11.04 Leasehold Insurance

11.04.1

In General

The ALTA leasehold owner's and leasehold loan policies (1975, 1987, 1990 and 1992), are essentially identical to their ALTA counterparts for fee titles and mortgages. They differ in additional provisions inserted in the Conditions and Stipulations of the leasehold policy and by the incorporation to its Schedule A of the description of the leasehold estate being insured.

See Owner's Policies and Loan Policies.

The following are the main features of leasehold policies, and the 1992 leasehold owner's and loan policy provisions are those quoted unless otherwise noted:

Additional Provisions to the Conditions and Stipulations of the Leasehold Policies

"Leasehold estate. The right of possession for the term or terms described in Schedule A hereof subject to any provisions contained in the Lease which limit the right of possession."

Appears in:

1(g) of the 1975 form.

1(h) of the 1990 and 1992 forms.

"Valuation of estate or interest insured. If, in computing loss or damage incurred by the insured, it becomes necessary to determine the value of the estate or interest insured by this policy, the value shall consist of the then present worth of the excess, if any, of the fair market rental value of the estate or interest, undiminished by any matters for which claim is made, for that part of the term stated in Schedule A then remaining plus any renewal or extended term for which a valid option to renew or extend is contained in the Lease, over the value of the rent and other consideration required to be paid under the Lease for the same period."

Appears in:

13. of the 1975 Leasehold Owner's policy.
12. of the 1975 Leasehold Loan policy
14. of the 1990 and 1992 Leasehold Owner's policies.
13. of the 1990 and 1992 Leasehold Loan policies.

Leasehold owner's provisions only:

"Miscellaneous items of loss. In the event the insured is evicted from possession of all or a part of the land by reason of any matters insured against by this policy, the following, if applicable, shall be included in computing loss or damage incurred by the insured, but not to the extent that the same are included in the valuation of the estate or interest insured by this policy."

The reasonable cost of removing and relocating any personal property which the insured has the right to remove and relocate, situated on the land at the time of eviction, the cost of transportation of that personal property for the initial twenty-five miles incurred in connection with the relocation, and the reasonable cost of repairing the personal property damaged by reason of the removal and relocation. The costs referred to above shall not exceed in the aggregate the value of the personal property prior to its removal and relocation.

Personal property, above referred to, shall mean chattels and property which because of its character and manner of affixation to the land, can be severed therefrom without causing appreciable damage to the property severed or to the land to which the property is affixed.

Rent or damages for use and occupancy of the land prior to the eviction which the insured as owner of the leasehold estate may be obligated to pay to any person having paramount title to that of the lessor in the Lease.

The amount of rent which, by the terms of the Lease, the insured must continue to pay to the lessor after the eviction for the land, or part thereof, from which the insured has been evicted.

The fair market value, at the time of the eviction, of the estate or interest of the insured in any sublease of all or part of the land existing at the date of the eviction.

Damages which the insured may be obligated to pay any sublessee on account of the breach of any sublease of all or part of the land caused by the eviction.

Appears in:

14. of the 1975 Leasehold Owner's Policy
13. of the 1975 Leasehold Loan Policy*
15. of the 1990 and 1992 Leasehold Owner's Policies
14. of the 1990 and 1992 Leasehold Loan Policies*
* applies to post-acquisition of title

Additional Incorporation to Schedule A of the Leasehold Policies

The leasehold policies have their own Schedules A. These schedules are also identical to their ALTA owner's and loan counterparts except for the following:

Schedule A, Section 2 refers to the leasehold estate and allows the lease to be described by date, parties, and recording date:

"2. The estate or interest in the land which is covered by this policy is the leasehold estate, as leasehold estate is defined in Paragraph 1(h) of the Conditions and Stipulations of this policy, created by the instrument herein referred to as the Lease which is identified as follows:"

Schedule A, Section 2 describes the term of the leasehold being insured:

"3. The leasehold term insured is:"

Schedule B of the Leasehold Policies

There are no special Schedules B forms for use with the leasehold policies. The appropriate existing Schedule B forms are to be used with the leasehold policies.

Marketability

There is no A-Form leasehold owner's policy. The leasehold policies insure marketability.

