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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:
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:
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.