11.04 Leasehold Insurance

11.04.1

In General

To insure a leasehold interest either owner or mortgagee policies are issued.  Mandatory Leasehold Endorsements are then added.

In 2004, the Texas Insurance Commissioner adopted (essentially intact) the ALTA Leasehold endorsements.  While most coverages are substantially the same as in the prior Texas-only forms, the organization of the endorsements is quite different. 

Definition of Terms:

The Leasehold Owner Policy Endorsement (T-4), the Residential Leasehold Endorsement (T-4R), and the Leasehold Mortgagee Policy Endorsement (T-5), define 8 terms: evicted or eviction, lease, leasehold estate, lease term, personal property, remaining lease term, tenant (T-5 only), and tenant leasehold improvements.

Deletion of Co-insurance Section:

The T-4 Leasehold endorsement deletes the co-insurance provision of the T-1 Owner Policy.  The other policies to which the T-4R and T-5 apply do not contain this provision.

Additional Items of Loss Covered By the Policy:

In case of an eviction, the title company will pay to move the insured's personal property up to 100 miles in connection with the tenants relocation.

Also Covered by the endorsement are:

Rent payable to persons having superior title to the landlord; amounts owed by insured to landlord after eviction; fair market value of Tenant Leasehold improvements; damages tenant is required to pay to lessees or sublessees because of break of lease; reasonable costs to obtain replacement premises; and actual cost of uncompleted improvements at time of eviction.

There is no premium payable on any of these endorsements.

11.04.2

Calculation of Premium for Leasehold Policy

You can find information regarding the methods of calculating the amount of insurance for a Leasehold Owner’s Policy under P-66A.2 and R-22.  The amount of insurance for a Loan Policy can be found under P-66B.

11.04.3

Insuring a Leasehold Estate

In connection with the insurance of a leasehold estate, the following items must be fully ascertained or complied with:

  • Has the lessor's title been thoroughly examined?

    A complete examination of the fee title must be made in order to establish that the lessor had fee simple title to the property at the time of the execution of the lease.

  • Are there liens or encumbrances affecting the property at the time of the execution of the lease?

    It is necessary to ascertain what liens or encumbrances the fee and the leasehold estates are subject to.

    All outstanding exceptions to the fee title prior to the recording of the lease or memorandum thereof must be shown as exceptions to the leasehold estate.

  • Date of the lease.

    Is the lessor the record owner at the time of the execution of the lease?

    Normally, a lease will operate by way of estoppel on an after-acquired title, but there are some differences of opinion on the conditions essential to the estoppel and whether it depends on the existence of covenants of warranty or quiet enjoyment, express or implied.

    In order to insure a leasehold estate in which the lessor was not the record owner at the time of the execution of the lease but who subsequently acquired the title, it is necessary to require that either a re-executed lease or a ratification agreement thereof be filed for record.

  • Date of commencement.

    The lease must commence on a certain date. A lease which term commences "when construction is completed "or upon some other condition occurring "in the future?, is uninsurable.

    If the lease does not contain a date of commencement, it is necessary to require that by a separate instrument, which is to be recorded, both lessor and lessee acknowledge that the lease has either commenced or will commence on a certain date.

  • Description of the subject property.

    It is necessary that an insurable legal description be conveyed by the lease instrument. Leases describing the subject property as a building or part of a building may present some formidable problems in determining whether both the building and the subjacent land pass under the lease.

  • Sufficiency of the words granting the leasehold estate.

    Unless otherwise provided by statute, no special words are required to create a lease.

    The intention of the parties is the test. Any words that express the agreement of the parties will be sufficient if the meaning is clear.

    The usual words that have long been used for the creation of a leasehold estate are "lease", "demise", "farm let", "farm out", "let" and "rent".

  • Duration or term of the lease.

    The lease must contain a designation of its term, that is, the date on which it begins and the date on which it terminates.

