The title commitment comes back on a three-unit you are buying and Schedule B has an entry you have never seen before. It reads something like memorandum of lease, recorded at a book and page from four years ago, naming a tenant you are about to inherit. Your agent says it is nothing. Your title agent says it is an exception. Your lender’s underwriter asks for a copy and then asks for two more documents, and the file sits.
A recorded memorandum of lease is one of the quieter title exceptions on small investment property, and it is the only one that can put a tenant’s rights ahead of your mortgage. We place loans on rentals and flips across Pennsylvania and additional states, and this exception shows up often enough on two-to-four unit purchases that it is worth knowing cold before you see it on a commitment.
What a memorandum of lease actually is
A lease is a private contract. A memorandum of lease is a short recorded notice that the lease exists. It typically names the landlord and tenant, identifies the property, states the commencement date and the term, and references any options the tenant holds. It does not contain the rent, the deposit, the use clauses, or most of the economics. It is a flag in the public record, not the agreement itself.
Tenants record them for one reason: constructive notice. Recording a memorandum tells the world that someone holds a possessory interest in the property, which protects the tenant against a later buyer or lender claiming they did not know. On commercial leases this is routine. On residential rentals it is unusual, which is exactly why it catches people out.
When you do see one on a house or a small multi, there is almost always a reason. A long term, a renewal option, a purchase option, a right of first refusal, a tenant who paid for improvements, or a tenant who is also a business. If a tenant went to the expense of recording, assume they were advised to, and assume they know what they hold. The underlying lease still governs everything, which is why the lease assignment at closing matters just as much as the recording does.
Where it appears, and what Schedule B means
You will find it in Schedule B of the title commitment, in the exceptions section. Schedule A tells you what is being insured and who owns it. Schedule B tells you what the policy will not cover and what has to be cleared. A memorandum of lease lands in the exceptions because the title underwriter is not willing to insure against a tenant’s recorded possessory rights.
That placement has a specific consequence. An exception that stays in the final policy is a risk you accepted. Your lender’s policy will carry the same exception unless something is done about it, which means if the tenant’s rights later interfere with the lender’s remedies, the title insurer is not paying for it. Reading the commitment properly matters here, and if the layout is unfamiliar, start with how to read a title commitment.
Note also what is not in the exception. The entry names a book and page. It does not tell you the rent, whether the tenant is current, whether an option has been exercised, or whether the lease was amended ten times since recording. The recorded memorandum is the outer wrapper, and the contents can be very different from what you assume.
Priority, and why recording order decides the fight
Real property interests in most states rank by the order they hit the record, with the usual shorthand being first in time, first in right. A memorandum recorded four years ago sits ahead of a mortgage you record at closing next month. In plain terms, the tenant’s recorded interest is senior to your loan.
Why your lender cares is straightforward. If the loan ever has to be enforced, a senior possessory interest survives the enforcement. A buyer at the end of that process takes the property with the tenant and the tenant’s terms intact, including a below-market rent locked for another six years or a purchase option at a price set in 2022. That is a materially different asset than the one the appraisal valued, which is why lenders treat senior leasehold interests as a collateral question rather than a tenancy question.
An unrecorded lease does not vanish, to be clear. A tenant in actual possession generally gives notice by being there, and the signed lease your lender wants at closing is evidence of that. But recording removes every argument about who knew what and when, and it fixes the date. That date is the whole issue.
The purchase option hidden inside the memorandum
The clause worth reading twice is any reference to an option. A recorded memorandum that references a purchase option, a right of first refusal, or a right of first offer means the tenant may have a recorded, enforceable claim on the property you are trying to buy or finance.
A right of first refusal is the common one. It generally says that before the owner sells to a third party, the tenant gets the chance to match. If the memorandum references one and nobody obtained a waiver, your purchase can be challenged after closing. Title underwriters know this, which is why a referenced option usually triggers a requirement rather than a mere exception. The economics of option money and credited rent run through the same machinery as a rent-to-own or lease-option arrangement, and underwriters read them the same way.
What you need is a written waiver or an estoppel from the tenant confirming the option was not exercised, has expired, or is waived for this transaction. That is a negotiation with a tenant who now knows you need something, so get to it early rather than three days before a scheduled close.
