Every month we feature a CRE Expert who answers some questions about topics related to commercial real estate. This month Tobias Kinsler, Esq., of Dane County Title Company in Madison, Wis., discusses title insurance and the commercial real estate marketplace.
For brokers, buyers, lenders, and owners conducting business in the commercial real estate market, title insurance is a routine component of any transaction meant to provide security against any title issues that may arise and unexpectedly interrupt the deal. It is the comfort of knowing that when the deal is closed, it’s closed for good.
However, these same parties often fail to realize that tenants of leased property can encounter a number of pitfalls inherent to leasing. Entering into a long-term lease with the plan to build out the property bears significant risk of exposure to title landmines that can send any potentially-great deal into the ground. Obtaining leasehold insurance from a respected, trusted title company with the resources to fully assess and clear risk can protect against these potential catastrophes:
Illusory ownership — If a great piece of property is legally held in one name and the affiliated operating company (which exists as a separate legal entity) signs the contract with another name, the result is a legally unenforceable lease. In essence, the lessor may not actually own the property. While there may not be malicious intent on the lessor’s part to defraud the lessee, the lease is nonetheless meaningless.
Sudden vacancy — Several businesses, among them spas, salons, and medical clinics, rely heavily on a locational goodwill to drive business. It is comforting to the clientele to fix their destination, and if the spa/clinic has to move abruptly as a result of a legal issue with the lease, the potential collapse of the practice exists.
Losing the good deal — Much of the commercial lease enterprise is bent on negotiating a favorable lease. Once a favorable deal is struck, the subsequent management of the business relies on the parameters set forth and agreed upon in the favorable lease. However, unseen title issues can eliminate the lease and all of the good work that led to its construction. What is left is for both parties to start all over without the advantage of the prior lease guiding the way.
Still, the good news is that obtaining adequate leasehold insurance can cover these looming traps. Securing leasehold insurance is especially critical when signing any long-term lease; in fact, a tenant’s lender may require leasehold title insurance if the tenant is self-financing the lease or build out. Logic dictates that the more money is invested in a leased property, the more exponential the damage may be from an adverse title issue. Without leasehold insurance, recovering costs from any of the associated professionals (contractors, engineers, architects) would be next to impossible.
That said, the title company that issues the leasehold insurance should have the resources and reputation to perform premium title examination. Such examination should identify:
- Unrecorded leases, unknown heirs, and “off the record” deals that were never officially entered into public record, a commonality that only a title company with significant historical paper records could uncover;
- Required consents from any prior recorded mortgages that could foreclose on or potentially renegotiate the agreed-upon lease; and
- Defective access rights and encroachment issues that could terminate or restrict a private easement.
Even beyond the identification of these property issues, a reputable title company provides financial assurances to sufficient available assets to satisfy any later claim- even those that arise years after the initial lease is signed. Of course, you will want to consider the cost of removing or relocating property, the amount of rent, and the costs of any improvements to the property when obtaining the correct amount of leasehold insurance. That said, employing a strong title company and securing leasehold title insurance protects your critical business interests in case of title mishaps.
