B-61327, NOVEMBER 19, 1946, 26 COMP. GEN. 335

B-61327: Nov 19, 1946

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LEASES - BINDING EFFECT UPON SUBSEQUENT GRANTEE IN ABSENCE OF RECORDING REQUIRED BY STATE LAW A LEASE OF PREMISES BY THE GOVERNMENT IN THE STATE OF NORTH CAROLINA FOR AN ORIGINAL TERM OF LESS THAN ONE YEAR WITH AN OPTION TO RENEW YEARLY THEREAFTER FOR NOT TO EXCEED FOUR YEARS IS A LEASE "FOR MORE THAN THREE YEARS" WITHIN THE MEANING OF THE NORTH CAROLINA REGISTRATION STATUTE AND. IS INEFFECTUAL TO BIND A SUBSEQUENT GRANTEE OF THE PREMISES TO THE TERMS OF THE LEASE IN THE ABSENCE OF RECORDING. 1946: I HAVE YOUR LETTER OF OCTOBER 15. AS FOLLOWS: THERE IS SUBMITTED FOR YOUR CONSIDERATION AND OPINION THE FOLLOWING CASE CONCERNING LEASED PREMISES OCCUPIED BY THE SOIL CONSERVATION SERVICE OF THIS DEPARTMENT.

B-61327, NOVEMBER 19, 1946, 26 COMP. GEN. 335

LEASES - BINDING EFFECT UPON SUBSEQUENT GRANTEE IN ABSENCE OF RECORDING REQUIRED BY STATE LAW A LEASE OF PREMISES BY THE GOVERNMENT IN THE STATE OF NORTH CAROLINA FOR AN ORIGINAL TERM OF LESS THAN ONE YEAR WITH AN OPTION TO RENEW YEARLY THEREAFTER FOR NOT TO EXCEED FOUR YEARS IS A LEASE "FOR MORE THAN THREE YEARS" WITHIN THE MEANING OF THE NORTH CAROLINA REGISTRATION STATUTE AND, AS SUCH, IS INEFFECTUAL TO BIND A SUBSEQUENT GRANTEE OF THE PREMISES TO THE TERMS OF THE LEASE IN THE ABSENCE OF RECORDING.

ACTING COMPTROLLER GENERAL YATES TO THE SECRETARY OF AGRICULTURE, NOVEMBER 19, 1946:

I HAVE YOUR LETTER OF OCTOBER 15, 1946, AS FOLLOWS:

THERE IS SUBMITTED FOR YOUR CONSIDERATION AND OPINION THE FOLLOWING CASE CONCERNING LEASED PREMISES OCCUPIED BY THE SOIL CONSERVATION SERVICE OF THIS DEPARTMENT, IN EDENTON, NORTH CAROLINA.

THE DEPARTMENT HAS A LEASE, DATED SEPTEMBER 23, 1943, WITH THE CHOWAN REALTY COMPANY, COVERING 165 SQUARE FEET OF SPACE IN THE CITIZENS BANK BUILDING, IN EDENTON, NORTH CAROLINA. THIS LEASE WAS FOR THE PERIOD OCTOBER 1, 1943, TO JUNE 30, 1944, WITH THE PRIVILEGE OF RENEWAL UNDER THE SAME TERMS AND CONDITIONS FROM YEAR TO YEAR UNTIL JUNE 30, 1948, THE RENEWAL PRIVILEGE TO BE EXERCISED UPON WRITTEN THIRTY DAYS' NOTICE OF INTENTION TO RENEW BY THE GOVERNMENT TO THE LESSOR BEFORE THE EXPIRATION OF THE TERM IN THE LEASE OR BEFORE THE EXPIRATION OF ANY EXTENSION THEREOF. THE GOVERNMENT HAS RENEWED THE LEASE FROM YEAR TO YEAR. THE PROPERTY WAS SOLD ON APRIL 20, 1946, BY THE CHOWAN REALTY COMPANY TO ONE SMALL, AND THE GOVERNMENT'S NOTICE OF RENEWAL FOR THE YEAR 1946 WAS DULY GIVEN BY THE GOVERNMENT TO THE CHOWAN REALTY COMPANY AND ALSO TO THE SUBSEQUENT PURCHASER SMALL. THE GOVERNMENT DID NOT RECORD ITS LEASE, AND MR. SMALL, ALTHOUGH HAVING KNOWLEDGE OF THE EXISTENCE OF THE LEASE AND HAVING RECEIVED THE NOTICE OF THE GOVERNMENT'S INTENT TO RENEW, NEVERTHELESS CONTENDS THAT THE LEASE IS INEFFECTIVE AS TO HIM BECAUSE IT WAS NOT SO RECORDED IN ACCORDANCE WITH THE NORTH CAROLINA REGISTRATION LAW. THE REGISTRATION STATUTE IN NORTH CAROLINA PROVIDES:

