Business tenants who want to protect their leasehold estate may purchase title insurance. Generally, this is accomplished by an owner’s policy combined with the ALTA Endorsement 13-06. That’s the coverage combination, along with other applicable endorsements as requested.
Referred to as the Leasehold-Owner’s endorsement, the ALTA 13-06 articulates protections in a leasing context for problems which lessees could encounter if evicted, in whole or in part, due to matters covered by the policy. This endorsement prescribes a formula for valuing the leasehold estate when computing loss or damage to the insured tenant under the policy, and spells out additional items of loss covered.
Before closing a lease agreement, commercial tenants frequently will hear one or more of three distractions from their sphere of influence, resulting in not electing to insure their leasehold estate.
1. It’s Not Customary In Our Market
That’s it? A commercial lessee bypasses the evaluation of safeguards because a suit says it’s not customary. Except that, the lessee is a consumer in the deal, willing and able to explore becoming an insured, ready to listen despite tales of no tenants in the geographic market opting for coverage.
As a business occupier entering into an agreement, the leased premises are valuable to operations. The rights to possess and use parts of lands or buildings for a specified period of time may create obligations impacting the bottom line, like build-out and equipment. Any disruptive, unanticipated eviction arising from title issues would have even more impact on the bottom line. Some enterprises alone wouldn’t be able to weather the storm. Rather than buying the so-called prevailing custom, you may decide that you want to buy title insurance.
2. Landlord Has Owner’s Title Insurance
Say there has been confirmation the lessor, or landlord, is insured in fee title via an owner’s policy. On the plus side, the rights and interest of the fee owner are insured under that policy. The assurance feels good and seems in alignment with the due diligence by the contracting parties on the lease deal.
However, understand a couple points on the minus side. First, there being an owner’s policy does not mean there isn’t a title defect which could cause loss, damage or eviction, either in whole or in part. Second, the landlord’s coverage under the owner’s policy does not extend to tenants. Without a leasehold title policy naming the lessee as the insured, the commercial tenant is not covered.
3. Save Your Money At Closing
There’s logic to a thrifty notion that if you don’t pay the premium for title insurance at closing, you “save” that money, as surplus. Why expend on a premium for coverage against title risks which may never materialize, so to speak? Why not take your money and run? In fact, the propensity is to reallocate those funds to consume another economic good or service, in lieu of self-insuring risks.
After forgoing insurance, and when misfortune crushes everything its path, what is your sphere of influence going to do? Nothing but keep up their risk-management shaming. Purchasing something voluntarily seems to attract scrutiny, whereas purchasing something required by institutional arrangement can go for years unchecked. Regardless, a title failure can impair a tenant.
Leasehold situations are unique, and so are state laws and court rulings. Don’t get distracted. Discuss questions with a commercial title officer, and seek legal advice from a real estate attorney experienced in title insurance.