The New ALTA 36 Energy Project Endorsement Series

Transcription

1 The New ALTA 36 Energy Project Endorsement Series A new series of Energy Project endorsements, the ALTA 36 Series, was officially adopted by the American Land Title Association on April 2, They were drafted in response to a growing need by the alternative energy industry to deal with special risks involved with solar panel and windmill farms. As stated in the ALTA s comments on the new endorsements, Energy projects, including those designed to harvest wind and solar for energy, have accounted for a significant percentage of volume and gross revenue for the title insurance industry for a number of years and, particularly, in recent years as our country seeks to reduce its reliance on foreign energy sources. The key factor with solar or windmill projects is the sheer size of the land involved, as well as the accompanying issues associated with maintaining the integrity of the project as an operational whole. These endorsements are an effort by the title industry to respond to some of these needs by crafting uniform endorsements that can be used nationwide. Generally speaking, wind farms and solar panel farms share many of the same features. They are usually created through the use of multiple leases or easements granted by the fee owners of the surface of open land in the target area, allowing the energy production company to build improvements on the surface of the land, along with the right of access to and from the improvements for service, maintenance and repair. The important thing to remember is that, generally speaking, the solar and wind farms are made up of many constituent parcels of land, aggregated and integrated into one large tract, or perhaps a checkerboard pattern when creating a wind farm project. With the aggregation of these numerous parcels, issues of contiguity and accessibility can be vital to the operation of the facility. Solar panel farms tend to be dense installations of solar panels which convert the solar energy into electricity, and then transmit it to a distribution or transmission facility. Because of the nature of the solar panels and the density of the installations, the land under the solar panels becomes unusable for any other purpose. On the other hand, a windmill farm requires distance between each windmill in order to maximize the ability to capture the wind. The windmill blades are high above the ground, anywhere from 80 to 120 feet, allowing the fee owner to continue to utilize the land underneath and surrounding each windmill for farming and/or grazing, so long as these activities do not interfere with the access to the individual windmills and turbines, or the transmission lines to the distribution or transmission facility. There are 7 new endorsements in the ALTA 36 series. The first six endorsements are three paired sets (one for the owner s policy, one for the loan policy), while the seventh endorsement was drafted to be used on either the owner s or the loan policy, or both. 1. ALTA (Energy Project Leasehold/Easement Owner s) ALTA (Energy Project Leasehold/Easement Loan) The first two endorsements provide coverage for energy projects that have both leasehold and easement interests insured under Schedule A, and address the basic issues by adding specific definitions, special valuation sections and a section dealing with additional items of loss particular to leasehold and easement titles. a. Section 1 is a list of 12 definitions particular to the energy project coverage. There is a definition for a Constituent Parcel, which is defined as one of the parcels of Land * described in Schedule A that together constitute one integrated project. This is an important concept as the endorsement later * As used herein, references to the Land mean the same as that defined in Section 1(g) of the Conditions of the ALTA Owner s and Loan Policies.

2 addresses the valuation of the title as an Integrated Project, made up of the various constituent parcels. The definition for Electricity Facility is very inclusive, and contains a laundry list of items such as a substation, a transmission line, a transformer, generator, turbine, solar panel, footing, tower, communications or radio relay system, etc., so long as these items by law are considered to be real property. There is a definition for Severable Improvements to deal with the issue of improvements (such as turbines, solar panels, etc.) that have been affixed to the Land as part of the electricity facility, but do not constitute real property because they can be severed from the Land without causing material damage to the property or to the Land. The endorsement also provides for a definition for Plans, where the title company can insert specific information regarding surveys, site and elevation plans or other drawing prepared in anticipation of construction of improvements on the Land, which Plans are in existence at Date of Policy. This allows the endorsement to provide coverage for post policy improvements that are built in accordance with these specified plans. Other definitions under this section are Easement, Easement Interest, Easement Term, Evicted or Eviction, Lease, Leasehold Estate, Lease Term, and Remaining Term. b. The endorsements then contain two sections on valuation. Section 3, Valuation of Title as an Integrated Project, defines how a loss affecting a Leasehold or Easement title will be computed. First of all, it is important to remember that in order for there to be a compensable loss under the endorsement, the Insured must suffer an eviction from all or any part of the integrated project. The value of the title, as computed in Section 3(a), is determined by adding the (i) value of the Leasehold Estate or Easement Interest for the Remaining Term plus (ii) any Electricity Facility existing on the date of the Eviction, plus (iii) any reduction in value of another insured Lease or Easement as computed in Section 3(b) below. In addition to the Section 3(a) coverage, Section 3(b) recognizes that additional loss or damage can be suffered by the entire integrated project when the Insured is Evicted from one or more Constituent Parcels, and includes that loss in the computation if it is a covered matter. Section 3(c) allows the Insured to have the Leasehold Estate, Easement Estate and any Electricity Facility affected by a defect to be valued either as a whole or separately. Section 3(d) makes it clear that the coverage under the endorsement does not diminish or reduce any of the Insured s rights under any other endorsement(s) to the policy, but that it does not allow duplication of recovery. c. Section 4, Valuation of Severable Improvements, deals with the valuation of any Severable Improvements that have been placed on the Land at the time of Eviction. Section 4(a) allows the calculation of loss to include the diminution in value of the Insured s interest in any Severable Improvements which results from the Eviction, but reduced by any salvage value of the Severable Improvements. In order to avoid any duplication of recovery, however, this calculation is limited to the extent that any items of Severable Improvements may be included in the value of the title determined under Section 8 of the Conditions of the policy. In addition, since Severable Improvements may or may not be considered to be real property under the law, Section 4(b) makes it clear that the endorsement does not insure against loss, and the title company will not pay costs, attorney s fees or expenses for issues relating to the nature of the Severable Improvements, any liens or title issues relating to the Severable Improvements, or even the determination of whether or not any specific property is real or personal property in nature. This means that in the event that there is a question as to whether, after an eviction, a Severable Improvement is real or personal property, the title company is not liable for, and will not pay any expenses on this issue.

