of just purchased the building, and was somehow not aware that your
lease was locked in for eight-years. The attorney advises you that the new
landlord has declared your lease to be invalid, demands that you immediately
vacate the premises, and punctuates that demand with a menacing warning that if
you fail to vacate, they will pursue legal proceedings to have you removed.
What just happened?
What
happened is that your lease is longer than seven years, and you neglected to
record a “notice” of that 7-plus year lease with the Suffolk County Registry of
Deeds. Such failure has, indeed and tragically, given your new landlord the
legal right to declare your lease invalid under Massachusetts law.
The
law at issue is a Massachusetts statute, G.L.
c. 183, §4, which provides that any “lease for more than
seven years from the making thereof…shall not be valid” against anyone except
that landlord who entered into the lease “or persons having actual notice of
it”. Thus, a purchaser who acquires the property without actually knowing about
a lease (or, even with knowledge of the lease, but without actual knowledge
that the term of the lease is longer than seven years) is not bound by the
lease, and can declare it to be invalid. The basic policy behind the statute it
to protect bona fide purchasers who innocently purchase property without
knowledge that it is encumbered by a long-term lease. Imagine a hypothetical
developer who purchases property for a redevelopment project, and was led to
believe that the existing building thereon was occupied only by a handful of
at-will commercial tenants whose tenancies could be terminated on 30 days’
notice. One can understand the injustice suffered by that developer if, after
paying the purchase price and taking over ownership of the property, it only
then learns that there is a tenant on the property with a 10-year lease that
would block the purchaser’s redevelopment plans. The purpose of the statute is
to relieve the purchaser of this hardship, provided that the purchaser was
truly innocent in buying the property without knowledge of the long-term lease.
Of
course, our hypothetical Boston tenant was not aware that its landlord was even
selling the building, and thus would have had no reason to think that it needed
to advise the potential purchaser about its 7-plus year lease. How in the world
could a tenant in that scenario have any control over disclosure of its lease
to a purchaser of which it is unaware? Particularly where the consequences are
so severe -- invalidation of its lease!
The
answer to that question is that the tenant can record a simple “notice of
lease” with the applicable land recording office for the county in which the
property is located. For our hypothetical Boston tenant, the recording office
would be the Suffolk County Registry of Deeds (or, if the land is registered,
the Suffolk Registry District of the Massachusetts Land Court). By recording a
notice of lease upon signing the lease (or shortly thereafter), the tenant puts
all future potential purchasers of the property on constructive notice of the
existence of the lease, and most importantly that the lease term is longer than
seven years. If the notice of lease is on record in the public property records
at the time that the future purchaser closes on the acquisition of the
property, the purchaser cannot claim that it had no “notice” of the lease, or
that the term thereof exceeded seven years. Even if the purchaser did not have
actual notice of the lease, it still cannot claim to be an innocent victim,
since it could have (with fairly minimal diligence), and should have, examined
the public title records to the property. Such examination would have revealed
the existence of the lease and of the lease term. Accordingly, if our
hypothetical Boston tenant described at the beginning of the article would have
recorded a notice of lease, the new LLC that purchased the building would have
been on actual (or at least constructive) notice of the tenant’s lease, would
therefore not have been an innocent purchaser without notice of the lease. That
would have averted the tragedy—the new LLC would not have had the right to
invalidate the below-market lease to free up the space for lease to a new
tenant at the then higher market rents.
So,
the lesson to be learned from this allegory is simple. Any commercial tenant
who signs a lease with a term longer than seven years should be sure to record
a notice of lease. This would apply both to leases having an initial term
longer than seven years, and also to leases having a shorter term but contain
tenant extension options that could extend the term beyond seven years. The
notice of lease must be recorded with the registry of deeds (or registry
district of the Land Court) for the county in which the premises is located,
must contain mandatory information prescribed by the statute, and must further
conform to the formatting and recording formalities of the particular recording
office. Accordingly, it is highly advisable for the tenant to retain a
qualified real estate lawyer to prepare and record the notice of lease in
compliance with these legal requirements.
A
past president of REBA. Tom Bhisitkul is a principal of the firm of Moriarty
Troyer & Malloy LLC, chairs of its Commercial Real
Estate Department. Tom has over 20 years of experience in representing Fortune
500 companies, national and local banks, retailers, shopping center owners, and
investors in all facets of acquisition, development, operation and leasing of
commercial real estate throughout the country.
Tom’s email address is tbhisitkul@lawmtm.com.
