REFORMULATING THE ALTA LEASEHOLD TITLE INSURANCE POLICY

Transcription

1 REFORMULATING THE ALTA LEASEHOLD TITLE INSURANCE POLICY About a year ago, the American Land Title Association ( ALTA ) notified ACREL that it would be reformulating its leasehold title insurance policy. It asked ACREL s Title Insurance Committee for input in the process. At ACREL s mid-year meeting, the Title Insurance Committee held a workshop to discuss leasehold title insurance and how it could be a more helpful tool for the real estate bar. The following materials include an article by Harris Ominsky summarizing that discussion as well as a copy of the materials provided for that workshop. At the workshop, various fact patterns were presented and the participants discussed the type of coverage they would be looking for in a leasehold title policy. Regardless of the fact patterns, three basic issues confronted workshop participants: 1. From an attorney s standpoint, knowing how much title insurance the client should buy. 2. From the title company s standpoint, controlling the amount of damages the title company could conceivably have to pay. 3. Creating a sufficiently useful product that will provide value to clients and a profit source to the title industry. As a follow-up to the ACREL workshop, the Title Insurance Committee communicated the issues raised at the workshop to ALTA. ALTA has now promulgated two proposed endorsements, copies of which are attached, for further consideration. The workshop being held at the Boston meeting will discuss these proposed endorsements in light of the three issues noted above. Once again, the Title Insurance Committee will forward its recommendations to ALTA so that ALTA can continue its process of finalizing a product. Leasehold estate endorsement THIS ENDORSEMENT APPLIES ONLY TO LEASEHOLD ESTATES CREATED BY LEASES DESCRIBED IN SCHEDULE A OF THE POLICY. 1. As used in this endorsement, the following terms shall mean:

2 a. Leasehold Estate : the right of possession under the Lease described in Schedule A of the Policy, including any Leasehold Improvements for the term or terms described in the Lease, subject to the Lease provisions that limit the insured s rights. b. "Lease Term": the duration of the Leasehold Estate, including any renewal or extended term if a valid option to renew or extend is contained in the Lease. c. "Remaining Lease Term": the Lease Term left unrealized after the insured has been evicted. d. "Leasehold Improvements": those improvements on the leasehold estate or to be constructed on the leasehold estate, if the policy insures the title or a leasehold estate in the improvements vested in the insured. e. Personal property, shall mean chattels and property which, because of their character and manner of affixation to the land, can be severed from the land without causing appreciable damage to the property severed or to the land to which the property is affixed. 2. Additional items of loss covered by this endorsement: Subject to Section 3 of this Endorsement, if the insured is evicted from possession of all or a part of the insured Leasehold Estate by reason of any matters insured against by this policy, the following items, if applicable, shall be added to the value of the Leasehold Estate in computing loss or damage incurred by the insured, but not to the extent that the value of the item is included in the valuation of the Leasehold Estate

3 a. The reasonable cost of removing and relocating any personal property which the insured has the right to remove and relocate, situated on the Leasehold Estate at the time of eviction, the cost of transportation of that personal property for the initial one hundred miles incurred in connection with the relocation, and the reasonable cost of repairing the personal property damaged by reason of the removal and relocation. The costs referred to above shall not exceed in the aggregate the value of the personal property prior to its removal and relocation. b. Rent or damages for use and occupancy of the land prior to the eviction which the insured as owner of the Leasehold Estate may be obligated to pay to any person having paramount title to that of the lessor in the Lease. c. The amount of rent which, by the terms of the Lease, the insured must continue to pay to the lessor after eviction from the Leasehold Estate, or part thereof, from which the insured has been evicted. d. The fair market value, at the time of the eviction, of the estate or interest of the insured in any sublease of all or part of the land existing at the date of the eviction. e. Damages which the insured may be obligated to pay to any sublessee on account of the breach of any sublease of all or part of the land caused by the eviction

4 f. Reasonable costs incurred by the insured to secure a replacement leasehold equivalent to the Leasehold Estate if the insured is evicted because of a matter insured against by this policy. g. The amount paid by or on behalf of the insured for the construction of the Leasehold Improvements on the Leasehold Estate, if the Leasehold Improvements are not completed at the time of eviction. The costs related to construction of the Leasehold Improvements includes costs incurred to obtain land use, zoning, building and occupancy permits, architectural and engineering fees, construction management fees, costs of environmental testing and reviews, landscaping costs and interest on loans for the acquisition and construction. 3. Delete Section 7 of the Conditions and Stipulations of the Policy and substitute the following for it: 7. Determination and Extent of Liability. This policy is a contract of indemnity against actual monetary loss or damage sustained or incurred by the insured claimant who has suffered loss or damage by reason of matters insured against by this policy and only to the extent herein described. The liability of the Company under this policy shall not exceed the least of: a. the Amount of Insurance stated in Schedule A; or,