3 d. Section 5 contains a list of additional items of loss that are covered by the endorsement. These additional items are very similar to the additional items of loss that are in the ALTA Leasehold Endorsement. These include: i. The reasonable cost of disassembling, removing, relocating and reassembling any Severable Improvement that the Insured has the right to remove and relocate, and which was situated on the Land at the time of Eviction, to the extent necessary to restore and make the integrated project functional again. This cost includes the cost of transporting the Severable Improvement(s) the initial 100 miles, and the expense of restoring the Land if the removal and relocation resulted in damage to the Land solely because of the Eviction; ii. Payment to the owner of paramount title to the Land (as opposed to the Lessor or Grantor under the Lease or Easement) for any rent or damages due by reason of the Insured s use and occupancy of the Land prior to the Eviction; iii. The amount of rent or easement payments or damages that the Insured must continue to pay under the terms of the Lease or Easement to the Lessor or Easement Grantor with respect to the portion of the Leasehold Estate or Easement Interest affected by the Eviction; iv. If the Insured has sub let any portion or the Lease or Easement pursuant to permission in the Lease or Easement, the fair market value of the Insured s interest as sub lessor or sub grantor in any sub lease or easement; v. As a counterpart to 5(d)(iv) above, the endorsement also includes loss for any damages the Insured, as sub lessor or sub grantor, is obligated to pay to any sub lessees or sub grantees of an easement on account of any breach caused by the Eviction; vi. The reasonable cost to obtain new zoning, building and occupancy permits, architectural and engineering services and environmental testing for a replacement leasehold that is reasonably equivalent to the Leasehold Estate or the Easement Estate; and vii. If the Eviction occurs while an Electricity Facility is still under construction on the Land, loss under the Endorsement will also include the actual costs incurred by the Insured up to the date of Eviction, less the salvage value, for that part of the Electricity Facility located on the Land from which the Insured in Evicted. These costs include the costs incurred to construct and fabricate the Electricity Facility, and the soft costs set forth in (vi) above. e. Section 6 is a broad exclusion for any loss, damage or costs resulting from environmental damage or contamination. f. The loan policy version, the ALTA (Energy Project Leasehold/Easement Loan) has an additional definition for Tenant, which includes the lender after acquisition of all or any part of the title. Also, Section 5 is slightly different in that it speaks to the Insured lender after acquisition of title, and before an Eviction. In all other respects, the endorsements are identical. 2. ALTA (Energy Project Leasehold Owner s) ALTA (Energy Project Leasehold Loan) These two endorsements address those situations where the energy project consists only of leasehold interests, and there are no easement interests insured, so the references to easements that are included in the and

