Race to Renewal: North Carolina addresses registration requirements for binding lease renewal options
Recent decisions by the North Carolina Court of Appeals underscore the importance of properly recording lease terms and renewal options.
North Carolina’s Connor Law (codified as NC Gen. Stat. § 47-18) states that North Carolina operates under a “pure race” system, where the first person to register an interest in real estate has priority over subsequent purchasers or stakeholders. This means that if the first person fails to properly record an interest in the real property through a deed, note, or other instrument, the second person can record his or her own instrument and have an alternative interest in the real property, even if the second person has actual or presumed knowledge of the interest. Personality of the first person in the property.
Connor’s Law applies to a number of interests in real estate, including any lease for a term of more than three years, which includes any subsequent renewal rights. It is necessary to have a registered lease note setting out the relevant terms of the lease to protect the tenant’s interest in the property and to notify subsequent purchasers or stakeholders of this lease. On August 1, 2023, the North Carolina Court of Appeals decided GreaseOutlet.com, LLC v. MK South II, LLCNo. COA22-648 (N.C. Ct. App. Aug. 1, 2023) (“Grease outletThe GreaseOutlet opinion explained that options to renew a lease must be affirmatively recorded by a note to be binding on subsequent purchasers of the underlying properties.
In the Grease outlet In the case, the plaintiff, a tenant, leased commercial space from the then landlord for a period of 5 years. The terms of the initial lease were properly recorded by a memorandum and stated that the lease would automatically terminate on April 30, 2021. However, after the lease memorandum was recorded, the plaintiff and the landlord amended the terms of the original lease by amending the lease (“Amendment”) and granted the plaintiff Option to renew the lease for two consecutive 5-year terms after April 30, 2021. Plaintiff failed to record an amendment to the lease note to memorialize the amendment in public records.
Subsequently, the defendant purchased the property, making the defendant the plaintiff’s new owner. During the sale, the defendant received copies of the original lease and the amendment. In August 2020, the plaintiff attempted to exercise its option to renew the lease and sent the defendant a check to pay rent in advance for the first eight months of the renewed term. In November 2020, Plaintiff sought to renew its permit with the State of North Carolina to operate its business and requested that Defendant execute a new owner’s permit as part of its permit renewal. The defendant refused to sign the landlord mandate and instead only discussed extending the lease beyond April 2021. The defendant conditioned the lease extension on its ability to unilaterally terminate the lease two years after any proposed renewal term. The plaintiff rejected this offer and in March 2021, the defendant rejected the plaintiff’s attempt to renew the lease, and reimbursed the plaintiff for the rent previously paid.
The plaintiff then filed 6 claims against the defendant in a North Carolina state court. The court accepted the defendant’s request to dismiss the case, and the plaintiff appealed the rejection decision. The plaintiff argued that the defendant should comply with the amendment because the defendant had actual notice of the existence of the amendment. However, the North Carolina Court of Appeals rejected this argument, stating that in a racially exclusive state like North Carolina, a notice of unregistered interest does not bind subsequent purchasers. The court also rejected the plaintiff’s second argument that it “won the race” because the initial lease was registered before the defendant purchased the property. The court reasoned that the initial lease note was only binding on the defendant for the first five-year period, and the plaintiff should have recorded a new note to prove that the amendment put future purchasers on notice of extended lease benefits pursuant to the amendment.
Briefly, Grease outlet The opinion highlights the importance of ensuring that lease terms and renewal options are properly filed in writing and recorded in applicable North Carolina real estate records to protect tenants’ real estate interests. Failure to properly record these terms and options may result in them being deemed invalid and unenforceable against subsequent purchasers or owners of the underlying real property.
If you or your business have any questions or need assistance with your lease related to this alert, please contact a Womble Bond Dickinson attorney.