General Requirements to Insure a Leasehold Estate

A lease is a written or oral agreement by which the owner of land, referred to as the landlord or lessor, transfers into another party, referred to as the tenant or lessee, the right to the exclusive possession and use of the real estate for a definite period of time. The lessee pays to the lessor rent for a designated amount over that designated period of time. During the term of the lease, the tenant has exclusive occupancy and use of the estate. To create a valid lease, the lessor must always retain a reversionary right to retake possession of the property after the term has expired.

While the requirements may vary slightly from jurisdiction to jurisdiction, our general requirements to insure a leasehold estate include:

• Lessor must be the owner of the fee estate at beginning of the lease.
• The lease must contain an exact date of commencement.
• The lease must contain a termination date.
• The lease must contain a valid legal description.
• The lease must be for a legal purpose.
• The lease must contain sufficient language to create the leasehold estate (i.e., lease, demise, let or rent).
• The lease must be signed by both the lessor and lessee.
• The lease must contain consideration language, i.e., time and manner of payment.
• A full copy of the lease, along with any amendments, must be reviewed to confirm it contains the items as set out above, that the current transaction is allowed under the terms of the lease, and to pick up any interest or encumbrance referenced in the lease that is not of public record that will need to be excepted to.
• The lease, or a memorandum of lease which contains the essential terms of the lease (i.e., the parties, identification of the subject property, duration of the lease and language to convey the leasehold estate), must be recorded.
• The fee estate must be searched until the time the lease was created pursuant to normal search criteria for the particular state the property is located in, adding in any exceptions that have priority over the lease. From the time the lease was created, the leasehold estate must be searched to confirm if there are any amendments to the lease, termination of the lease or merger of the fee and leasehold estate that could result in a termination of the lease. The fee estate should also be searched post-lease to specifically look for mechanics liens, building code violation proceedings, demolition proceedings, condemnation proceedings, taxes/special assessments and any matters that may have priority over the lease based on subordination clause in the lease.
• Judgment and other lien indexes against the lessor and lessee must be searched, adding as exceptions any liens that have priority over the lease under state law.
• The mortgage conveying the leasehold estate must be recorded, if applicable.
• The assignment of lease or sublease must be recorded, if applicable.
• The lease must confirm the granting of a mortgage in the leasehold estate or assignment of lease or sublease, if applicable, is allowed under state law.
• The lease must add as an exception the terms and provisions of the lease.
• The lease must add as an exception the terms and provisions of any assignment or sublease, if applicable.

In addition, if the leasehold estate to be insured is a leasehold mortgage or an assignment of the lease or a sublease, an estoppel should be obtained from the landlord to verify that:

• Conveyance by the lessee of a mortgage in the leasehold estate does not violate the terms of the lease (for leasehold mortgages)
• The assignment or sublease is allowed under the terms of the lease (when there is an assignment or sublease)
• The lease is currently in existence, has not been modified and contains no current defaults

See “Leasehold Insurance” and “Leases” in our underwriting manual on virtualunderwriter.com for additional information concerning insuring leasehold estates. Also visit the site for up-to-date underwriting information.

If you are a Stewart Trusted Provider, feel free to contact your Stewart underwriting counsel with questions.

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