As owners, buyers, or lenders in the commercial real estate market, title insurance is a customary part of business transactions. It’s routinely secured just in case there are title issues that interrupt the deal unexpectedly.
But as a tenant of a leased property, you may not realize the pitfalls that are inherent to leasing. You might enter into a long-term lease and plan to complete a property build out, only to encounter a title landmine that sets your business into a tailspin.
The good news: Obtaining adequate leasehold title insurance can cover these pitfalls. Securing this type of insurance is especially critical if you’re signing a long-term lease. As you invest more money in your leased property, the potential damage of an adverse title issue increases exponentially. A tenant’s lender may also require leasehold title insurance if the tenant is financing the lease or build out. And in a sour deal, recovering costs from architects, contractors, engineers, and other professionals may be impossible without this insurance.
Here are some potential pitfalls that make obtaining leasehold title insurance so critical to protecting your business interests:
Property Ownership
A big landmine is that the lessor may not actually own the property. This may not be intentional on the lessor’s part when signing on the dotted line. But the property may be legally held in one name and the operating company—a separate legal entity—may sign the contract with another name. The result may be a legally unenforceable lease.
Losing Locational Goodwill
What if you’re a primary care physician whose practice is built around the location of your property? If there are legal issues with your lease and you are forced to move, you give up your locational goodwill—and potentially a good part of your practice. This concern holds true for a number of industries where location matters, and leasehold title insurance can protect you if you’re forced to move.
Keeping a Favorable Lease
In a challenging climate for commercial property, obtaining a favorable lease—in a good location at a good price—is more commonplace. But if you’ve managed to secure a favorable deal, having this stripped away due to unforeseen title issues can be devastating to your business. Leasehold title insurance will protect these interests.
Title Exams—Not a Catchall
In addition to lack of authority by the signer, title examinations may not catch all of the pitfalls. Despite every effort, an accurate examination of public records may not alert you to:
• Unrecorded leases: Off-the record deals that weren’t officially entered into public documents.
• Survey and encroachment issues: Unresolved concerns that now become yours to address as leaseholder.
• Required consents from mortgage holders: Landlord’s lender with a prior recorded mortgage could foreclose and wipe out or want to re-negotiate your lease; consent to the later lease prevents that.
• Unrecorded claims of others outside of the chain of title: Unknown heirs of present or prior owners of the property.
• Defective access rights: Property not adjacent to a public road or rights over a private easement may be terminated or restricted.
Furthermore, a title insurance company provides you with financial assurance that sufficient assets will be available to satisfy any claim you as tenant may have when the claim is actually made. This could be years after you first sign the lease.
How Much Is Enough?
Securing enough leasehold title insurance to protect your business interests is crucial. So what guidelines should you follow?
You will want to obtain enough to cover the costs of:
• Removing and relocating any property
• Amount of rents being paid
• Replacement leasehold if you are forced to find alternate space
• Costs of improvements you have made to the property
As you are about to sign a lease, just remember that you need to be protected in the case of title mishaps. There are many title scenarios that can negatively impact your lease and your business. Leasehold title insurance can make sure you land on better ground if leasing disasters strike.
Jim Dressman is an officer of Excel Title Services and a partner with Dressman Benzinger LaVelle in greater Cincinnati. Excel Title is an Ohio and Kentucky title agency that offers a full range of title insurance products and coordinates title services for clients and commercial projects nationwide.