4 the are deleted. In every other respect, they are identical to the and the ALTA (Energy Project Covenants, Conditions and Restrictions Land Under Development Owner s) ALTA (Energy Project Covenants, Conditions and Restrictions Land Under Development Loan) These two endorsements are the energy project equivalent of the ALTA (Restrictions, Encroachments, Minerals Land Under Development Loan Policy) and the ALTA (Covenants, conditions and Restrictions Land Under Development Owner s Policy), which were adopted at the same time as the ALTA 36 series. After providing Section 2 definitions for Covenant, Electricity Facility, Plans and Severable Improvements that are identical to those set out in the previous endorsements, Section 3 sets forth the specific insurance provided by the endorsement. In the owner s endorsement, ALTA , Section 3 insures against loss or damage sustained by the Insured by reason of: a. A violation of an enforceable Covenant by any Electricity Facility or Severable Improvement, unless an exception to the violation has been taken in Schedule B of the policy, in which case the matter described by that exception is not covered; b. Enforced removal of any Electricity Facility or Severable Improvement as a result of a violation of a building setback line shown on a recorded plat of subdivision, unless an exception to the violation has been taken in Schedule B of the policy, in which case the matter described by that exception is not covered; or c. A notice of a violation of an enforceable Covenant relating to environmental protection, which notice is recorded in the Public Records at Date of Policy, and which describes any part of the Land and refers to the Covenant. But this coverage is limited only to the extent of the violation of the Covenant referred to in the recorded notice, and only so long as no exception has been taken to the notice in Schedule B of the policy. These coverages also apply to any Electricity Facility that is built on the Land in accordance with Plans in existence at Date of Policy and described in the definition of Plans in Section 2(c). In the ALTA , drafted to be issued with a Loan policy, there is an additional Section 3 coverage addressing Loan Policy issues. Section 3(a) of the endorsement insures against loss or damage sustained by the Insured by reason of a violation of a Covenant that (i) divests, subordinates, or extinguishes the lien of the Insured Mortgage; (ii) results in the invalidity, unenforceability, or lack of priority of the lien of the Insured Mortgage; or (iii) causes a loss of the Insured s title after acquisition of the title by the Insured in satisfaction or partial satisfaction of the Indebtedness. The remaining three coverages are identical to those in the Section 4 of the endorsements contains three exclusions to coverage under the endorsements. Excluded from coverage is any loss or damage resulting from (a) any Covenant in an instrument creating a lease or easement; (b) any Covenant that relates to obligations to perform maintenance, repair or remediation on the Land; or (c) any Covenant pertaining to environmental protection of any kind or nature, including hazardous or toxic matters, conditions, or substances, except for recorded notices of violations as provided in Section 3(c) above. These exclusions are the energy project version of the exclusions contained in each of the ALTA 9 series endorsements; and like the ALTA 9 series, they are very broadly worded. For example, the Section 4(a) exclusion applies to every lease or easement, whether recorded or not, and whether the lease or easement is shown on Schedule A or Schedule B of the policy, and so on.

5 It is also important to note that the coverage for violations and forced removal set forth in these endorsements are limited to violations of Covenants, and that these endorsements do not address loss due to forced removal of improvements due to encroachments. For that coverage, you need the ALTA , discussed next. 4. ALTA (Energy Project Encroachments) The ALTA is the only endorsement in the 36 Series that can be issued on both the Owner s and the Loan Policies. It addresses loss when an encroachment affects the Electricity Facility or Severable Improvements, or causes the enforced removal of any part of the Electricity Facility or Severable Improvements. As with the other 36 Series endorsements, it begins with definitions of Electricity Facility, Plans and Severable Improvement. Then Section 3 provides the affirmative coverages, where the title company insures against loss or damage sustained by the Insured by reason of: a. An encroachment by any Electricity Facility or Severable Improvement onto adjoining land, or into an easement located on the Land, unless an exception is made to the encroachment in Schedule B; b. An encroachment of an improvement located on adjoining land onto the Land at Date of Policy, unless an exception is made to the encroachment in Schedule B; c. The forced removal of any Electricity Facility or Severable Improvement which encroaches onto any portion of the Land that is subject to an easement, if the owners of the easement require the removal or relocation of the encroaching Electricity Facility or Severable Improvement for the purposes of exercising their right to use or maintain the easement; d. Damage to any Electricity Facility or Severable Improvement that is located on or encroaches onto a portion of the Land that is subject to an easement shown as an exception in Schedule B, if the damage results from the right to maintain the easement for the purpose for which it was granted. An optional paragraph 3 (e) allows the title company to exclude or limit the 3(c) and 3(d) coverages set out above by specifically stating that the coverage in those sections shall not apply to any encroachments listed as specifically numbered exceptions in Schedule B. The endorsement has a general exclusion in Section 4 for loss resulting from contamination, explosion, fire, vibration, fracturing, earthquake or subsidence. One unique thing about the ALTA 36 series is that the endorsements were drafted so that an Insured could request the issuance of more than one endorsement in the series. For example, an Insured owner would certainly desire the ALTA 36 06, but might also desire the if there are covenants of record that might affect the project, as well as the if a survey indicates that there might be encroachment issues. Now that the ALTA has formally adopted these endorsements, it is up to the title companies, state title associations and insurance departments to get them filed and approved where necessary before they can be used. I anticipate that the title companies may want to charge a premium for the issuance of the endorsements, although I have no information at this time as to how much such premium might be. I also expect the title companies to consider the issuance of these endorsements to be extra hazardous, and that they will require special underwriting and approval by senior underwriting staff before they can be issued. While the ALTA 36 Series is an excellent effort to provide the alternative energy industry with coverages specific to their issues, I anticipate that these endorsements will be tweaked in the next year or so to provide further clarity or definition

6 to what is being offered. I also anticipate that the energy industry will lobby for additional coverages that some title companies have been giving in the past, but may try to discourage now that the ALTA forms have been adopted. The statements expressed herein are the solely the opinion of the author, and may not reflect the opinion of the American Land Title Association, or any title insurance company. This article should not be relied upon as legal advice or a statement of the law. Janice Carpi GRS Group National Underwriting Counsel jcarpi@grs global.com