REFORMULATING THE ALTA LEASEHOLD TITLE INSURANCE POLICY About a year ago, the American Land Title Association (“ALTA”) notified ACREL that it would be reformulating its leasehold title insurance policy. It asked ACREL’s Title Insurance Committee for input in the process. At ACREL’s mid-year meeting, the Title Insurance Committee held a workshop to discuss leasehold title insurance and how it could be a more helpful tool for the real estate bar. The following materials include an article by Harris Ominsky summarizing that discussion as well as a copy of the materials provided for that workshop. At the workshop, various fact patterns were presented and the participants discussed the type of coverage they would be looking for in a leasehold title policy. Regardless of the fact patterns, three basic issues confronted workshop participants: 1. From an attorney’s standpoint, knowing how much title insurance the client should buy. 2. From the title company’s standpoint, controlling the amount of damages the title company could conceivably have to pay. 3. Creating a sufficiently useful product that will provide value to clients and a profit source to the title industry. As a follow-up to the ACREL workshop, the Title Insurance Committee communicated the issues raised at the workshop to ALTA. ALTA has now promulgated two proposed endorsements, copies of which are attached, for further consideration. The workshop being held at the Boston meeting will discuss these proposed endorsements in light of the three issues noted above. Once again, the Title Insurance Committee will forward its recommendations to ALTA so that ALTA can continue its process of finalizing a product. Leasehold estate endorsement THIS ENDORSEMENT APPLIES ONLY TO LEASEHOLD ESTATES CREATED BY LEASES DESCRIBED IN SCHEDULE A OF THE POLICY. 1. As used in this endorsement, the following terms shall mean: 003.251075.1 -1- a. “Leasehold Estate”: the right of possession under the Lease described in Schedule A of the Policy, including any Leasehold Improvements for the term or terms described in the Lease, subject to the Lease provisions that limit the insured’s rights. b. "Lease Term": the duration of the Leasehold Estate, including any renewal or extended term if a valid option to renew or extend is contained in the Lease. c. "Remaining Lease Term": the Lease Term left unrealized after the insured has been evicted. d. "Leasehold Improvements": those improvements on the leasehold estate or to be constructed on the leasehold estate, if the policy insures the title or a leasehold estate in the improvements vested in the insured. e. “Personal property,” shall mean chattels and property which, because of their character and manner of affixation to the land, can be severed from the land without causing appreciable damage to the property severed or to the land to which the property is affixed. 2. Additional items of loss covered by this endorsement: Subject to Section 3 of this Endorsement, if the insured is evicted from possession of all or a part of the insured Leasehold Estate by reason of any matters insured against by this policy, the following items , if applicable, shall be added to the value of the Leasehold Estate in computing loss or damage incurred by the insured, but not to the extent that the value of the item is included in the valuation of the Leasehold Estate. 003.251075.1 -2- a. The reasonable cost of removing and relocating any personal property which the insured has the right to remove and relocate, situated on the Leasehold Estate at the time of eviction, the cost of transportation of that personal property for the initial one hundred miles incurred in connection with the relocation, and the reasonable cost of repairing the personal property damaged by reason of the removal and relocation. The costs referred to above shall not exceed in the aggregate the value of the personal property prior to its removal and relocation. b. Rent or damages for use and occupancy of the land prior to the eviction which the insured as owner of the Leasehold Estate may be obligated to pay to any person having paramount title to that of the lessor in the Lease. c. The amount of rent which, by the terms of the Lease, the insured must continue to pay to the lessor after eviction from the Leasehold Estate, or part thereof, from which the insured has been evicted. d. The fair market value, at the time of the eviction, of the estate or interest of the insured in any sublease of all or part of the land existing at the date of the eviction. e. Damages which the insured may be obligated to pay to any sublessee on account of the breach of any sublease of all or part of the land caused by the eviction. 