In one of my early blogs in this Title Insurance 101 series, I wrote about the various estates in land, e.g., fee simples, leaseholds, and easements ( “What the Heck is a Fee Simple?”). This time, I’m going to talk about leasehold estates, and what kind of title insurance you can get to protect your leasehold estate.
A leasehold estate is basically the right to possess a parcel of land or part of a building, for a certain length of time. At the expiration of the lease term, the Tenant has to return the right of possession to the Landlord and leave the premises. The Tenant has to pay rent in periodic payments, although there have been cases where the entire rent is paid up front. If the Tenant fails to pay rent, or violates any of the other obligations under the lease, the Landlord generally has the right to evict him. A lease is a contract between the Landlord and the Tenant, and should be in writing and signed by both parties in order to define their rights and obligations under the lease. Most residential leases have fairly short original terms, i.e., 12 month terms. Once the original term expires, the lease may continue on a month-to-month basis, (giving the Tenant or Landlord the right to terminate the lease with a 30 day notice), or by executing a new lease for a new term. Most commercial leases are for much longer terms, usually 10 to 30 years, and may give the Tenant the right to place fixtures and equipment or construct improvements on the land. Once the commercial Tenant has made extensive improvements, the cost of having to vacate the premises before the end of the lease term becomes very expensive.
So what is the title risk for a Tenant? Simple. If the Landlord loses all or part of the title, the Tenant will lose all or part of his title. If there is a title failure on the part of the Landlord, then any leases made by him would not be valid, and the Tenant would not have a valid right of possession of the land. Title failures can occur through fraud or forgery, or through other causes like having a missing heir show up after a decedent’s estate has been probated. In the case of a total title failure, the Tenant may end up evicted from the property, and have to move his equipment and fixtures to another location. Or, in the event of a partial title failure, the title failure could so affect the Tenant’s business that it is essentially impossible to continue in business at that location. For example, loss of access to the property can be caused by an invalid easement or right of way, and the Tenant’s customers or employees would be unable to get to the property from a street or road. Either type of loss would be devastating to the Tenant’s business.
In order to protect his leasehold interest, a Tenant could obtain an Owner’s Policy of title insurance, but an Owner’s Policy by itself doesn’t address some of the issues that the Tenant would face if evicted from his lease because of a title problem. Some of the items of loss that are particular to a leasehold estate would be the cost of relocating fixtures and equipment to another location, the expense of finding a suitable location within a reasonable distance, and any rent that the Tenant may have to pay to someone other than the original Landlord, if the original Landlord did not have good title to begin with. So, in order to protect the special interests of a Tenant, the ALTA created Leasehold Endorsements that provide special coverage for loss that a Tenant could suffer from an eviction, either in whole or in part, of the land.
The Leasehold series (ALTA Endorsements 13-06 for the Owner, and 13.1-06 for the Lender) provide additional definitions for Leasehold Estate, Lease, Eviction, Personal Property, Lease Term, Remaining Lease Term, and Tenant Leasehold Improvements. It provides a special formula for valuing the loss or damage suffered by the Tenant as a result of an Eviction, and lists 7 additional items of loss that are covered by the endorsement. These additional items of loss can be very important when a Tenant is forced to relocate its business. Some of these additional items of loss that are included in the Leasehold Endorsement are:
- The reasonable cost of removing and relocating any Personal Property of the Tenant, including the cost of transportation of the Personal Property up to one hundred miles, the cost of repairing any Personal Property damaged by the removal and relocation, and the cost of restoring the Land if it was damaged by the removal and relocation of the Tenant’s Personal Property;
- Any rent or damages that the Tenant has to pay to a third party having paramount title to that of the Landlord;
- Any rent that the Tenant has to continue paying to the Landlord after eviction;
- The cost of obtaining zoning permits, architectural and engineering services for a replacement leasehold that is reasonably equivalent to the Leasehold Estate;
- Damages that the Tenant has to pay to any sub-tenants on account of the breach of any sublease.
The form for the Lender is essentially the same. You should refer to the actual endorsements to get the actual wording of each endorsement. These can be found at www.alta.org, or at the website of most title insurance companies.
The cost of obtaining the Leasehold Endorsement is minimal compared to the potential losses that could be incurred by an uninsured Tenant. If you have any questions, or would like to obtain a rate quote, you should contact your local title agent or underwriter for assistance.
As usual, here is my caveat: The opinions stated in this blog are those of the writer, and should not be construed to be a statement of fact or conclusion of law. Any statements herein should not be relied upon in any litigation, arbitration or mediation. Statements herein have not been approved by the American Land Title Association, its officers or members.
Janice Carpi is National Underwriting Counsel at GRS Group. email@example.com