When purchasing a residential or commercial property obtaining an owner=s policy of title insurance as evidence of clear title and protection against any adverse claims (e.g. judgments, liens or claims of prior title interests) is standard practice.  Yet, most tenants do not realize that they can obtain title insurance in the form of a leasehold title policy to protect against these same concerns.

The leasehold title policy insures that the landlord is the actual owner of the property and is authorized to enter into the lease.  It also lets the tenant know if there are any mortgages, liens or other encumbrances against the property that may have priority over the tenant=s leasehold interest.  This is important to know, because if there is a prior mortgage on the property, for example, which is foreclosed due to the landlord=s failure to pay, the lender or purchaser (in the event the foreclosure results in a sale of the property) can terminate the lease without any obligation to the tenant.  A tenant who is aware of a prior mortgage may be able to obtain what is commonly known as a non-disturbance agreement from the lender.  The non-disturbance agreement will typically provide that so long as the tenant fulfills all of its obligations under the lease, the lender or a purchaser will abide by the terms of the lease and not disturb the tenant=s possession of the premises.

While a leasehold title policy may be overkill and relatively expensive for a short term lease, it could be very important to have with a long term lease or with a lease where the tenant will be making substantial improvements to the premises.  A ground lease where the tenant is paying to construct the building is a perfect example of a situation where a leasehold title policy makes sense to protect the tenant’s investment in the property.  The last thing the tenant needs is to spend a half million dollars constructing a building it intends to depreciate over the term of the lease only to discover a title restriction that interferes with or prevents the operation of its business on the property.  Obtaining the title search or commitment in anticipation of the leasehold policy should reveal such a restriction, and if it does not, the leasehold insurance policy would protect against it.

If you would like to know more about the title insurance available to you as a tenant, please do not hesitate to contact a real estate attorney or paralegal at ZKS.