5 b. the difference between the value of the Leasehold Estate as insured and the value of the Leasehold Estate subject to the defect, lien or encumbrance insured against by this policy; plus the value of any loss defined in Section 2 of the Leasehold Estate Endorsement, less the value of any such loss that is included in the value of the Leasehold Estate. 4. Valuation of the Leasehold Estate: If, in computing loss or damage to the Leasehold Estate incurred by the insured when totally dispossessed, it becomes necessary to determine the value of the estate or interest insured by this policy, that value shall consist of: a. the then present value of that portion of the Leasehold Estate constituting the Remaining Lease Term; and b. to the extent not otherwise included in this section, (i) the then present value for the Remaining Lease Term of those portions of any Leasehold Improvements located on the land to which the insured is entitled to possession by virtue of the lease or the insured's title; (ii) the residual value to the insured of any Leasehold Improvements after the expiration of the Lease Term that it loses as a result of a matter insured against by this policy, but

6 (iii) not including the value of any Leasehold Improvements that are not completed at the time of eviction that will be added to the insured s loss or damage under Section 2g of this Endorsement. DISCUSSION DRAFT ONLY August 28, 2000 modification of June 30, 2000 Tentative Draft Leasehold Endorsement provisions for attachment to ALTA Owner's Policy ENDORSEMENT to Owner's Policy of Title Insurance No. Issued by BLANK TITLE INSURANCE COMPANY The provisions of this endorsement apply only to any leasehold estate that is shown as an insured estate or interest in Schedule A of this policy. 1. DEFINITION OF TERMS The following terms when used in this endorsement mean: "Lease": the lease described in item No. 2 of Schedule A hereof. "Leasehold estate": the right of possession for the term of years set forth in the Lease, subject to any provisions in the Lease which limit that right of possession. "Lease Term": the duration of the lease described on Schedule A, including any renewal or extended term of said lease for which a valid option to renew or extend is contained in the said lease

7 "Remaining Lease Term": the Lease Term less the period of time that the insured has been in possession of the land pursuant to the said lease prior to the time a valid claim is made under this policy. "Leasehold improvements": those improvements demised by the lease described on Schedule A or which are to be constructed on the demised premises by the insured, that do not violate the terms of the Lease "Personal property": chattels or property which because of their character and manner of affixation to the land can be severed therefrom without causing appreciable damage to the property severed or to the land to which the property is affixed. 2. VALUATION OF ESTATE OR INTEREST INSURED When, in computing loss or damage incurred by the insured, it becomes necessary to determine the value of the estate or interest insured by this policy, that value shall consist of: (a) the then present worth of the Remaining Lease Term, taking into account the then present value of the rental payments due for the Remaining Lease Term; and (b) to the extent not otherwise covered by this policy, with respect to those portions of Leasehold Improvements in which the insured has an ownership interest, (i) the present value for the Remaining Lease Term, and (ii) the residual value to the insured after the expiration of the Lease Term, in either case measured at the time the claim is made; and (c) the amount of money actually expended by the insured for the construction of Leasehold Improvements if they are not completed at the time of the presentation of a valid claim under this policy. 3. ADDITIONAL ITEMS OF LOSS In the event the insured is evicted from possession of all or a part of the land by reason of any matter for which this policy provides insurance, the following, if applicable, shall be included in computing loss or damage incurred by the insured, but not to the extent that the same are included in the valuation of the estate or interest insured by this policy. (a) The reasonable cost of removing and relocating any personal property which the insured has the right to remove and relocate, situated on the land at the time of eviction, the cost of transportation of that personal property for the initial 100 miles incurred in connection with the relocation, and the reasonable cost of repairing the personal property damaged by reason of the removal and relocation. The costs of referred to above shall not exceed in the aggregate the value of the personal property prior to its removal and relocation

8 (b) Rent or damages for use or occupancy of the land prior to the eviction which the insured as owner of the leasehold estate may be obligated to pay to any person having paramount title to that of the lessor in the Lease. (c) The amount of rent which, by the terms of the Lease, the insured must continue to pay to the lessor after eviction from the land, or part thereof, from which the insured has been evicted. (d) The fair market value, at the time of eviction, of the estate or interest of the insured in any sublease of all or part of the land existing at the date of the eviction. (e) Damages which the insured may be obligated to pay to any sublessee on account of any breach of any sublease of all or part of the land caused by the eviction. 4. Section No. 7(b) of the Conditions and Stipulations is hereby deleted. THE LEASEHOLD TITLE INSURANCE POLICY * Introduction In 1975, the American Land Title Association ( ALTA ) adopted a standard leasehold policy form. A copy of the explanatory materials that were issued at the time are attached to these materials and are instructive in understanding what ALTA was trying to accomplish through adoption of a standard leasehold policy and in understanding what difficulties that standard form present for the real estate professional a quarter century later. ALTA has recognized the need to address those difficulties and is currently undertaking a review and revision process that will result in the development of a new leasehold policy that will address the current deficiencies in coverage. From a real estate attorney s perspective, understanding both the difficulties with the current form and what ALTA will ultimately be proposing will be critical in advising clients whether obtaining leasehold coverage is appropriate and, if so, in what amounts. In evaluating the current coverage and deciding what is needed to more adequately protect insureds, there are two issues that need to be addressed. First, what is the interest that the insured is trying to protect when it buys a leasehold policy? Second, are the remedies adequate to cover the interest the insured is trying to protect? What is the Insured Trying to Protect? In obtaining leasehold coverage, the insured is trying to protect not only against the same risks an owner is usually trying to protect against, but also against certain other risks that might arise in the leasing context. The areas that the insured is trying to protect include the following:

