Leasehold Estates

Leasehold Estates: Underwriting Guidelines

The following are general guidelines. Consult with local underwriting counsel for state-specific requirements.  Review the lease agreement. It should contain the following items:

 

1.  Names of all parties involved and execution by all lessors and all lessees (and acknowledgements if required by state law); 

2.  An insurable legal description of the property; 

3.  A grant of the leasehold estate, usually accomplished by words such as “lease”, “demise”, “let”, or “rent”; 

4.  A commencement date that is certain (e.g., a term that commences “when construction is completed” is not a date that is certain);

5.  A certain term that is a specific date on which the lease begins and a specific date on which it ends; 

6.  Time and manner of payment (i.e., the consideration for the lease). 

 

The lease or a memorandum of lease must be recorded in the appropriate real property records. If a memorandum of lease is recorded, the laws of most states require that the memorandum must include at least the information mentioned above in items 1-6. This constitutes the minimum information a Memorandum of Lease must include to impart record notice of the lease. 

 

Title to the land must be examined to make certain that the lessor had fee simple title to the land at the time of the execution of the lease. 

 

All outstanding exceptions to fee title must be shown as exceptions to the leasehold estate

 

To insure a mortgage covering a leasehold estate:

  

      Verify that the lease agreement does not contain any provisions that would prohibit the mortgaging of the leasehold estate;   

      Obtain the written consent of the lessor, if the lessor’s consent is required by the lease agreement;   

      Obtain written verification from the lessor that the lease is in full force and effect and that neither lessor nor lessee is in default under the lease;   

      Search judgment and other general lien indexes, and except to any liens filed against the lessee, unless state law prevents such liens from attaching to a leasehold estate; and   

      Record the mortgage.

 

To insure a leasehold estate obtained by an assignment of lease or a sublease:

  

      Verify that the lease agreement does not contain any provision that would prohibit the assignment or sublease;   

      Obtain the written consent of the lessor, if the lessor’s consent is required by the lease agreement;   

      Obtain written verification from the lessor and lessee that the lease is in full force and effect and that neither lessor nor lessee is in default under the lease;   

      Record the assignment of lease or the sublease; and   

      Except to the terms and conditions of the Assignment of Lease or the Sublease.