It is standard practice to obtain a title insurance policy when purchasing a residential or commercial property as evidence of clear title and protection against adverse claims (judgments, liens, claims of prior title interests). The majority of tenants do not realize that title insurance is available to protect them against these same concerns in the form of leasehold title policies. Purchasing a leasehold title insurance policy to cover your interests as a tenant is definitely a worthwhile investment.

First Things First: What is a Leasehold Title Insurance Policy?

The leasehold title policy protects tenants by ensuring that the landlord is the actual owner of the property and has the authority to enter into a lease agreement. Plus, the document informs the tenant if there are any mortgages, liens, or other encumbrances against the property which may take precedence over the tenant’s lease. A leasehold title insurance policy is important and should not be overlooked. Also, tenants should get proper advice from their attorney about the amount of leasehold title insurance required at each site and what type of coverage each policy provides.

Why Leasehold Title Insurance Matters to Tenants

If there was a prior mortgage on the property, and the landlord failed to pay, the lender or purchaser (if the foreclosure results in the sale of the property) could end the lease with no obligation to the tenant. Tenants aware of a prior mortgage may be able to secure a non-disturbance agreement from the lender. Non-disturbance agreements typically state that so long as the tenant fulfills all of its obligations under the lease, the lender or purchaser will abide by the lease terms and refrain from interfering with the tenant’s possession of the premises.

Scenarios:

1. Tenants entering a short-term lease may not need a leasehold title insurance policy.
2. For tenants entering a long-term lease or making significant improvements to the property, a leasehold title insurance policy is extremely beneficial to protect their investment. 
3. When a tenant is entering into a ground lease and spending a substantial amount of money to construct a building, it is essential to protect their investment in the property. This is a prime example of a situation where it makes perfect sense to obtain a leasehold title insurance policy. A tenant does not want to spend a half-million dollars (or more) building a building it intends to depreciate over time, only to discover that there is a title restriction that interferes with or prevents the operation of its business on the property. When a title search or commitment is conducted ahead of a leasehold policy, such a restriction should appear, and if it doesn’t, the leasehold policy would cover the loss.

A leasehold owner’s title insurance policy will protect you against title defects for as long as you lease your space or building. Tenants with enough leverage can even get the landlord to pay the premium by negotiating that into the lease. Under the right circumstances, it makes sense to insure the title to your leasehold interest.

The Bottom Line

The cost of obtaining leasehold title insurance is minimal compared to the potential losses that could be incurred by an uninsured tenant. If you have any questions or would like to obtain a rate quote, contact Clarion Title for assistance.

This material is provided as a courtesy and for educational purposes only. Please consult your title professional for specific information regarding your situation.