Title insurance for owners and lenders is common on many commercial deals and affords some protection from title and zoning problems that are missed or arise later. However, tenants and lenders are also at risk if those problems are present. For example, a ground lease where the owner’s title is challenged, an expropriation or, the “permitted use” is prevented (e.g. by zoning) (what is referred to in the LTE as an: “Eviction”).
History: The LTE in Canada is based on Form 13 in the U.S. (for tenants) and Form 13.1 (for leasehold lenders) and modifies/supplements the terms of the insurer’s Owner’s Policy.
What is Covered ?- “Eviction”: S.1 of the LTE defines “Eviction” as:
1. the lawful deprivation in whole or in part of the right of possession covered by the policy contrary to the lease itself (i.e. loss of quiet enjoyment due to a prior interest or third party title claim); and
2. the lawful prevention of the use or the tenant’s improvements for the purposes permitted by the lease, as a result of a covered risk (e.g. the use — as of the policy date — not being a permitted use under the applicable zoning by-law, title defects such as easements or restrictive covenants, lack of legal access etc.).
The LTE is not meant to protect a tenant from its own default resulting in termination, nor from landlord default. Rather, it covers risks noted in the policy which are NOT otherwise excluded (e.g. an Eviction resulting from an expropriation action instituted prior to the date of the policy which was unknown to the Insured at the Policy Date).
When to Consider LTE? When there are significant costs at risks such as under a ground lease, the making of major capital improvements, or where, over time you could significant goodwill has amassed at a particular location. There is usually no additional cost for the LTE as it is an endorsement to the Owner’s Policy and modifies the estate of the owner under the policy which is being protected.
What Losses Are Covered on “Eviction”: Some examples are as follows provided that they cannot in total exceed the policy amount:
1. The value of the “Remaining Lease Term” [includes options to extend/renew] taking into account rent and other consideration for which the tenant will no longer be required to pay for the Remaining Lease Term”.. ;
2. The value of the “Tenant Leasehold Improvements” (“TLI”) (i.e. “those improvements, required or permitted to be built on the land by the Lease that have been built at the insured’s expense or in which the insured has an interest greater than the right to possession during the Lease Term.
2. Reasonable costs of removing/relocating/repairing Personal Property up to 100 km;
3. Damages for a claim for trespass which the tenant may have to pay to a party with title paramount to the landlord;
4. The balance of rent for the lease term [e.g. the landlord has good title but the tenant is “Evicted” because it is prevented from carrying on its use by the zoning];
5. The fair market value of the tenant’s interest in any sub-lease(s);
6. Damages the tenant is obligated to pay to subtenant(s) as a result of the Eviction [i.e. since quiet enjoyment is lost under the head lease, the subleases are similarly affected];
7. Reasonable costs incurred to secure an equivalent leasehold estate; and
8. Other costs could arguably be covered but should be discussed with the insurer when taking out the policy. For example, leasing/broker costs for new premises or those payable for arranging the first lease but not yet paid; legal fees incurred for the lease and Eviction (the tenant should not take legal action without insurer approval as it will be the insurer’s right to decide whether or not to defend title); and financing costs for the construction of the new TLI unless reimbursed by the insurer for the costs of the TLI.
How Much Coverage? It is usually easier to value the TLI than valuing the “Remaining Lease Term”. There is no definition of “value” so each case needs to be determined in light of issues unique to the location and the tenant. TLI typically decrease in value over the term while in some cases the value of the leasehold estate itself will appreciate — where long term rents are fixed and not tied to market rents assuming market rates rise in relation to the fixed lease rent. The Remaining Lease Term’s value is determined as at the Eviction date based on the then fair market value of the lease less the rent remaining to be paid under the lease. If the tenant added value to the site through re-zoning, minor variance, severance etc. these could also be taken into account. Currently there is no standard method for setting the policy amount.
Exclusions: Options to lease are not covered under the LTE so a ground lease with options for additional lands, could prove a significant loss to the tenant.
The Lessons: 1. Consider an LTE where material costs are or will be incurred – such as a ground lease and discuss the costs/benefits with legal counsel and title insurers who provide coverage as there can be differences in the LTE used; 2. There is a general statement on the LTE that provides that it is part of the larger policy and subject to all of its terms and provisions and other endorsements, if any. This re-affirms the importance of never reading and interpreting a clause in isolation since other clauses may expand/limit the one in question. 3. If a title matter arises during due diligence, notify the insurer so that it can be underwritten in Schedule B of the policy. The more due diligence i.e. full title searches to determine ownership and third party rights such as easements, restrictive covenants, the less exposure to loss.
Disclaimer: This article is for general information purposes only and not intended as or to be relied upon for legal advice. Consult with a lawyer for your unique situation.
[*If there is a general real estate or leasing related question you would like to see addressed in a future article in “The Legal Corner”, please contact me directly by e-mail at email@example.com with your suggestion. Not all requests can be accommodated.]