Making Real Estate Work

Do you ever wonder – why tenants generally don’t get title examinations for space leases?

Posted In Real Estate

Here are a couple of contexts.  Context 1 – a retail tenant negotiates a lease for a space in a strip center and does no title due diligence.  Context 2 – a retail tenant negotiates a ground lease for a store (either as, for example, a standalone store or a wing of a mall) and includes in the lease a condition for title examination and approval.  Why the difference?

Hard to say.

Perhaps a couple of things.  First is cost.  A small retail tenant (say, 2,500 square feet or less) likely believes it has no room in the budget for even a limited title exam.  That even though a search to confirm ownership would likely cost less than $250.  Throw in a bit more to confirm what mortgages or liens are on the property. Those can affect a tenant’s rights and interests, too. A simple on-line search of tax records, or asking for a copy of the landlord’s title insurance policy, may be sufficient. Second is the historical perception that there is little or no risk that the party with whom the tenant negotiates and signs the lease is not the landlord.  If commercial properties go the way of residential, that may or not be the case, as evidenced by this nightmare example.   Then again the problem may not be identifying the owner but making sure that the leasing agent represents the owner.  In today’s climate even a small tenant may be well-advised to confirm both the identity of owner and the authorization of the broker.

Every lease, regardless of its value, should contain a “quiet enjoyment” provision in which the landlord warrants the tenant’s rights under the lease against adverse claims of any third parties (or at least against claims of anyone claiming by, through or under the landlord, which is customary in commercial leases) and covenants to defend the tenant’s lease rights against those adverse claims.  That provision helps but is typically only worth the landlord’s equity interest in the property and may be little more than basis for a lawsuit.   

Increasingly, a bit more confirmation up front may not hurt. 

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