Winning the Race to Record: Protecting Rights in Real Estate

By Scott Miskimon and John Jo

The North Carolina Court of Appeals this week addressed an important issue involving leases, options to renew, and the North Carolina recordation statutes known as the “Connor Act.” The decision affects anyone who buys or sells land, leases it, or makes a loan secured by real estate.

The Court ruled that the plaintiff tenant, who attempted to exercise an unrecorded option to renew its lease after the defendant purchased the property, could not enforce the lease renewal against the purchaser/new landlord. Because of the Connor Act, as to the purchaser, the renewal option was void and the purchaser bought the land free of the tenant’s unrecorded renewal options. The case is GreaseOutlet.com, LLC v. MK South II, LLC, 2023-NCCOA-___ (“GreaseOutlet”), and Smith Anderson represents the defendant who prevailed at the Court of Appeals.

The original Connor Act has been on the books for 135 years and has been expanded with a host of related recording statutes, some of which have been recently amended.  The Connor Act applies to contracts for the sale of land, leases with a term greater than three years, lease renewal rights, options to purchase, rights of first refusal, deeds of trust, easements, and restrictive covenants. In general terms the Connor Act provides that, to protect interests in real estate, the interest must be registered with the register of deeds in the county where the property is situated. The interest may be registered through a memorandum recorded in the property’s chain of title, and it must be signed by all parties to the agreement that creates the real property interest. If a sufficient memorandum is properly recorded, the real estate interest is protected against third parties who later record their interests. These third parties can be a purchaser for value who has subsequently recorded its deed, or a lien creditor who has subsequently recorded its deed of trust.

If the recordation laws are not complied with, however, the unrecorded interest is invalid as to such third parties who have properly recorded, and they may treat the unrecorded interest as if it does not exist. This is true even if the third party has actual knowledge of the unrecorded interest. The only thing that matters is recordation, because North Carolina law protects the party who “wins the race” and is first in time to properly record.

In GreaseOutlet, the plaintiff tenant and its original landlord entered into a written commercial lease with a five-year term for property located near downtown Raleigh. A memorandum of this lease was recorded with the register of deeds. Months later, the original landlord granted two five-year options to renew that were set forth in a written lease amendment. No memorandum regarding the amendment was recorded, and nothing appeared in the property’s chain of title indicating that renewal options had been granted. Several years later, during the original five-year term, the defendant bought the property and received a deed which did not mention the tenant’s lease renewal options.  

After that closing, the tenant purported to exercise the first of its renewal options. It also pre-paid rent for the entire year of 2021, which covered rent for the last four months of the original lease term and the first eight months of the purported renewal period. The defendant—now the new landlord—took the position that the renewal option was invalid, gave notice that the lease would expire at the end of the five-year term, demanded possession, and refunded the excess amount of pre-paid rent. After the lease expired, the tenant remained in possession and sued its new landlord for, among other things, breach of contract and unfair trade practices.

The trial court dismissed the lawsuit in its entirety, and the Court of Appeals affirmed the dismissal. Because of the Connor Act, and the tenant’s failure to record a memorandum reflecting the terms of the renewal options, all six of its claims failed as a matter of law. The Court rejected the tenant’s arguments that the recorded memorandum of the original lease, which contained a general, unspecific reference to future amendments, could be stretched to cover the unrecorded renewal options. It also rejected arguments based on the defendant’s conduct, including its acceptance of rent, as a way to by-pass the Connor Act.

Because of the Court’s decision, the defendant purchased the land subject to the original lease term but not as to any renewal option, and the tenant had no right to stay in possession after the lease expired. GreaseOutlet shows how non-compliance with the registration laws has serious consequences, and that rights in real estate claimed by a party can be lost by failing to record. The Court’s opinion underscores the continuing vitality of the Connor Act and the importance of taking the statutorily-mandated steps needed to protect interest in real estate.

Moving forward, the plaintiff in GreaseOutlet has no automatic right of appeal, but could petition the Supreme Court of North Carolina for a discretionary review of the decision. Smith Anderson will provide updates in the event of any future developments in this case.

If you have any questions related to this alert, please contact any member of our Real Estate Development group or your regular Smith Anderson lawyer.