Landlords and tenants understandably have numerous provisions in their leases that lead to arguments, negotiations, and compromises. One of the lease terms Indiana landlords and tenants should be cautiously aware of is a provision regarding the recording of a lease or a memorandum of lease that has suddenly become a popular topic of discussion, although it has been the law for some time. Let’s get up to speed …

Indiana Code § 32-31-2-1 provides that no more than “forty-five (45) days after” lease “execution, a lease of real estate for a period longer than three years shall be recorded in the Miscellaneous Record in the recorder’s office of the county in which the real estate is located.” The statute allows for a memorandum of lease to be recorded in lieu of a lease if the memorandum is executed and acknowledged by the parties and contains: (1) the names of the parties; (2) the term of the lease; (3) any option of the lessee to renew or extend the term of the lease; and (4) the specific legal description of the real estate or a survey or plot plan showing the location of the real estate. See Ind. Code § 36-2-11-20(g).

What happens if the parties fail to follow this law? Well, if the parties to a lease fail to record a lease or memorandum of the lease within 45 days of the lease’s execution, the lease is void against any “subsequent purchaser, lessee, or mortgagee who acquires the real estate in good faith and for valuable consideration.” See Ind. Code § 32-31-2-2. The failure to record the lease or memorandum of the lease can lead to costly outcomes for both landlords and tenants, as discussed in two case summaries below analyzing this statute.

A gut reaction to this statute is – Wait!, landlords have a strong interest to not cloud the title of their real property. Therefore, recommendations to protect landlords from situations creating clouds on title are: (1) to include an automatic termination provision, and (2) to include an attorney-in-fact provision within the lease and, or memorandum of lease allowing the landlord to release the recorded memorandum of lease. For example, the following provision should be considered for inclusion: “This Memorandum shall automatically terminate without any further action upon the expiration or earlier termination of the Lease; and Tenant acknowledges and agrees that Landlord has the right and authority, as Tenant’s attorney-in-fact, to execute and record a release of this Memorandum upon the expiration or earlier termination of the Lease. Landlord acknowledges and agrees it shall have no other rights as Tenant’s attorney-in-fact under the Lease other than the right provided herein.”

Another approach a landlord could take, although this approach does not follow the statutory requirement, which should be adhered to, is to insert an exhibit within a purchase agreement listing each of the leases affecting the subject property and noting for each lease the tenant, subject property legal description depicting the location, terms, and options to renew or extensions. By doing this, the actual knowledge requirement noted under the case law would be satisfied.

The rationale for the recommendations above comes from a review and analysis of the following case law:

In Crown Coin Meter Company v. Park P, LLC, 934 N.E.2d 142 (Ind. Ct. App. 2010), a tenant incurred numerous legal fees in connection with enforcing its right to possess its leased premises. In Crown, the tenant laundry-mat (Crown) leased space in an apartment complex for a lease term greater than three years. Crown at 145. Subsequent to entering into the lease, the apartment complex was sold to a new owner (Park P). Id. After exchanging correspondence concerning the quality of Crown’s laundry-mat operations, accepting the laundry services provided by Crown, and paying some of the utilities necessary for Crown’s operations, Park P filed a quiet title action and sought a declaratory judgment that the lease between Crown and the prior owner was void as to Park P. Id. The trial court granted summary judgment in favor of Park P, concluding that since the lease was not properly recorded under § 32-31-2-1, it was void as a matter of law pursuant to § 32-31-2-2. Id.

On appeal, the court explained that pursuant to the statute, an unrecorded lease longer than three years is void as a matter of law against a bona fide purchaser i.e., one who purchases in good faith, for valuable consideration, and without notice of the outstanding rights of others. Id. at 147 (citing Keybank Nat’l Ass’n v. NBD Bank, 699 N.E.2d 322, 327 (Ind. Ct. App. 1998)). Though the lease was not recorded, the court nonetheless found Crown had designated enough significant evidence to create a genuine issue of material fact as to whether the new owner had notice, both actual and constructive, of Crown’s laundry-mat operations. Crown at 148. Namely, there was evidence that large signs in the leased premises specifically stated the machines were owned by the tenant pursuant to a written lease. Id. The court determined this evidence created a question of fact that precluded summary judgment.

While the court ultimately ruled in the tenant’s favor in Crown, the tenant in County Seat Bakery, LLC v. Sakura KJ Japanese Restaurant, 147 N.E. 3d 1060 (Ind. Ct. App. 2020) did not fare as well. In County Seat, the tenant bakery entered into a lease in 2014 that was set to expire on April 19, 2019, and also granted the tenant options to renew for additional five year terms. Id. at *1. The lease was not recorded, nor was a memorandum of lease. Id. In 2018, the landlord negotiated a sale of the property to Sakura KJ Japanese Restaurant (Sakura), and the landlord represented the lease would expire on April 30, 2019. Id. Sakura and the landlord entered into a purchase agreement in December 2018, with a closing planned for May 31, 2019. Id. Between the purchase agreement execution and the closing date, the tenant exercised its option to renew, which was not recorded. Id.

Sakura conducted a title search which did not reveal the unrecorded lease right, and at closing, the prior owner executed a vendor’s affidavit stating there were no parties with a right to possess the premises other than the prior owner. Id.

The transaction closed, leading to a dispute between the bakery tenant, who wanted to remain on the premises under the terms of their lease, whereas Sakura wanted the tenant to vacate. Id. The tenant sought a declaratory judgment finding the lease was enforceable against Sakura, but after a fact finding hearing, the trial court concluded the lease was void as Sakura acquired the premises in good faith — lacking both actual and constructive knowledge of the lease. Id. at *2.

On appeal, the court affirmed the trial court’s finding, determining Sakura lacked actual knowledge of the lease, given it was told by the prior owner the lease expired on April 30, 2019, nearly a month before the closing of the transaction. Id. The tenant argued Sakura unreasonably relied on the prior owner’s representations, while Sakura argued that the tenant’s ongoing possession of the premises after April 30, 2019, looked like a tenant merely holding over its term. Id. at *4. However, the court found this evidence was not sufficient to disturb the fact finding at the trial court level and thus affirmed the trial court’s ruling. Id. The court cautioned that cases of this nature would undoubtedly descend into a fact finding, totality of the circumstances determination; however, the simplest way to avoid the fact-sensitive litigation would be to timely record the lease pursuant to statute. Id.

Both Crown and County Seat have a clear message for landlords and tenants: to avoid costly, fact sensitive litigation related to a future fee simple conveyance of the leased premises, the simplest and easiest protection is to record a memorandum of lease for leases with a term greater than three years. From the tenant’s perspective, the recorded memorandum of lease helps preserve the tenant’s future rights under the lease with a new fee simple owner. For landlords, the recorded memorandum of lease can help avoid potentially costly fact sensitive litigation from future buyers — and title companies.