Title Insurance for Leasehold Interests
Articles from The Massachusetts Focus
Newsletter of Stewart Title Guaranty Company, Massachusetts Offices
Winter 2003, Volume 2, Number 1
Title Insurance for Leasehold Interests
by Marie L. Franco, National Underwriting Counsel and Boston National Title Services Office
On October 13, 2001, the American Land Title Association (ALTA) adopted two new forms of endorsement that provide enhanced coverage when insuring a leasehold interest. These new forms are the ALTA Endorsement 13 (Leasehold Owner) and the ALTA Endorsement 13.1 (Leasehold Loan).
ALTA forms of policy for use with leasehold interests have long been available. However, the traditional forms of policy did not address certain areas of importance when insuring a leasehold interest, namely the value of improvements that would be added to the leased land. Consequently, there was a need for enhanced leasehold coverage, especially in commercial transactions where a tenant under a ground lease would construct valuable improvements on the leased land. The new forms of Leasehold Endorsements were adopted to address this concern. Additionally, these new Leasehold Endorsements provide significant benefits in other areas specific to leasehold interests.
The following are the benefits of the new ALTA Leasehold Endorsements:
- These Endorsements expressly include the value of improvements added by the tenant in the calculation of loss if the tenant is evicted from the land because of a matter that is covered by the policy;
- In these Endorsements, eviction is defined as both "the lawful deprivation, in whole or in part, of the right of possession" and also "the lawful prevention of the use of the land or the Tenant Leasehold Improvements for the purposes permitted by the Lease";
- These Endorsements expand the covered moving expenses to include the cost of transportation of personal property for a distance up to one hundred miles (the traditional ALTA leasehold policies cover moving expenses up to twenty-five miles);
- These endorsements expand the additional items of loss to include reimbursement for reasonable costs incurred by the insured to secure a replacement leasehold property equivalent to the insured leasehold estate;
- These Endorsements also include as additional items of loss the actual cost (less salvage value) to complete the leasehold improvements if the tenant is evicted prior to the substantial completion of the tenant leasehold improvements. These costs may include expenses incurred to obtain land use, zoning, building and occupancy permits; fees for architects and engineers; construction management fees; environmental testing and reviews; landscaping fees; and interest and costs incurred in connection with acquisition and construction loans.
Both ALTA Leasehold Endorsements are issued in connection with an underlying ALTA Fee Owner or Loan Policy and the standard Fee Owner or Loan policy jacket is used. However, some modifications to Schedule A of the underlying policy will need to be made to reflect that a leasehold interest is the insured estate. Specifically, Item 2 of Schedule A of the underlying policy will need to be modified to reflect that a leasehold interest is the insured estate, rather than a fee simple estate. Additionally, recording information for the appropriate Notice or Memorandum of Lease or Leasehold Mortgage will need to be included where appropriate in Schedule A of the underlying policy. Schedule B of the policy should include the same title exceptions as would be included if a fee policy is issued. Also, it may be appropriate to include an exception in Schedule B for the terms and provisions of the lease that is being insured.
The ALTA Leasehold Loan Endorsement provides substantially the same coverage as the ALTA Leasehold Owners Endorsement. However, in the Loan Endorsement, the term "Tenant" is defined to include the Insured Claimant "after acquisition of all or any part of the estate or interest in the land described in Schedule A in accordance with the provisions of Section 2(a) of the Conditions and Stipulations of this policy" (i.e., after the Insured Lender has succeeded to the interest of the tenant under the lease by foreclosure of the leasehold mortgage).
Issuance of the traditional forms of ALTA Leasehold Owner and Loan Policies may still be appropriate in certain cases, such as the situation where the leased property is space in a shopping center and the tenant has not added valuable improvements to the leased land. Also, some of the franchise fast food chains prefer the traditional form of Leasehold Owner Policy.
Customarily, the minimum underwriting requirements that need to be considered for the issuance of leasehold title insurance include the following:
- Review of the underlying lease and the recording of a "Notice" or "Memorandum" of Lease that meets the requirements of the state recording statute (in Massachusetts, G.L.c. 183, §4);
- Review of the landlord's title and execution of appropriate "Subordination, Non-Disturbance and Attornment Agreement(s)" by the tenant and the holder of any mortgages on the fee title of the landlord;
- In connection with the assignment or mortgaging of an existing leasehold interest, receipt of an Estoppel Certificate from the landlord that includes assurances that the lease is in full force and effect, that the tenant is not in default of any of the terms and provisions of the lease, and (unless specifically authorized by the terms and provisions of the lease) that the landlord consents to the further assignment of the lease or the leasehold mortgage.
It is recommended that you consult with a company underwriter to discuss your client's needs so that the appropriate form of leasehold coverage can be selected.