003.251075.1 -3- f. Reasonable costs incurred by the insured to secure a replacement leasehold equivalent to the Leasehold Estate if the insured is evicted because of a matter insured against by this policy. g. The amount paid by or on behalf of the insured for the construction of the Leasehold Improvements on the Leasehold Estate, if the Leasehold Improvements are not completed at the time of eviction. The costs related to construction of the Leasehold Improvements includes costs incurred to obtain land use, zoning, building and occupancy permits, architectural and engineering fees, construction management fees, costs of environmental testing and reviews, landscaping costs and interest on loans for the acquisition and construction. 3. Delete Section 7 of the Conditions and Stipulations of the Policy and substitute the following for it: 7. Determination and Extent of Liability. This policy is a contract of indemnity against actual monetary loss or damage sustained or incurred by the insured claimant who has suffered loss or damage by reason of matters insured against by this policy and only to the extent herein described. The liability of the Company under this policy shall not exceed the least of: a. the Amount of Insurance stated in Schedule A; or, 003.251075.1 -4- b. the difference between the value of the Leasehold Estate as insured and the value of the Leasehold Estate subject to the defect, lien or encumbrance insured against by this policy; plus the value of any loss defined in Section 2 of the Leasehold Estate Endorsement, less the value of any such loss that is included in the value of the Leasehold Estate. 4. Valuation of the Leasehold Estate: If, in computing loss or damage to the Leasehold Estate incurred by the insured when totally dispossessed, it becomes necessary to determine the value of the estate or interest insured by this policy, that value shall consist of: a. the then present value of that portion of the Leasehold Estate constituting the Remaining Lease Term; and b. to the extent not otherwise included in this section, (i) the then present value for the Remaining Lease Term of those portions of any Leasehold Improvements located on the land to which the insured is entitled to possession by virtue of the lease or the insured's title; (ii) the residual value to the insured of any Leasehold Improvements after the expiration of the Lease Term that it loses as a result of a matter insured against by this policy, but 003.251075.1 -5- (iii) not including the value of any Leasehold Improvements that are not completed at the time of eviction that will be added to the insured’s loss or damage under Section 2g of this Endorsement. DISCUSSION DRAFT ONLY August 28, 2000 modification of June 30, 2000 Tentative Draft Leasehold Endorsement provisions for attachment to ALTA Owner's Policy. --------------------------- ENDORSEMENT to Owner's Policy of Title Insurance No.________________ Issued by BLANK TITLE INSURANCE COMPANY The provisions of this endorsement apply only to any leasehold estate that is shown as an insured estate or interest in Schedule A of this policy. 1. DEFINITION OF TERMS The following terms when used in this endorsement mean: "Lease": the lease described in item No. 2 of Schedule A hereof. "Leasehold estate": the right of possession for the term of years set forth in the Lease, subject to any provisions in the Lease which limit that right of possession. "Lease Term": the duration of the lease described on Schedule A, including any renewal or extended term of said lease for which a valid option to renew or extend is contained in the said lease. 003.251075.1 -6- "Remaining Lease Term": the Lease Term less the period of time that the insured has been in possession of the land pursuant to the said lease prior to the time a valid claim is made under this policy. "Leasehold improvements": those improvements demised by the lease described on Schedule A or which are to be constructed on the demised premises by the insured, that do not violate the terms of the Lease "Personal property": chattels or property which because of their character and manner of affixation to the land can be severed therefrom without causing appreciable damage to the property severed or to the land to which the property is affixed. 2. VALUATION OF ESTATE OR INTEREST INSURED When, in computing loss or damage incurred by the insured, it becomes necessary to determine the value of the estate or interest insured by this policy, that value shall consist of: (a) the then present worth of the Remaining Lease Term, taking into account the then present value of the rental payments due for the Remaining Lease Term; and (b) to the extent not otherwise covered by this policy, with respect to those portions of Leasehold Improvements in which the insured has an ownership interest, (i) the present value for the Remaining Lease Term, and (ii) the residual value to the insured after the expiration of the Lease Term, in either case measured at the time the claim is made; and (c) the amount of money actually expended by the insured for the construction of Leasehold Improvements if they are not completed at the time of the presentation of a valid claim under this policy.