    In the absence of statutory regulation, a lease may be made for any length of time the parties select: it may be for a day or for ninety-nine (99) years.

  • Does the lease contain any recital giving notice of interests or encumbrances not appearing of record?

    Consideration must be given to any interest or encumbrance not appearing of record but notice of which is disclosed by the lease and proper exception to any such matter must be reflected in Schedule B of the policy.

  • Special provisions of the lease.

    Sometimes, it becomes necessary to raise additional exceptions in Schedule B of the policy if the lease contains any of the following provisions:

    • Subordination agreement
    • Option to renew
    • Option to purchase
    • Prohibition of assignments, subleases, or mortgages
    • Right of first refusal
    • Optional right of termination
    • Conditions precedent to a valid assignment, sublease, or mortgage

  • Illegality of the lease.

    The general principles of the illegality of agreements are applicable to leases.

    It is a well-recognized general rule that, whenever subject property are let with the knowledge and intent of both parties that they are used or to be used for an illegal purpose, the lease becomes illegal, void, and unenforceable.

  • Execution.

    The signature of the lessor is necessary to give effect to a lease.

    It is the universal practice to obtain the lessee's signature also, although it is not essential that the lease be signed by the lessee if the lessee accepts the lease and takes possession of the leased subject property.

    In order to insure the leasehold estate, both the lessor and the lessee must execute the lease.

  • Acknowledgment.

    It is necessary to comply with state statutes on acknowledgments.

  • Recording.

    To be insurable, either the full lease must be recorded, or if only a memorandum of lease is recorded, this memorandum must be sufficient in itself to create the interest which the Company insures without having to refer to the unrecorded full lease.

    Any memorandum of lease must contain information identifying the lease, the parties thereto, the subject property leased, and set forth the duration of the lease. In addition, it must actually demise the subject property by containing the necessary operative language to create the lease. If any of these elements do not appear in the memorandum of the lease, it should be viewed as defective for title insurance purposes. Also, a fully executed copy of the lease, capable of being recorded, must be obtained and kept in deposit prior to the issuance of the title policy.

  • Exceptions in regard to matters affecting the fee title after the recording of the lease.

    See the above section: Are there liens or encumbrances affecting the property at the time of the execution of the lease?

    Most matters affecting the fee title after the recording of the lease or memorandum thereof need not be shown as exceptions to the leasehold estate.

    Exceptions to the above stated rule are:

    • Building code violation proceedings
    • Demolition proceedings
    • Condemnation proceedings
    • Taxes and special assessments
    • Mechanic's liens
    • Matters acquiring priority through subordination clause contained in the lease

It may be advisable to show all the matters affecting the fee title, and then make mention of those which are subordinate to the leasehold estate.

  • Exceptions in regard to matters affecting the leasehold estate.

    • Terms and provisions of the lease.
      It is unnecessary to raise an exception regarding the terms and provisions of the lease when using the standard owner, residential owner or mortgagee policy forms inTexas.
    • Modification agreement
    • Sublease
    • Assignment
    • Mortgage
    • Subordination agreement
    • Nondisturbance and attornment agreement

  • Has any event occurred since the creation of the lease which may have resulted in its termination?

  • Any possibility of default?

    If the lease has already commenced, proof must be required in order to ascertain whether the leasehold is still in full force and effect.

    The requirement should be as follows:

    Furnish a written statement executed by the owners of the fee title to the subject property that no default has occurred under the terms of the aforesaid lease and that the leasehold estate created thereby is now in full force and effect.

  • Taxation.

    Are there any special taxes in relation to the leasehold estate?

  • Example of leasehold description.

