Companies should carefully consider the Endorsement’s application to their particular properties before finalizing.
As part of our work on several recent transactions, we carefully evaluated the ALTA 13-06 Leasehold Owner’s Policy Endorsement (in its base form, the Endorsement). Although the form is drafted broadly to address a number of leasing scenarios, in our review and negotiation of the Endorsement, we found that modifying it may be useful and even may prove necessary when seeking to insure a unique commercial property. Separately, the Endorsement as written may provide sufficient protection for an energy project lease.
If a property to be insured is particularly valuable to the lessee because of the property’s location or address, a company should strongly consider revisions to the Endorsement to address the value of title to the property in particular. In this context, consider a property located in a generic A-level commercial retail location in any city in the United States. Although title failure at the particular location would be covered, the Endorsement conceptually would value that property at what it may cost to relocate the lease to a similar generic A-level commercial retail location in the same city, perhaps several streets or several miles away. Contrast this failure of title with a failure of title on Rodeo Drive in Beverly Hills, or on Fifth Avenue in New York. One cannot say that a property on Rodeo Drive is equivalent to a property on Wilshire Boulevard in Los Angeles, even if the two are mere blocks away. Accordingly, companies should carefully evaluate Section 2 and Section 3 of the Endorsement to ensure that the language adequately addresses the loss a company would face in a title failure.
Looking at the failure of leasehold title from an energy project perspective, the protections provided in the Endorsement in Section 3 look much more appealing. Using the example of a solar project, in the event that title fails and the project developer must move its equipment (and provided that the equipment has been specifically designated as personal property in the lease documents and other agreements with the fee owner and lenders), the Endorsement provides coverage for moving and repairing equipment, the entitlement of the new leasehold, and certain costs incurred in the development and entitlement up to the time moving is required, in the event that certain improvements are incomplete.
Summarizing, the Endorsement, although drafted to be broad, is not a one-size-fits-all endorsement. Companies must carefully consider the business plan and value of title to a particular property in question before finalizing the Endorsement. Tailoring the Endorsement to the transaction at hand may best address a company’s specific business and legal needs.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Los Angeles
Marc A. Liverant