In August of 2023, The North Carolina Court of Appeals, to the surprise of many, upheld a law known as The Connor Act. This requires any real estate leases with a term greater than three years be recorded for protection against claims of third parties. Inclusive of renewal options, it must have a recorded memorandum of lease outlining the relevant terms of the agreement. If it’s not recorded, there is no protection for the tenant’s interest and subsequent purchasers can terminate the lease. Potentially just as impactful, the Act states that options to renew a lease must be affirmative, detailed and recorded to transfer to the new landlord.
In simple terms, without the official record, all aspects of the lease will no longer be binding if the ownership of the building transfers.
Why is this impactful to tenants? Because if a memorandum of lease is not drafted properly and recorded, tenants face the risk of a new owner not having to recognize their lease and would have the right to terminate it. It is typically the responsibility of the landlord to record lease memorandums, and many don’t.
It is important to understand there is no incentive for the landlord to record a lease if they are not pressed to do so early in the process. Typically, a landlord’s “pushback” position on recording a memorandum of lease is as follows: the recording will cloud the title when transferring ownership or refinancing, and not having a recorded lease can be a selling point to the buyer. The new owner will have the option to keep the current tenant(s) or find new ones, depending on how the market has shifted since the lease was signed. In some situations, the new owner may want to occupy the building or change the use.
Given how important this is for tenants, it should be considered a critical term, and addressed on the very front end of discussing and negotiating primary terms under which a tenant would move forward under. In 2023 and 2024, a total of 29.1M SF sold in the Raleigh-Durham market. The average occupancy on the square footage sold was 89%, meaning approximately 25.9M SF of occupied space could be at risk.
The concepts behind the Act are far from new, however of late, we have seen more landlords trying to push back on allowing tenants to record this important memorandum of lease. The original Connor Act is 136 years old but has recently come into the spotlight given the high uptick in cases involving leases being voided by landlords. This led to the recent opinion, establishing precedent that only further shelters and benefits landlords.
It’s confirmation this is an ongoing issue tenants must be aware of and should be one of the main transaction terms a tenant’s advisor is educating clients on, as well as negotiating for during a lease negotiation. Strong consideration should be given to engaging a pure tenant advisor who will offer valuable education and a competitive edge in negotiations, helping to secure the most favorable terms.