    The leasehold estate created by the Lease executed by ______________, as lessor, to ______________, as lessee, dated _____________, (recorded ___________ in Book __________, Page ___________ ) (notice of which is given by the Memorandum of Lease dated ___________, recorded in Book __________ , Page __________ ), demising and leasing for a term of ___ years, beginning _____________, and ending ______________, the following in Book ________, Page ________, described subject property, to-wit:

    __________________(Legal Description)____________________________
    ______________________________________________________________
    ______________________________________________________________

11.04.4

Insuring a Mortgage on a Leasehold Estate

The following items must be fully ascertained or complied with in connection with the insurance of a mortgage on a leasehold estate:

  • Whether the lease is an insurable lease.
  • Whether the lease contains any provision that would prohibit the mortgage of the leasehold estate.
  • Whether the prior lessor's consent is necessary, and in the event of a mortgage on a subleasehold estate, whether the consent of the lessee (the sublessor) is also necessary.
  • Whether the mortgage of the leasehold is prohibited either by statute or by the provisions of the lease.
  • Whether the lease is in full force and effect and whether any default now exists in relation thereto.
  • Whether the lease has been assigned, altered, modified, or amended, and if so, the effect of any such assignment, alteration, modification, or amendment in connection with the proposed mortgage.
  • Whether all the matters that affect the fee estate have been shown as proper title exceptions.
  • Whether all the matters that affect the leasehold estate or the subleasehold estate have been shown as proper title exceptions.
  • Whether the mortgagor is a lessee, an assignee, or sublessee.
  • Whether the mortgage on the leasehold estate has been filed for record.
  • Whether the amount of the leasehold loan policy equals the amount of the mortgage.

11.04.5

Insuring a Sublease Estate

The following items must be fully ascertained or complied with in connection with the insurance of a sublease estate:

  • Whether the lease is an insurable lease.
  • Whether the sublease is an insurable sublease.
  • Whether the instrument states clearly the intention of the lessee (sublessor) to sublease less than the entire remainder of the term of the lease.
  • Whether the instrument complies with all the formal statutory requirements for its validity and recordation.
  • Whether the sublease is prohibited either by statute or by the provisions of the lease.
  • Whether the prior lessor's consent is necessary.
  • Whether the lease is in full force and effect and whether any default now exists in relation thereto.
  • Whether the lease has been assigned, altered, modified, or amended, and if so, the effect of any such assignment, alteration, modification, or amendment in connection with the proposed sublease.
  • Whether all the title matters that affect the fee estate have been shown as proper title exceptions.
  • Whether all the title matters that affect the leasehold estate have been shown as proper title exceptions.
  • Whether all the title matters that affect the subleasehold estate have been shown as proper title exceptions.
  • Whether Schedule B contains, among others, the following exception:

Terms and provisions of the lease estate. . . . . .

. . . . . recorded in Book _______, Page _______.

  • Whether the sublease has been filed for record.
  • Example of sublease description form.
    The sublease estate created by the sublease executed by ______________, as sublessor, to ______________, as sublessee, dated _____________, (recorded ___________ in Book __________, Page ___________ ) subleasing for a term of ___ years, beginning _____________, and ending ______________, the following in Book _______, Page _______, described subject property, to-wit:
    __________________(Legal Description)____________________________
    ______________________________________________________________
    ______________________________________________________________

11.04.6

Insuring an Assignment of a Leasehold Estate

The following items must be fully ascertained or complied with in connection with the insurance of an assignment of a leasehold estate:

  • Whether the lease is an insurable lease.
  • Whether the instrument states clearly the intention of the lessee (assignor) to assign the unexpired term of the leasehold and all rights and interest of the assignor.
  • Whether the instrument complies with all the formal statutory requirements for its validity and recordation.
  • Whether the assignment is prohibited either by statute or by the provisions of the lease.
  • Whether the prior lessor's consent is necessary.
  • Whether the lease is in full force and effect and whether any default now exists in relation thereto.
  • Whether the lease has been assigned, altered, modified, or amended, and if so, the effect of any such assignment, alteration, modification, or amendment in connection with the proposed assignment.
  • Whether all the title matters that affect the fee estate have been shown as proper title exceptions.
  • Whether all the title matters that affect the leasehold estate have been shown as proper title exceptions.
  • Whether the assignment has been filed for record.
  • Example of leasehold description form to be used in the insurance of the assignment of a leasehold estate:

