In California, recording a Memorandum of Lease is key to protecting a solar operator’s lease from being extinguished (and a Power Purchase Agreement from being impacted) when a lienholder, junior in time to the lease, forecloses. Some operators of solar projects on leased land may forgo this simple step, relying on the landowner to record the Memorandum or the visibility of the project itself to notify any would-be lender. However, without a recorded Memorandum of Lease, a foreclosure could extinguish the lease, forcing the solar operator to remove the project prematurely and potentially incur fees under any outstanding revenue agreements or, worse, resulting in default under such agreements. By recording a Memorandum of Lease, an operator can protect its project from most junior foreclosures.
The Impact of Foreclosure When a Memorandum of Lease is Utilized
A Memorandum of Lease is much shorter than the Lease itself, reciting essential terms, but omitting terms such as price and other sensitive information. Often the Lease itself will provide that the parties must sign and record a Memorandum concurrently with the Lease’s execution so that if the landlord refuses to sign and record the Memorandum, the landlord would be in breach of the Lease. It is also considered best practices to sign the Memorandum with the Lease’s execution as it gets only more difficult to get a landlord to sign when ownership changes. The Memorandum is then recorded in the official public records and serves the key purpose of providing the world with actual notice of a leasehold interest, protecting a project from a potential claim of ignorance of the lease by a future lender.
In California, the foreclosure of a senior lien generally terminates all subordinate liens or interests, potentially including an otherwise senior lease if no Memorandum was recorded and the junior lienholder had no notice of the lease. Without a Memorandum of Lease, a lessee bears the burden of establishing that a junior lienholder had notice of the lease, which requires proof of constructive notice or inquiry notice. These issues of proof can be costly, are highly fact dependent, and require judicial determination.
Conversely, if a Memorandum of Lease is recorded prior to the creation of an encumbrance, the lease will survive the foreclosure of the junior encumbrance unless the foreclosure involves a tax lien (see below).
A Memorandum of Lease Does Not Protect Against Tax Foreclosures
Unlike traditional foreclosures, tax foreclosures extinguish all other non-tax encumbrances, including leases that are senior to the tax lien. Under Section 3712 of the California Revenue and Taxation Code, a deed conveyed under a tax foreclosure is free of “all encumbrances,” except for other tax liens. However, even in this situation, it is helpful to record a Memorandum of Lease as the recorded interest can help establish the right to a share of any excess proceeds from the foreclosure sale, which are distributed in order of seniority.
Sometimes (as when buying portfolio projects), the previous operator or developer may have skipped recording a Memorandum of Lease and the acquiring party may think it’s too late to record one. But even if no Memorandum of Lease was recorded at the time of lease execution, it is not too late to record one—and the earlier the better. A lessee may not be able to gain seniority over an existing lien, but recording a Memorandum of Lease will protect the project from future encumbrances and may also preserve evidence of notice for future disputes.
The Bottom Line: Protect the revenue stream, secure the project's longevity, and establish the lease’s rightful place in the chain of title by ensuring that a Memorandum of Lease is recorded in the official public records upon lease execution. It is the most effective insurance policy a solar project will ever have.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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