Excepting in Schedule B of the Policy the "Terms and Provisions of the Lease"

Because the leasehold policy defines leasehold estate (in Section 1(h) of the Conditions and Stipulations) as "the right of possession for the term or terms described in Schedule A hereof subject to any provisions contained in the Lease which limit the right of possession," it is unnecessary to raise as a special exception in Schedule B of the policy "the terms and conditions of the lease or duties and obligations imposed upon the lessee by the lease."

Amount of the Policy

Because of the diversity of situations that can be encountered, it is extremely difficult to formulate rigid rules in connection with the amount of a leasehold owner's policy to be issued in favor of an original lessee, since ordinarily, the lessee pays no consideration for the lease at its inception, but instead agrees to pay rent. On the other hand, the total amount of the rents to be paid cannot be considered the value of the leasehold, because if the title were defeated, the obligation to pay rent would cease.

In most cases, the value of the leasehold must be determined by negotiation with the lessee, and it is always subject to the approval of the Company.

Any leasehold loan policy must be issued for the full amount of the leasehold mortgage.

Use of the Leasehold Owner's Policy

The leasehold owner's policy can be used for the purpose of insuring:

  • A leasehold estate.

  • Two or more leasehold estates in the same policy.

  • An assignment of a leasehold estate.

  • A sublease.

  • A sub-sublease.

  • A leasehold estate in conjunction with the ownership interest in the severed buildings or improvements on the land covered by the leasehold estate.

The leasehold owner's policy cannot be used in any of the following cases:

  • When insuring one or more fee estates and one or more leasehold estates in the same policy.

  • When insuring a leasehold estate and an option to purchase a fee simple interest in the land.

Use of the Leasehold Loan Policy

When insuring a mortgage on a leasehold estate, the leasehold loan policy can be used in the same circumstances in which the leasehold owner's policy would be used.

The leasehold loan policy should not be used in connection with the insurance of a mortgage affecting both the fee and the leasehold estate in the same policy. See discussion in Section 11.04.6.

11.04.2

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 relative to an after-acquired title, but there are some differences of opinion with regard to the essential elements in order to establish estoppel, particularly 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, providing that 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 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.

The following states expressly authorize recordation of memoranda of leases (sometimes requiring lessee joinder) or recordation of options by the lessor: California (an affidavit of lease, option agreement, or agreement for sale executed and acknowledged or proved, Cal. Gov't. Code section 27228); Colorado (authorizes recordation of option agreement, section 38-35-111); Louisiana (extract of lease pursuant to R.S. 9:2721.1); Maine (memorandum of lease, 33 section 201); Maryland (memorandum of lease, Real Property section 3-101); Massachusetts (notice of lease, 183 section 4); Montana (abstract of conveyance, section 70-21-305); New Hampshire (notice of lease, 477:7-a); New Mexico (14-9-1 Instruments affecting real estate; recording); New York (memorandum of lease, Real Property Law section 291-C); Ohio (options to purchases and memoranda of leases, section 317.08); Oregon (memorandum of lease or land sale contract, 93.710); Rhode Island (memoranda of leases, section 34-13-1); and,West Virginia (memorandum of lease, section 40-1-8).

Any memorandum of lease must contain the following information: the parties; identification of the subject property; and 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.

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 with regard to matters affecting the leasehold estate.

Terms and provisions of the lease.

It is not necessary when using the ALTA leasehold owner's (1975, 1990 or 1992) policy forms to raise an exception regarding the terms of the lease. Paragraphs 1(g) and 1(h), respectively, of the Conditions and Stipulations cover the limiting provisions that may be contained in the lease. Prior to the adoption of the ALTA leasehold owner's policy (1975), it was necessary to raise a "terms and provisions of the lease" exception.

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 requested 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 ____________, Page ______ ), demising and leasing for a term of ______ years, beginning ________ , and ending _______ , the following in Book _________, described subject property, to-wit:

_________________________________________________________________

_________________________ (Legal Description) _________________________

11.04.3

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.

  • W hether 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.

11.04.4

Insuring A Sublease Estate

The following item 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 legal description form:

The subleasehold 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 described subject property, to-wit:

_________________________________________________________________

_________________________ (Legal Description) _________________________

Note: Schedule B of the policy must contain among others, a pertinent exception in relation to the "terms and provision of the lease."