    The leasehold estate created by the Lease executed by ______________, as lessor, to ______________, as lessee, dated _____________, recorded ___________ in Book __________, Page ___________, as assigned to ____________, by instrument dated ___________, recorded _____________ , in Book __________, Page ______________ , demising and leasing for a term of ___ years, beginning _____________, and ending ______________, the following in Book ________, Page _______, described subject property, to-wit:

    __________________(Legal Description)____________________________
    ______________________________________________________________
    ______________________________________________________________

11.04.7

Insuring the Fee to One Parcel and a Leasehold to another Parcel in the Same Policy

11.04.8

Insuring a Mortgage That Has Become a Lien on the Leasehold Estate and a Lien on the Fee in the Same Land

The insurance of a mortgage as a lien on a leasehold estate and as a lien on a fee estate in the same land can be effectuated only upon strict compliance with the following:

  • The express joinder of the fee owner and the holder of the leasehold interest in the execution of the mortgage. 
    From a title insurance point of view, no reliance should be placed on:

    • The fact that the lease contains a clause which automatically subordinates the fee to a subsequent leasehold mortgage.
    • The execution by the fee owner of a separate document wherein the fee interest is subordinated to the mortgage.
  • A proper endorsement is attached to the policy providing the definition of the term "Leasehold Estate "to the Conditions and Stipulations of the policy.

    Any commitment being issued in contemplation of the insurance of a mortgage covering a leasehold estate and the fee in the same land must contain in Schedule B thereof the following language:

    The mortgagee policy, if and when issued, will contain a Leasehold Endorsement attached thereto and amending the policy.

11.04.9

Insuring an Option to Purchase Granted In Favor Of a Lessee

Insuring only an option to purchase in favor of a lessee is a definite extrahazardous risk that requires the prior approval of Texas Underwriting Counsel.Any request to insure an option to purchase must be referred to a Texas Underwriting Counsel.

11.04.10

Commitment Forms Pertaining To Leasehold Insurance

Forms:

Example TX Commitment To Insure A Lease Which Is To Be Created 1 ;
Example TX Commitment To Insure An Existing Recorded Lease 1 ;
Example TX Commitment To Insure An Assignment Of An Existing Recorded Lease 1 ;
Example TX Commitment To Insure A Sublease Of An Existing Recorded Lease 1 ;
Example TX Commitment To Insure The Fee And Leasehold In The Same Policy 1 .

  • To insure a lease which is to be created.
  • To insure an existing recorded lease.
  • To insure an assignment of an existing recorded lease.
  • To insure a sublease of an existing recorded lease.
  • To insure the fee and a leasehold estate in the same policy.

11.04.11

Policy Forms Pertaining To Leasehold Insurance

Forms: 

Example TX Insuring A Leasehold Estate 1 ;
Example TX Insuring A Mortgage On A Leasehold Estate 1 ;
Example TX Insuring A Subleasehold Estate 1 ;
Example TX Insuring A Mortgage On A Subleasehold Estate 1 ;
Example TX Insuring An Assignment Of A Leasehold Estate 1 ;
Example TX Insuring A Mortgage Affecting A Leasehold That Has Been Assigned 1 ;
Example TX Insuring The Fee And The Leasehold Estates In The Same Policy 1 ;
Example TX Insuring A Mortgage On The Fee And On The Leasehold In The Same Policy 1 .

  • Leasehold Owners Endorsement
  • Leasehold Loan Endorsement
  • Leasehold estate
  • Mortgage on a leasehold estate
  • Subleasehold estate
  • Mortgage on a subleasehold estate
  • Assignment of a leasehold estate
  • Mortgage on an assignment of a leasehold estate
  • Fee and leasehold estates in the same policy
  • Mortgage on the fee and leasehold estates in the same policy