When it comes to real estate, almost every purchaser acquires an owner's title insurance policy. But what about tenants? Not every tenant opts for a leasehold title insurance policy, and deciding whether to pursue one requires careful consideration. This blog post takes a deeper look at a few key points.
What Does Leasehold Title Insurance Cover?
Leasehold title insurance provides peace of mind against the risk that a tenant's lease interest in real estate might be disrupted. Similar to owner's title insurance, obtaining leasehold title insurance means you have a financial safety net if a tenant's interest in the premises is challenged by a covered claim. For instance, this insurance can offer monetary coverage if a tenant loses the right to lease the premises.
However, leasehold title insurance comes with a list of exceptions to coverage. Some exceptions are standard for any title insurance policy, while others refer to specific documents recorded or otherwise encumbering the premises. Examples include recorded easements and restrictions, superior mortgages or other security interests in the premises, and the terms of the lease granting the leasehold interest.
Factors Influencing the Decision
The decision to get leasehold title insurance often hinges on the tenant's level of investment in the premises. Two key factors influence this decision: the length of the lease and the anticipated tenant improvements.
- Length of the Lease: The longer the lease term, the more likely a tenant may decide to obtain leasehold title insurance. For example, tenants with a 20-year lease term may choose to insure their leasehold because they are committed to the space long-term and moving to a new location would be burdensome. Conversely, tenants with a shorter lease term of three years or less may find that a title policy does not make sense for their situation. Such tenants may be seeking different space for the long term or experimenting in a new location.
- Tenant Improvements: The greater the financial investment in constructing significant improvements, the more likely a tenant will elect leasehold title insurance. If tenants plan to make substantial improvements or build a new building, they likely would want to protect that investment with the insurance policy. On the other hand, if tenants are moving into a "move-in ready" space and not incurring significant build-out costs, they may find leasehold title insurance is not worth the expense. Such tenants may take the risk of a title claim due to their lower investment in the site and may be confident they can lease comparable space elsewhere if they lose their right to lease the premises.
Process for Obtaining Leasehold Title Insurance
To obtain a leasehold title insurance policy, a title company will require several documents to be signed by the landlord. The landlord must provide a duly signed owner's affidavit indicating, among other terms, encumbrances to the leasehold that may be unrecorded. There may also be state-specific documents (such as transfer tax documentation, tax certificates, additional affidavits, disclosure documents, etc.).
The landlord and tenant should negotiate a memorandum or short form of the lease to be recorded in the public records. Although the parties could decide to record the whole lease, it is not customary as many generally prefer to keep most of the lease details confidential.
Finally, a recent survey is also important to provide to the title company. If a tenant does not provide a recent survey, the leasehold title policy will contain a general exception for matters that could have been determined with an accurate survey. This means the title company will not cover claims that could have been discovered through a property survey. Tenants often obtain surveys when planning to get title policies due to the added value of survey coverage.
Cost of Leasehold Title Insurance
Determining the appropriate insurance coverage for a leasehold policy can be more challenging than with an owner's policy. Some tenants choose to cover the cost of anticipated improvements to a site or the project budget, ensuring their investment in the improvements is covered. Other tenants value the leasehold based on a calculation of a portion of the annual rent payments. Once the amount of coverage is determined, the title company will share the cost of the leasehold title insurance. The premium varies by state and depends on the coverage amount provided in the policy. It is important to consider these costs when deciding whether to obtain leasehold title insurance.