"SECTION 47-18. CONVEYANCES, CONTRACTS TO CONVEY, AND LEASES OF LAND. NO CONVEYANCE OF LAND, OR CONTRACT TO CONVEY, OR LEASE OF LAND FOR MORE THAN THREE YEARS, SHALL BE VALID TO PASS ANY PROPERTY, AS AGAINST CREDITORS OR PURCHASERS FOR A VALUABLE CONSIDERATION, FROM THE DONOR, BARGAINER, OR LESSOR, BUT FROM THE REGISTRATION THEREOF, WITHIN THE COUNTY WHERE THE LAND LIES.'

MR. SMALL CONTENDS THAT THE ORIGINAL LEASE FOR ONE YEAR PLUS THE EXTENSIONS THEREOF AGGREGATE A TERM OF MORE THAN THREE YEARS AND THEREFORE SHOULD HAVE BEEN RECORDED IN ACCORDANCE WITH THE ABOVE QUOTED STATUTE. ASSERTS THAT THE GOVERNMENT'S LEASE, NOT BEING A MATTER OF RECORD, AS TO HIM, HAS NO EFFECT, EVEN THOUGH HE HAD ACTUAL KNOWLEDGE OF ITS EXISTENCE AND RECEIVED THE NOTICE OF RENEWAL. CONSEQUENTLY, HE WISHES A NEW LEASE WITH THE GOVERNMENT, WITH HIGHER RENT.

THERE ARE MANY CASES CONSTRUING THE REGISTRATION LAW IN NORTH CAROLINA, AND THE COURTS HAVE DECIDED THAT, UNDER THIS STATUTE, NO NOTICE, HOWEVER FULL AND FORMAL, AS TO THE EXISTENCE OF A PRIOR DEED OR INSTRUMENT SUFFICIENTLY RECORDABLE, WILL SUPPLY THE WANT OF REGISTRATION. MCCLURE V. CROW, 196 N.C. 657, 146 S.E. 713; COLLINS V. DAVIS, 43 S.E. 579; SMITH V. TURNAGE-WINSLOW CO., 212 N.C. 310, 193 S.E. 685. AN INSTRUMENT WHICH IS NOT RECORDED IN NORTH CARLINA DOES NOT CONVEY COMPLETE TITLE AND IS INEFFECTUAL AS AGAINST SUBSEQUENT GRANTEES UNDER REGISTERED DEEDS AND CREDITORS OF THE GRANTOR. GLASS V. LYNCHBURG SHOE CO., 212 N.C. 70, 192 S.E. 899; PATTERSON V. BRYANT, 216 N.C. 550, 5 S.E. (2), 849, SILLS V. FORD, 171 N.C. 733, 88 S.E. 636. THE PURPOSE OF THIS STATUTE THE COURT SAID, IN GRIMES V. GUION ET AL. (1942), 220 N.C. 676, 18 S.E. (2), 170, IS THAT, FOR REASONS OF PUBLIC POLICY, PURCHASERS ARE ENABLED TO RELY WITH SAFETY UPON THE EXAMINATION OF THE RECORDS, AND ACT UPON THE ASSURANCE THAT, AGAINST ALL PERSONS CLAIMING UNDER THE DONOR, BARGAIN OR, OR LESSOR, WHAT DID NOT APPEAR DID NOT EXIST. FURTHER, IN WOOD V. TINSLEY, 138 N.C. 507, 51 S.E. 59, IT WAS SAID THAT, ALTHOUGH HARDSHIPS WOULD COME TO SOME IN APPLYING THE RIGID STATUTORY RULE, THE CHANGE IN THE REGISTRATION LAWS OF NORTH CAROLINA WAS DEMANDED BY THE DISTRESSING UNCERTAINTY INTO WHICH TITLE TO LAND HAD FALLEN IN THE STATE.

