Title Insurance for Commercial Tenants - A Worthwhile Investment

by Ted Bush and Larry Rothenberg, Esq.

Lenders and purchasers in commercial real estate purchase transactions have long accepted the value of title insurance to protect their interests in the property. However, commercial tenants who are entering into leases, or lenders making loans secured by a mortgage on the leasehold, often overlook, or do not realize the availability of Leasehold Title Insurance to insure their interests.

A commercial lease is similar in many ways to an outright purchase of property, in that the lease represents a major investment of the lessee’s time and resources. Any unexpected termination of the lease can have a traumatic effect on the operations of the tenant’s business.  The risks associated with potential title issues that might affect the tenant’s occupancy can be mitigated by title insurance. Leasehold title policies provide essentially all of the same coverage offered by standard title policies, as well as terms and provisions that are unique to the leasing context.

Until 2001, there were separate American Land Title Association (ALTA) policy forms for Leasehold Owner’s and Leasehold Loan title policies. In 2001, ALTA withdrew the Leasehold Owner’s and Leasehold Loan policy forms and replaced them with the ALTA Endorsement 13 series. These endorsements are attached to standard ALTA Owner or Loan policies to address unique circumstances surrounding leasehold transactions.

Like standard title policies, a policy with an ALTA 13 Endorsement will insure against loss or damage caused by the “eviction” of a tenant. “Eviction” is defined as “(a) the lawful deprivation, in whole or in part, of the right of possession insured by this policy, contrary to the terms of the lease or (b) the lawful prevention of the use of the land or the tenant leasehold improvements for the purposes permitted by the lease.” In either case, the “eviction” has to stem from a matter covered by the policy, such as:

1. Title to the estate or interest described in the policy being vested other than as stated therein
2. Any defect, lien or encumbrance on the title
3. Unmarketability of the title
4. Lack of a right of access to and from the land
5. Lack of priority or enforceability of the insured mortgage

Additional coverage tailored to the leasing context is afforded by the ALTA 13 and includes coverage for the following “additional items of loss” in the event that the tenant is evicted:

1. The reasonable cost of removing and relocating personal property of the insured, including costs associated with the transportation of personal property from the leased premises as well as repairs not only to the personal property damaged by reason of the removal and relocation but also restoration of the leased premises to the extent damaged as a result of the removal and relocation of the personal property and required of the insured solely because of the eviction.
2. Rent or damages that the insured may be required to pay to a superior title holder or that the insured may still be required to pay to the lessor.
3. The fair market value, at the time of eviction, of the insured’s interest in any sublease of the premises that the insured has entered into, as well as damages caused by the eviction that the insured owes to any sub-lessees to the extent the eviction causes a breach of the sublease.
4. The reasonable cost to obtain land use, zoning, building and occupancy permits, architectural and engineering services and environmental testing and reviews for a replacement leasehold reasonably equivalent to the leasehold estate.

In plain English, before a lease for a significant commercial property is signed, prospective tenants and their lenders want assurance that their risks are limited to the extent possible. For example:

• Are they contracting with the proper party, i.e., the true owner of the premises?
• Are there are any liens against the property that could be foreclosed upon resulting in the leasehold interest being extinguished?
• Is the property suitable for its intended use (e.g., the property has proper access, is zoned properly and is not subject to any easements or restrictions that would interfere with the intended use)?
• Is there a mortgage on the property owner's fee interest?  If so, the parties will need to determine whether owner’s mortgage holder’s consent is required for any leasing of the premises, and whether to seek a non-disturbance agreement whereby the owner's mortgage holder would agree not to evict the lessee in the event the property owner defaults on its mortgage.
• Will the tenant’s lender’s mortgage have the intended priority as against other liens?