I currently have a pasture lease that lasts through the end of the year. My landlord just sold the property to someone else. Does my lease continue on with the new owner?
This is a great question, and one that I frequently get asked at presentations. There are, surprisingly, few Texas cases that have addressed this issue. Nevertheless, the law appears to be fairly settled on this point. As with most legal questions, the answer depends on the facts.
First, if the original lease agreement between the landlord and tenant states that the landlord shall have the right to terminate the lease if the property is sold, that is an enforceable contractual term and the lease may be terminated by the landowner. See, e.g. Frankfurt Fin. Co. v. Treadway, 159 S.W.2d 514 (Tex. Ct. App. 1942) (“Our attention is directed to the well-settled rule that parties to a lease may lawfully stipulate for a termination of the leasehold upon sale by the owner; and it has further been held that such a provisio becomes a covenant running with the land, thus a right inuring to the purchaser.”)
If, however, the lease is silent as to termination upon sale to a new purchaser, the common law applies. The basic rule in this situation is that so long as the new purchaser is on notice that a lease exists, the sale of property does not terminate the lease agreement. Instead, the new purchaser takes the property subject to the terms of the lease agreement. The new purchaser essentially steps into the shoes of the original landlord. See, e.g., Cantile v. Vanity Fair Properties, 505 S.W.2d 654, 658 (Tex. Ct. App. – San Antonio 1973) (“It is elementary that the sale of the reversion by the landlord does not, itself, bring about a termination of the lease.”); Wilson v. Beck, 286 S.W. 315 (Tex. Ct. App. – Dallas 1926) (“The sale by Mrs. Miller of the reversion to Phillips did not terminate the tenancy of McDonald or deprive him of any rights under the lease. McDonald was…the tenant of Phillips.); 49 Tex. Jur. 3d Landlord and Tenant Section 50 (“In the absence of a contrary provision in the lease, a sale of the reversion by the landlord does not affect the tenant’s rights.”).
The one exception to this rule is that if the new purchaser buys without notice of the lease, he or she may be able to argue that they are a “bona fide purchaser” such that they take free of encumbrances such as a lease. This argument, however, can be difficult to win as there are numerous ways a new purchaser may be put on notice of a lease. First, a tenant can put any potential purchasers on record notice by filing a memorandum of lease in the county deed records. This filing will come up in a title search and serves as notice to a potential buyer that a lease is in place. Second, a new purchaser can be place on actual notice, whereby the seller, realtor, tenant, or someone else tells the purchaser that a lease is in place. Third, the tenant can be placed on constructive notice if it is open and obvious that a lease is in place. For example, if the tenant’s cattle are on the property or the tenant has crops obviously under cultivation, this would likely place a potential purchaser on constructive notice. In Rumbold v. Adcock, 193 S.W. 415 (Tx. Ct. App. – Amarillo 1917), the court found that where a tenant leased farmland that was sold during the term of the lease, the fact that the tenant was “in visible and notorious possession of the land, actually occupying, using, and cultivating it, and had been for two years” the new purchaser was on notice of the lease and bought subject to the lease. See also Miller v. Compton, 185 S.W.2d 754 (Tex. Ct. App. – Eastland 1945) (“The tenant being in possession at the time of the sale, the purchaser is deemed to have had notice of his rights under the lease, and hence may not claim the standing of an innocent purchaser.”).
One Texas court summarized this concept well using a hypothetical. “Where D leased the pasture from P for the year, he had a legal right to use it during the year, and a sale by P of the pasture or a portion of it would not destroy or affect D’s rights under the lease. Such sale would pass the land subject to the right of pasturage in D, and D being on the land and the time of such sale, and using it for pasturage, the purchaser would be charged with notice of his rights, and would take the land subject to such rights.” See id.
This question offers important take-home points for both landlords and tenants.
First, both parties should consider whether to include language allowing termination upon sale in the lease agreement. A landowner may want this type of language to be included as it may make the property more marketable if the new purchaser is not burdened by a lease. On the other hand, a tenant may not want this type of language if he or she wants to ensure that the lease continues to a new owner. Of course, the opposite could be true as well. The tenant may only want to deal with the specific landlord and might want the lease to end if the property is purchased by a new owner. This is fact-specific and should be carefully considered by both parties.
Second, if the lease does not include a termination upon sale provision, a tenant wishing to ensure his or her lease is protected even if a sale occurs should take steps to ensure any potential purchasers are on notice of the lease. As discussed above, there are a variety of ways that notice may arise, including someone telling the buyer, the visible presence of the tenant, or a memorandum of lease recorded in the deed records. Of these, the most straight-forward and least likely to be challenged by a new purchaser is to have a memorandum of lease recorded at the courthouse as soon as the lease is signed by the landlord and tenant.