FURTHER, UNDER THIS STATUTE, POSSESSION ALONE CANNOT BE SAID TO BE NOTICE OF ADVERSE CLAIM. LANIER V. LUMBER CO., 177 N.C. 200, 98 S.E. 593; SEXTON V. ELIZABETH CITY, 169 N.C. 385, 86 S.E. 344; DYE V. MORRISON, 181 N.C. 309, 107 S.E. 138. THEREFORE, IT CAN BE SAID THAT IF THE GOVERNMENT'S LEASE IS FOR A TERM OF MORE THAN THREE YEARS AND IT IS NOT RECORDED, NEITHER THE NOTICE TO MR. SMALL NOR ACTUAL KNOWLEDGE ON HIS PART OF THE EXISTENCE OF THE LEASE AND ITS PROVISIONS WOULD HAVE ANY EFFICACY.

HOWEVER, IT IS NECESSARY TO CONSIDER WHETHER THE GOVERNMENT'S LEASE FOR THE PERIOD OCTOBER 1, 1943, TO JUNE 30, 1944, WITH THE OPTION OF YEARLY RENEWALS TO THE GOVERNMENT UP TO JUNE 30, 1948, IS A TERM FOR MORE THAN THREE YEARS, OR WHETHER IT IS A LEASE SIMPLY FOR THE ORIGINAL TERM, REGARDLESS OF THE RENEWAL PROVISIONS, SO THAT IT NEED NOT BE RECORDED IN ACCORDANCE WITH THE NORTH CAROLINA STATUTE. IT IS NOTED THAT A DISTINCTION IS MADE BETWEEN A COVENANT IN A LEASE FOR A RENEWAL AND A PROVISION THEREIN FOR THE EXTENSION OF THE TERM AT THE OPTION OF THE LESSEE, THE LATTER BEING TREATED, UPON THE EXERCISE OF THE PRIVILEGE, AS A PRESENT DEMISE FOR THE FULL TERM TO WHICH IT MIGHT BE EXTENDED AND NOT A DEMISE FOR THE SHORTER PERIOD WITH A PRIVILEGE FOR A NEW LEASE FOR THE EXTENDED TERM. MARCKRES BROS. V. PERRY GAS WORKS, ET AL., 179 N.W. 538, 540; ANDREWS V. MARSHALL CREAMERY, ET AL., 92 N.W. 706. HOWEVER, IN MOST JURISDICTIONS, THE NICETY OF THE DISTINCTION BETWEEN "RENEWAL" AND "EXTENSION" IS DISREGARDED AND THE TECHNICAL MEANING OF THESE WORDS IS USUALLY NOT CONTROLLING, BUT THE GENERAL INTENT OF THE PARTIES IS TO BE FOLLOWED.

IN ADDITION TO THE FOREGOING, THERE IS TO BE CONSIDERED SECTION 3679 OF THE REVISED STATUTES, 31 U.S.C. 665 AS INTERPRETED IN GOODYEAR TIRE AND RUBBER CO. V. UNITED STATES, 276 U.S. 287, AND LEITER V. UNITED STATES, 271 U.S. 204, WHEREIN IT HAS BEEN HELD THAT THE GOVERNMENT CAN CONTRACT ONLY ON A YEARLY BASIS BECAUSE OF THE CONTINGENCY OF AVAILABLE FUNDS APPROPRIATED BY CONGRESS.