11.04.5

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 legal description form be the one 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 the instrument dated ________, recorded _________, in Book _____, Page ______, demising and leasing for a term of _____ years, beginning ______, and ending ____________, the following described subject property, to-wit:

_________________________________________________________________

_________________________ (Legal Description) _________________________

11.04.6

Insuring The Fee To One Parcel And A Leasehold To Another Parcel In The Same Policy

It is possible to insure both a fee estate on one parcel of land and the leasehold estate on another parcel of land in the same policy and/or a mortgage on both estates in the same policy, if both estates (fee and leasehold) are owned by the same party.

In such circumstances, the ALTA leasehold policy forms cannot be used, because these policies were designed to insure leasehold estates only. However, the ALTA Owner's and Loan policy forms can be used to insure both the fee and the lease, provided appropriate endorsements ("Leasehold Policy Modification Endorsements," described below) are added to insure the leasehold estate as well as the fee interest.

For examples of the forms of Schedules A and B, see:

Example Commitment to Insure The Fee And Leasehold In The Same Policy 5

Example Policy Form Insuring The Fee And The Leasehold Estates In The Same Policy 7

Example Policy Form Insuring A Mortgage On The Fee And On The Leasehold In The Same Policy 8

The commitments and policies must contain the following statement in Schedule B:

"Leasehold Policy Modification Endorsement, attached hereto, is incorporated into, and made a part of this Schedule B."

Add the following endorsements:

To the Owner's Policy:

"STG Owner-to-Leasehold (Policy Conversion) Endorsement 1992"

To the Loan Policy:

"STG Loan-to-Leasehold (Policy Conversion) Endorsement 1992"

Revise the above endorsments as follows:

  • Delete:

    (i) the existing title "Owner/Loan-to-Leasehold (Policy Conversion);"
    and,
    (ii) all references to "Policy Conversion Endorsement."

  • Retitle the endorsement:
    "Leasehold Policy Modification Endorsement."

  • Revise the introductory clause to read:

    "With respect to the leasehold estate described in Schedule A hereof, this Policy is amended as follows:"

  • Based upon the policy form that you are using, renumber the provisions in the Leasehold Policy Modification Endorsement so that they conform to the following chart:
Policy year: 1970 1987 1990 1992

 

Policy type:

Definition of "leasehold estate"

Valuation of Estate or Interest Insured

Miscellaneous Items or Loss
Owner's/Loan

1 (g) / 1 (g)

14 / 14

15 / 15
Owner's/Loan

1 (h) / 1 (h)

18 / 18

19 / 19
Owner's/Loan

1 (h) / 1 (h)

18 / 17

19 / 18
Owner's/Loan

1 (h) / 1 (h)

18 / 17

19 / 18

11.04.7

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; or,

  • The execution of a "subjection" instrument by the fee owner which encumbers the fee interest and subjects it to the lien, terms and conditions of the tenant's 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 merely "subordinated" to the mortgage.

  • An ALTA loan policy is issued.

    An ALTA leasehold loan policy cannot be used because its language is not appropriate.

  • A proper endorsement is attached to the policy providing the definition of the term "Leasehold Estate" to the Conditions and Stipulations of the policy.

    Because the lender is unlikely to foreclose only on the leasehold estate, the policy modification endorsement does not need to be used because its provisions relating to valuation and loss would be irrelevant.

    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 loan policy, if and when issued, will contain an endorsement attached thereto and amending the policy as follows:

    The following subparagraph is added to paragraph number 1 of the 1992 policy's Conditions and Stipulations:

    (g) or (h) leasehold estate: the right of possession for the term or terms described in Schedule A hereof subject to any provisions contained in the lease which limit such right of possession.

11.04.8

Insuring An Option To Purchase Granted In Favor Of A Lessee

The insurance of an option to purchase in favor of a lessee is an extrahazardous risk that requires the prior approval of a Senior Underwriter.

If approved, the insurance of the option is accomplished by endorsement.

Caveat: If the option to purchase is contained in a sale/leaseback transaction, and depending on its wording, the existence of the option may be evidence that the transaction was intended merely as a mortgage or security device rather than a true sale and lease, in which case the option would be uninsurable.

Any request to insure an option to purchase must be referred to a Senior Underwriter.

11.04.9

Commitment Forms Pertaining To Leasehold Insurance

  • 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.

11.04.10

Policy Forms Pertaining To Leasehold Insurance

  • 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.