Carefully Spell Out Key Terms in Memorandum of Lease

Carefully Spell Out Key Terms in Memorandum of Lease

If the owner of the shopping center or office building where you lease space has financial difficulties, it may be dealing with one, or even several, liens filed against the property. If you don’t have priority if the owner becomes bankrupt, you could be dramatically affected, up to and including having to move out of your space. So what can you do to protect your interests with a shaky owner? Demand that it 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, a 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.

So what should use negotiate and draft in your clause? A key point is your special rights and options. You’ll notice that the owner will try to keep the smallest amount of information in the memorandum of lease because it knows that this information will be made public. While you could compromise and agree not to include any confidential information you don’t have to, for example, the economic terms of your lease—such as the amount of minimum rent, additional rent, and other fees, which could hurt the owner’s lease negotiations with future tenants or other tenants in the building or center, you should demand that the memorandum of lease refer to any special right or option you’ve been given—such as an extension option, right of first refusal or first offer, or exclusive use.

For three more key points to spell out in your memorandum of lease, plus model lease language you can adapt for your situation, see “Carve Out Rights in Comprehensive Memorandum of Lease,” available to subscribers here.