YOUR DECISION IS SPECIFICALLY REQUESTED WHETHER THE DEPARTMENT IS JUSTIFIED IN REGARDING THIS LEASE AS VOIDED BY REASON OF THE DEMAND OF THE OWNER, AND NEGOTIATING A NEW LEASE WITH HIM OR ANY OTHER PROPERTY OWNER, UNDOUBTEDLY AT A HIGHER RENTAL CONSIDERATION.

UNDER THE LEASE REFERRED TO IN YOUR LETTER (ASC ( SC-O/-1642, DATED SEPTEMBER 23, 1943), THE CHOWAN REALTY COMPANY LET THE PROPERTY THEREIN DESCRIBED TO THE GOVERNMENT FOR A TERM BEGINNING WITH THE DATE OF OCCUPANCY STATED AS OCTOBER 1, 1943, AND ENDING JUNE 30, 1944, AT A MONTHLY RENTAL RATE OF $10, WITH RENEWAL OPTION TO THE GOVERNMENT FROM YEAR TO YEAR THEREAFTER AT THE SAME RENTAL RATE UPON TIMELY WRITTEN NOTICE TO THE LESSOR PROVIDED, HOWEVER, THAT NO RENEWAL SHOULD EXTEND THE OCCUPANCY BEYOND JUNE 30, 1948. FOLLOWING RECEIPT OF YOUR LETTER, THERE HAS BEEN RECEIVED INFORMAL INFORMATION FROM THE ACTING CHIEF ADMINISTRATIVE SERVICES DIVISION, SOIL CONSERVATION SERVICE, TO THE EFFECT THAT RENTAL PAYMENTS HAVE BEEN MADE TO THE NEW OWNER FOR THE PERIOD FROM APRIL 20 TO SEPTEMBER 30, 1946. IN ADDITION, THERE HAS BEEN FORWARDED HERE A CERTIFIED COPY OF DEED EXECUTED ON APRIL 20, 1946, BY THE GOVERNMENT'S LESSOR CONVEYING THE PROPERTY IN WHICH THE LEASED PREMISES ARE LOCATED, TO THE NEW OWNER, H. S. SMALL. AN EXAMINATION OF THE DEED FAILS TO SHOW ANY REFERENCE TO THE GOVERNMENT'S LEASE OR THAT THE CONVEYANCE TO THE NEW OWNER WAS MADE SUBJECT THERETO.

ALSO, THERE WERE TRANSMITTED TWO LETTERS DATED MAY 22 AND JUNE 6, 1946, FROM THE AGENT OF THE NEW OWNER TO THE STATE CONSERVATIONIST AT RALEIGH, NORTH CAROLINA, AND TO THE ADMINISTRATIVE ASSISTANT, SOIL CONSERVATION SERVICE, RESPECTIVELY. IN THE FIRST DATED LETTER, IT IS STATED IN EFFECT THAT THE CITIZENS BANK BUILDING HAS BEEN PURCHASED BY MR. SMALL AND THAT THERE WOULD BE A NEW RENT SCHEDULE BEGINNING JUNE 1, 1946. IN THE SECOND LETTER ACKNOWLEDGING RECEIPT OF THE RENEWAL NOTICE FOR THE CURRENT FISCAL YEAR, IT IS STATED:

WHEN MR. SMALL PURCHASED THIS BUILDING FROM THE CHOWAN REALTY COMPANY HE WAS NOT ADVISED THAT YOU HAD A LEASE WITH SAID COMPANY GIVING YOU THE RIGHT OF RENEWAL AT SAME RATE. I HAVE SEARCHED THE RECORDS AND DO NOT FIND ANY LEASE TO YOU RECORDED IN CHOWAN COUNTY RECORDS. SO MR. SMALL IS AN INNOCENT PURCHASER AND IS NOT BOUND BY THIS LEASE. * * *

THE AUTHORITIES CITED IN THE FOURTH PARAGRAPH OF YOUR LETTER SUFFICIENTLY ESTABLISH THE RULE THAT UNDER THE LAW OF NORTH CAROLINA INSTRUMENTS PURPORTING TO CONVEY LAND OR LEASES THEREOF MUST BE RECORDED TO BE EFFECTUAL AGAINST SUBSEQUENT GRANTEES, EVEN THOUGH THE SAID GRANTEES HAD ACTUAL KNOWLEDGE THEREOF.

