Georgia Attorneys Title Guaranty Fund

Underwriting Bulletin No. 78

June 1, 2002

SUBJECT: Insuring Leasehold Estates
A new Leasehold Owner’s Endorsement (ALTA Form 13) and Leasehold Loan Endorsement (ALTA Form 13.1) have been approved by the American Land Title Association and are now available for use. These endorsements were designed to supplant the forms of Leasehold Owner’s Policy and Leasehold Loan Policy that have been decertified by the ALTA. Any remaining supply of these forms or the previous Owner’s Leasehold Endorsement FATIC-727 and Lender’s Leasehold Endorsement FATIC-726 in your possession should be returned to your agency representative or the State Office cancellation, since these forms may no longer be used.

These new endorsements add specific insuring provisions to the regular ALTA Owner’s Policy (10-17-92) and ALTA Loan Policy (10/17/92) that have the effect of converting them into leasehold policies. The endorsements specifically provide a definition for the term “Evicted” as the lawful deprivation, in whole or in part, of the right of possession insured by the policy, contrary to the terms of the lease or the lawful prevention of the use of the land or the tenant leasehold improvements for the purposes permitted under the lease. In computing loss or damage under the policy, the endorsements provide that the value shall consist of the value of the remaining lease term (including any renewal or extended term if a valid option to renew or extend is contained in the lease) of the leasehold estate and any tenant leasehold improvements existing on the date of eviction.

In addition to the loss or damage with respect to the value of the lease term and leasehold improvements, the endorsement sets forth seven additional items of loss specifically covered by the endorsement to the extent that they are not included in the valuation of the estate or interest insured by the policy as follows:

Reasonable cost of removing and relocating any personal property, the insured is entitled to remove upon eviction.

Rent or damages for use and occupancy the insured is obligated to pay to any person having paramount title.

The amount of rent the insured is obligated to continue to pay after eviction.

The fair market value at the time of eviction of any estate or interest in any lease or sublease terminated by the eviction.

Damages that the insured is obligated to pay to any lessee or sublessee as a result of the termination of the lease or sublease caused by the eviction.

Reasonable cost incurred to secure replacement leasehold equivalent.

If tenant leasehold improvements are not substantially completed at the time of eviction, the actual cost incurred, less salvage value, for the tenant leasehold improvements up to the time of eviction including various permitting, architectural, engineering and other soft costs as specified in the endorsement.

The remaining provisions of the standard owner’s and loan policy except as modified by the various provisions contained in the endorsements apply; accordingly, the foregoing losses under the policy cannot exceed the amount of the policy and losses with respect to those matters excluded from coverage remain excluded and cannot form the basis for coverage under the policy. As an example, an eviction resulting from an eminent domain action instituted subsequent to the date of the policy would be an excluded matter under the policy.

Since Leasehold is adequately defined in the endorsement as being the right of possession under the lease subject to the terms that condition such right of possession, there is no need to raise a separate exception to the terms and conditions of the lease.

There is no separate premium charge attributable to the endorsement.

The continuing problem as to determining the amount of coverage upon insuring a leasehold estate is unfortunately not answered by these endorsements. In most cases the value of the leasehold improvements decreases over the term of the lease and the value of the leasehold estate increases as market rates rise in relation to the rent specified in the lease. Since the endorsements by their terms include the cost of tenant improvements these will certainly serve as the starting point for the basis of the amount of the policy. In addition to the cost of the tenant improvements the amount of the policy must include the estimated fair market value of the leasehold estate in relationship to the market rates of similar leasehold estates. If a loan is involved, this is relatively easy since there will be an appraisal setting forth said fair market value for loan purposes. The loan policy on the other hand must be issued for at least the amount of the mortgage and can be issued for an amount up to 125% of the mortgage amount.

When issuing a commitment to insure a leasehold estate, Item 3 of Schedule A should reflect the owner of the “Leasehold Estate” and Schedule B, Part II, should contain a notation that the Owner’s Policy when issued will contain Endorsement 13 (Leasehold-Owner’s) and/or the Loan Policy when issued will contain Endorsement 13.1 (Leasehold-Loan). It is also important to note that the lease or a Short Form Lease (not just a memorandum of lease) that incorporates the various provisions of the unrecorded lease must be recorded in order to insure the leasehold transaction.

In conclusion, the new leasehold endorsements provide tenants and lenders with a means to protect their investments with greater certainty than in previous policy formats and endorsements. Further, the improved definition and expansion of coverage under these endorsements provide an “improved title product” to offer to prospective insureds.

Printable version: ub78.pdf

-Includes new endorsement.

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