Look Before You Lease

Quite often we hear companies dismiss the need for a title search prior to entering into a commercial lease of real property. There are different reasons, beyond simply the cost, why a prospective tenant may choose to forego a title search; however, no matter what the reason, not undertaking a title search comes with serious risks, even when the transaction is a lease rather than a purchase. A few justifications for (and consequences of) not undertaking a title search prior to leasing a commercial property have included the following:

1. The property has been in the same family for generations, so there should be no problems with the title.

Quite often a family farm or family-owned land is made up of multiple tracts of land, with various family members owning, over the course of many years, all or some of the lots, in full percentages or partial percentages. Frequently, in these cases, a title search has not been done for any of the conveyances, as family members have granted parcels to other family members or the title has passed through probate and non-probate estates of family members. Furthermore, over time, the title and the descriptions for what the family (or family trust or family business) owns becomes muddled, not only as to boundaries which may have changed with transfers, but also with respect to other existing encumbrances, such as old cart-paths, easements and rights of way, which may or may not have been impacted by the various conveyances, and which may or may not still be enforceable.

One issue that often turns up, especially in the large family-owned tracts, is lack of access from a public way. The landowners often have used an existing pathway or believe they have rights to cross an adjacent lot owned by other family members. However, without formal access either reserved in a deed or by grant of an easement, after a conveyance, there is not always guaranteed access remaining to all of the parcels in the original tract.

Recently, in one specific instance, a client wanted to sublease space from a ground lessor who had leased space from a family business. The family business assumed its title was clear, as the land had been in the family for decades and deeds from family members conveying title to the business had been signed and recorded. However, no title search had been done by the family business as part of a lot consolidation. When we did title for the prospective sublessee, we learned that the land was actually comprised of two lots with two separate chains of title. While the chain of title to the front access lot was clear, title to the back lot, where the ground leased area was located, was not. Title to the rear lot had originally been owned by two brothers as tenants in common and purportedly conveyed out by the heirs of the brothers. However, signatures from two heirs were missing. When the heirs were contacted for their signatures, they wanted payment for signing over their share of the property. Had a proper title search and title review been undertaken contemporaneously with the lot consolidation, their signatures likely could have been obtained without cost or for a lower cost.

In another recent situation, a family decided to create a subdivision and convey the various interests in the lots created to specific members of the family and to third parties. However, because no title search was done prior to the subdivision, one strip of land along one of the lots was never properly conveyed, causing an orphan, landlocked parcel owned by a different family member than the rest of the lots in the subdivision.

2. The landowner has title insurance, so we don’t need a title search.

While the fact that the landowner has a title insurance policy may provide some level of comfort, the only beneficiary of the title policy is the landowner who purchased it. While a title insurance company may defend a title and clear up the title issue, alternatively it may just pay out the value of the policy to the insured, without curing the underlying problem that would impact a future lessee or future owner. Furthermore, an owner or leasehold title insurance policy often only covers the insured’s equity in the property. If the land is encumbered by a mortgage, the payout may be less than the value of the property. While a landowner may have made title representations, warranties and covenants in a lease or deed, enforcing those obligations after a problem is discovered could require a costly lawsuit or other time-consuming and/or expensive curative measures.

3. We don’t need title because we are only leasing and not purchasing.

A commercial lease is still an investment that warrants protection. In doing title searches for our clients prior to their lease of buildings and/or raw land sites, we have found various types of use restrictions, easements, access problems and superior interests (such as mortgages and ground leases) that require the consent (and, in the case of secured interests, often non-disturbance agreements) of third parties prior to the land owner or lessor granting leases or subleases. Sometimes a lease is proffered by a party that doesn’t even have an interest in the property, such as a manager or relative of the owner, opening up the door to a later claim that the lease signatory was not authorized by the property owner and, therefore, voidable.

Typically, these issues can be resolved, and we have worked with the land owner or landlord parties to take care of them, at their expense, so that our clients use will not be hindered or prevented. In the case of superior secured interests such as mortgages, the failure to obtain non-disturbance protection could mean that the mortgagee could elect to terminate the lease entirely in the event of a foreclosure.

A thorough title search, certification and review by experienced title professionals, even without the purchase of a title policy, is well worth the expense. Undertaking a title search prior to entering into a commercial lease will reveal any possible encumbrances that could interfere with your intended use and rights. Issues are identified in time to require the owner of the property to resolve any title issues, saving you money and headaches down the road.

Minasian Becker LLC is a Massachusetts law firm experienced in all aspects of commercial real estate law, including title searches and the resolution of complex title issues.