AS INDICATED IN YOUR LETTER, THE PRINCIPAL ISSUE HERE IS WHETHER THE GOVERNMENT'S LEASE IN THIS INSTANCE PROVIDING FOR AN ORIGINAL TERM OF LESS THAN ONE YEAR, WITH A RENEWAL OPTION FROM YEAR TO YEAR THEREAFTER NOT TO EXTEND THE OCCUPANCY BEYOND FOUR YEARS THEREAFTER, IS A TERM FOR MORE THAN THREE YEARS WITHIN THE MEANING OF THE STATE STATUTE HERE INVOLVED.

SO FAR AS CONCERNS THE GENERAL PROPOSITION OF WHETHER A NEW TERM COMMENCES UPON THE EXERCISE OF OR THE FAILURE TO EXERCISE AN OPTION IN A LEASE, THERE APPEARS TO BE SOME CONFLICT IN THE AUTHORITIES. SEE III THOMPSON, REAL PROPERTY (1940), SECTIONS 1264-1276, AND II TIFFANY, LANDLORD AND TENANT (1910), SECTION 219. BRIEFLY, AS THOSE AUTHORITIES STATE, THE QUESTION OF WHETHER THE OPERATION OF AN OPTION CLAUSE RESULTS IN THE COMMENCEMENT OF A NEW TERM, OR THE CONTINUATION OF THE OLD, FOR SPECIFIC PURPOSES, DEPENDS UPON THE PARTICULAR WORDS USED IN THE CLAUSE AND THE INTENTION OF THE PARTIES. IN SOME STATES THE OPTION IS HELD TO CALL FOR THE EXECUTION OF A NEW LEASE AND, THEREFORE, THAT A NEW TERM MUST COMMENCE (III THOMPSON, SUPRA, SECTIONS 1264-1266; "AN OPTION TO RENEW DOES NOT CREATE A PRESENT DEMISE OF THE ADDITIONAL TERM BUT AMOUNTS TO NO MORE THAN A COVENANT TO GRANT THE TERM"). MOREOVER, EVEN IN THOSE CASES AND JURISDICTIONS WHERE A NEW LEASE IS NOT REQUIRED THERE IS SOME CONFLICT AS TO WHETHER A NEW TERM COMMENCES, OR WHETHER THE OLD ONE CONTINUES, BY VIRTUE OF THE OPERATION OF THE OPTION CLAUSE. II TIFFANY, SUPRA, SECTIONS 219, 224; III THOMPSON, SUPRA, SECTION 1264. ALSO, SEE A.L.R. 1917 E 1237, ET. SEQ., AND I TAYLOR, LANDLORD AND TENANT, PAGE 406.

HOWEVER, IT HAS BEEN HELD THAT A LEASE FOR A CERTAIN TERM WITH RIGHT OF RENEWAL FOR ANOTHER TERM IS A LEASE FOR THE SUM OF THE TWO TERMS FOR THE PURPOSE OF STATUTES, SIMILAR TO THE ONE HERE INVOLVED. TOUPIN V. PEABODY, 39 N.E. 280 ( MASS.); LEOMINSTER GASLIGHT COMPANY V. HILLERY, 83 N.E. 870 ( MASS.); GREAT ATLANTIC AND PACIFIC TEA COMPANY V. COFER, 106 S.E. 695 ( VA.) ALSO, SEE II TIFFANY, LANDLORD AND TENANT (1910), SECTION 219, SUPRA. IN THE CASE OF TOUPIN V. PEABODY, SUPRA, INVOLVING A STATUTE SOMEWHAT SIMILAR TO THE ONE HERE UNDER CONSIDERATION THE OWNER OF THE PROPERTY LEASED IT TO ONE TOUPIN FOR A TERM OF FIVE YEARS WITH THE PRIVILEGE OF A FURTHER TERM OF FIVE YEARS. THIS INSTRUMENT WAS NOT RECORDED UNTIL AFTER HE SOLD THE PROPERTY TO PEABODY. THE CONTEST AROSE BETWEEN THE LATTER AND TOUPIN OVER THE POSSESSION OF THE PREMISES. THE QUESTION PRESENTED FOR DECISION WAS THE EFFECT OF THE PROVISION FURNISHING THE PRIVILEGE OF RENEWAL. UNDER THE MASSACHUSETTS LAW AN INSTRUMENT PROVIDING FOR A TERM IN EXCESS OF SEVEN YEARS IS REQUIRED TO BE RECORDED. THE COURT HELD AS FOLLOWS:

