Title Insurance For Leaseholders

By: Lance T Denha, Esq.

As owners, buyers, or lenders in the commercial real estate market, title insurance is a customary part of business transactions. It’s routinely secured just in case there are title issues that interrupt the deal unexpectedly. But as a tenant of a leased property, you may not realize the pitfalls that are inherent to leasing. You might enter into a long-term lease and plan to complete a property build out, only to encounter a title landmine that sets your business into a tailspin.

Tenants will often sign a lease of significant duration and make expensive leasehold improvements without purchasing title insurance or even examining title to the premises. Most would not think of making such an investment in a fee interest without the purchase of a title insurance policy.

Overlooking this important aspect of leasehold coverage ignores three important issues. First, often the most important feature of a title insurance policy is the duty to defend. Title insurance companies spend approximately the same amount of money on defense costs as they do on the payment of claims. Second, the items “Miscellaneous Items of Loss” can often be quite significant. For example, Tenants can incur significant expenses in relocating personal property. A leasehold policy compensates for its expenses in removing, relocating and/or reinstalling (if applicable). Finally, there is a general misunderstanding of how a leasehold interest would be valued in the context of a title insurance claim. Cases valuing leaseholds in eminent domain proceedings, as an example, have implemented the fair market value of the lease minus the rent reserved in the lease. A fundamental mistake many make is to ignore the fact that the lease is valued at the time of the loss, NOT at the time of entering into a lease.

As one invests more money in your leased property, the potential problems regarding title issue increases exponentially.  Securing enough title insurance protect your business interests is crucial.  So what guidelines should you follow? In summary, a tenant will want to obtain coverage sufficient to cover the costs of:

•  Removing and relocating any property

•  Amount of rents being paid

•  Replacement leasehold if you are forced to find alternate space

•  Costs of improvements you have made to the property

Anyone contemplating a lease of real property, particularly long-term leases or where significant leasehold improvements are to be made, should consider the purchase of leasehold title insurance for all the same reasons the owner of a fee would purchase a policy.