Tenants’ Rights under Unrecorded Leases

Protection of private property rights is fundamental under Texas law. Applications of this principle to landlords are com­monly seen and understood, but Texas law also affords sub­stantial safeguards to tenants and their leasehold estate in­terests. Awareness of these rights can be critical in a variety of contexts.

In eminent domain takings as well as purchase and sale trans­actions, for example, disputes often arise when a lessee's rights are overlooked and in­fringed due to an unrecorded lease. Recording a real prop­erty instrument, such as a lease, in the real property re­cords of the county in which the property is located pro­vides constructive notice of the lease. Just like actual, subjec­tive knowledge of a lease, this constructive record notice is effective for enforcing leasehold rights against third parties, such as condemning authorities or purchasers of landlords' inter­ests.

But parties frequently do not want to record a lease in its entirety for a variety of rea­sons, including protecting the confidentiality of negotiated lease terms (e.g., rent) in highly competitive industries. If a lease is not recorded, a condemning authority or sub­sequent purchaser may claim it is not bound by the lease. Is this the end of the road for the lessee—i.e., does failing to record the lease leave the lessee completely exposed?

No.

While recording the lease itself provides the greatest protection, there are other ways a lessee can establish constructive notice and en­force its rights. For example, the lessee can record a memorandum of lease—a notice of the existence of the lease stating only certain ex­cerpted terms of the lease. The minimum requirements include a legal description of the property, the term of the lease, and the signatures of the landlord and tenant. It is up to the parties' discretion what additional terms, if any, to include.

A third party, such as a con­demning authority or pur­chaser of the landlord's inter­est, is charged with notice of all terms expressly stated in the recorded memorandum of lease. But Texas law goes further, providing that a third party will also be charged with notice of any other material facts that a reasonable inquiry would have disclosed.  Thus, even if the memorandum of lease leaves out certain terms of the lease, such as a right of first refusal granted to the tenant, a third party can still be deemed to have notice of those terms and the subject to other enforcement.

Even if neither a lease nor memorandum of lease is recorded, however, the lessee may still be able to protects its rights by establishing possession f the lease in an open, visible, exclusive, and unequivocal manner.  For example, an outdoor advertiser could show it has continuously maintained a billboard on the property to establish its rights as tenant under a ground lease.  Likewise, a commercial tenant could show construction or operation of a business on the property as open, visible, excusive, and unequivocal possession under an unrecorded lease.

Third parties may be charged with notice not only of the rights openly and visibly exer­cised (such as rights of posses­sion and use), but also all other terms of the lease (such as a right of first refusal). This is because the third party may be deemed to have enough notice to require further rea­sonable inquiry, from which all lease terms could have been discovered, just as with a memorandum of lease. Thus, while it is generally advisable to record a lease or memo­randum of lease, a tenant need not necessarily give up hope for enforcing its rights simply due to an unrecorded lease.

By J. Allen Smith & Michael R. Steinmark

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