The SNDA, and what your lender will ask for
The standard fix for a senior lease is a subordination, non-disturbance and attornment agreement. The tenant agrees their lease is subordinate to the mortgage, the lender agrees not to disturb the tenant’s possession so long as the tenant performs, and the tenant agrees to recognize a successor owner as the landlord. Each of the three pieces does a different job, and what an SNDA does to your tenant and your loan deserves its own read before you sign one.
On small residential investment property, many lenders will accept a tenant estoppel certificate instead, confirming the term, the rent, the deposit, that no defaults exist, and that no options remain outstanding. An estoppel is easier to get and does not require the tenant to give up priority, which is often the only way a cooperative tenant will sign anything at all.
Your lender may also want an assignment of rents that accounts for the recorded lease specifically, so the rent stream and the possessory interest are documented against the same instrument. None of this is exotic paperwork. It is a week of coordination, and the week is the cost of not planning for it.
What it does to your underwriting and your ratio
Here is where the recorded term becomes an arithmetic problem rather than a legal one. A below-market lease that is recorded, long, and senior is the rent your property actually produces for the duration, whatever the market says.
Take a three-unit where two units rent at market for 1,100 dollars each and the third is the tenant with the recorded memorandum, paying 650 dollars on a lease that runs another five years. Gross rent is 2,850 dollars. Taxes, insurance, and any association dues come to 520 dollars a month, and principal and interest at the quoted structure is 1,760 dollars, so the monthly obligation is 2,280 dollars. Coverage is 2,850 divided by 2,280, or 1.25.
Now assume the appraiser’s market rent opinion puts that third unit at 1,050 dollars. At market rents the gross would be 3,250 dollars and coverage would be 1.43. The gap between 1.25 and 1.43 is five years long and recorded. Most lenders will underwrite the lower of actual and market rent, so the recorded lease sets your number. Run it yourself in the DSCR deal calculator, and if the ratio mechanics are new, read how to calculate DSCR first.
When the memorandum outlives the lease
A memorandum does not expire off the record because the lease ended. Somebody has to record a termination. They frequently do not. Which means you can inherit a recorded exception for a tenancy that ended in 2021, held by a tenant who moved to another state, on a property where the current occupant is on a plain month-to-month arrangement.
Clearing a stale memorandum is the same curative work as clearing any dead instrument. You need a recorded release or termination signed by the party who holds the interest, and if that party cannot be found or will not sign, the title underwriter decides what evidence it will accept in lieu. When the recorded instrument is simply wrong or incomplete rather than stale, you are into corrective deeds and scrivener’s affidavits, which is slower than most purchase timelines allow.
Plan for the possibility that it does not clear. A lender may proceed with the exception in place if the lease terms are known, verified by estoppel, and acceptable. A lender may also decline, and that is not an unreasonable position when the senior interest cannot be documented. Either way, find out which before your contingency dates run.
How to handle one you find in escrow
Pull the recorded memorandum from the county the day you see the exception. It is a one-page instrument and it is public. Read the term, the commencement date, every referenced option, and the signature block. Then ask the seller for the actual lease, every amendment, and the payment ledger, and compare them to the recorded notice. Mismatches between the two are common and they are the whole point of the exercise.
Next, get a tenant estoppel in writing, and get a waiver of any referenced option. Send your lender the recorded memorandum, the lease, the amendments, and the estoppel in one package rather than in five emails, because a senior leasehold question that arrives in pieces gets re-reviewed in pieces. If your tenant’s lease has a federally protected early-termination right, that interacts with the recorded term too, and the military clause and the statute behind it covers how that reads.
Finally, price the deal on the recorded rent, not the market rent, and reset your own expectations before you reset anyone else’s. The same frontage-and-collateral logic applies as in a partial taking by eminent domain: what the record says about your property is what a lender underwrites, regardless of what the property could be. If you want a second set of eyes on a commitment with a leasehold exception on it, reach out.
FMC Capital is a Pittsburgh-based mortgage brokerage serving real estate investors. NMLS #1840537. Loan programs, terms, and guidelines vary by lender and are subject to change without notice. Nothing here is legal advice or an offer to lend. Recording statutes, priority rules, and estoppel practice vary by state, so consult a qualified attorney about your specific situation. Call 412-990-2941 to talk through a deal.