* * * IT IS ENOUGH, FOR THE PURPOSE OF THIS CASE, TO HOLD THAT AS TO ANY EXTENSION OR SECOND TERM, OR AGREEMENT FOR RENEWAL, WHICH WILL CARRY THE POSSESSION OF THE LESSEE TO MORE THAN SEVEN YEARS FROM THE MAKING OF THE INSTRUMENT, EVERY INSTRUMENT WHICH CONFERS AN ESTATE FOR YEARS IS WITHIN THE MEANING OF THE STATUTE. THE INSTRUMENT ON WHICH THE PLAINTIFF RELIES WAS OF THIS NATURE, AND, SO FAR AS IT PURPORTED TO GIVE HIM THE RIGHT TO A SECOND TERM OF FIVE YEARS, IT WAS INVALID AS AGAINST A PURCHASER WITHOUT ACTUAL NOTICE.

HENCE, WHILE A MERE COVENANT TO RENEW AT THE OPTION OF THE LESSEE SUCH AS HERE INVOLVED MAY NOT CONSTITUTE AN ACTUAL RENTING FOR A LONGER PERIOD THAN THE ORIGINAL TERM SPECIFIED, THE CONTRACT PROVIDES THE MEANS BY WHICH THE GOVERNMENT AT ITS OPTION--- WITHOUT CONTRAVENING THE PROVISIONS OF SECTIONS 3679 AND 3672, REVISED STATUTES, AS AMENDED--- CAN EXTEND THE TERM OF THE DEMISE SO THAT THE AGGREGATE TERM WILL BE FOUR YEARS AND NINE MONTHS. CF. 18 COMP. GEN. 675; 20 ID. 30; ID. 105. IN THAT RESPECT THE LEASE IS "FOR MORE THAN THREE YEARS" WITHIN THE MEANING OF THE STATUTORY PROVISION QUOTED IN YOUR LETTER.

ACCORDINGLY, THE QUESTION PRESENTED IN THE LAST PARAGRAPH OF YOUR LETTER IS ANSWERED IN THE AFFIRMATIVE, WITH THE UNDERSTANDING, OF COURSE, THAT IN CONNECTION WITH THE CONSUMMATION OF A NEW LEASE THERE WILL BE COMPLIANCE WITH THE STATUTORY REQUIREMENTS RELATING TO THE LEASING OF PROPERTY FOR GOVERNMENT PURPOSES.

HOWEVER, THERE WOULD APPEAR TO BE SOME BASIS UPON WHICH THE GOVERNMENT CAN HOLD THE ORIGINAL LESSOR LIABLE FOR ANY INCREASED RENTAL WHICH IT MAY BE REQUIRED TO PAY TO THE NEW OWNER. SEE, IN THIS CONNECTION, NEAL V. JEFFERSON, 99 N.E. 334, AND CASES THEREIN CITED; L.R.A. 1915 C. 219. ACCORDINGLY, CONSIDERATION SHOULD BE GIVEN TO THE INSTITUTION OF APPROPRIATE ACTION TO COLLECT FROM THE ORIGINAL LESSOR ANY DAMAGES THAT MAY RESULT FROM ITS ACTION IN CONVEYING THIS PROPERTY DURING THE TERM OF THE LEASE. THE COPY OF THE DEED ABOVE REFERRED TO WILL BE RETAINED HERE FOR FILING WITH THE LEASE.