9 E E E E E Is the insured entering into a lease with the correct party? Without a title search being completed, the parties might not know the true landlord entity. Not infrequently, for example, a landlord might be entering into a lease in the name of a parent entity when a subsidiary is truly the ownership entity. The leasehold policy will not only specify the identity of the proper landlord, it will also provide coverage if the lease had not been properly authorized by that entity. What restrictions on use might impair the tenant s ability to engage in its proposed activity in the leased premises? If a title search forms the basis for issuance of the policy, the leasehold policy should show any recorded restrictions on use whether they result from general restrictive or protective covenants recorded against the underlying land, reciprocal easement agreements, restrictions on access or exclusive use provisions that may have been granted to other tenants. In these situations, the proposed tenant has as great of a need to know what types of restrictions on use exist as would any proposed purchaser of the property. What mortgages, deeds of trust or other liens encumber the property that might take priority over the lease? Particularly if the tenant is going to improve the property or otherwise incur significant expense in buying a business where goodwill is being attributed to the location, the tenant must know what risk it faces from superior lienholders. As to mortgages or deeds of trust, frequently a non-disturbance agreement will be required to protect the tenant. If the lender is not willing to provide one, the tenant will want to understand what prompts such reluctance. To the extent a nondisturbance agreement is obtained, the tenant will want the insurer to state that the lender cannot foreclose the lessee interest. To the extent that other liens exist against the property, such as mechanics liens or unpaid taxes, the tenant can also delve into the issue further to determine why the landlord is having these problems and what the tenant can do to protect itself. To the extent resolution is reached and the title insurer is satisfied with that resolution, the title insurer should insure the tenant s priority over such competing interests. Will the tenant be able to occupy the leased premises at the time specified in the lease? Has the landlord leased (or agreed to lease) the space to another party? By virtue of the insurer insuring the leasehold estate, the insurer is insuring the right of possession. What options to purchase, options to expand or rights of first refusal (either as to purchase of the property in which the leased premises are located or as to leasing of additional space in the building in which the leased premises are located) exist? The existence of such interests will be of great interest to a tenant if that tenant is also negotiating for options to purchase or lease or rights of first refusal. General Format of Current Policy

10 Generally, the format of the leasehold policy, both owner s and lender s, is similar to the format for the owner s and the lender s policy. A sample form of both the Leasehold Owner s Policy and the Leasehold Loan Policy (revised 10/17/92) is attached to these materials. Because the format is generally the same as the typical owner s and loan policies, the same issues need to be addressed as in those situations. Thus, the attorney examining the title commitment will want to review all of the Schedule B Exceptions from Coverage, obtain copies of all documents referred to in Schedule B and analyze how those documents might affect the client s proposed use of the leased premises. The attorney will similarly want to understand which standard exceptions can be removed from the policy and what endorsements might be needed to provide the protection the tenant needs. Although the general format of the leasehold policy is similar to an owner s policy, there are some critical differences, as follows. E E The Conditions and Stipulations include a definition of leasehold estate, which definition states that an insured leasehold estate is the right of possession for the term or terms described in Schedule A hereof subject to any provisions contained in the Lease which might limit the right of possession. The intent is to limit what the title company is insuring to the tenant s right of possession as opposed to the landlord s other contractual obligations under the lease such as, for example, any obligation the landlord may have to repair the premises. The Conditions and Stipulations contain special provisions to provide a method for determining the value of the leasehold estate to compute if necessary the loss or damage suffered by the insured. The specific language is as follows: If, in computing loss or damage incurred by the insured, it becomes necessary to determine the value of the estate or interest insured by this policy, the value shall consist of the then present worth of the excess, if any, of the fair market rental value of the estate or interest, undiminished by any matters for which claim is made, for that part of the term stated in Schedule A then remaining plus any renewal or extended term for which a valid option to renew or extend is contained in the Lease, over the value of the rent and other consideration required to be paid under the Lease for the same period. The method specified is thus that typically used by appraisers of leasehold interests and focuses on the difference between the fair rental value of the leased property and the value of the rent required to be paid under the lease. In addition to the foregoing damages, the leasehold policy also provides coverage for the following items: (a) The reasonable cost of removing and relocating any personal property that the insured has the right to remove and relocate, situated on the land at the

11 time of eviction, the cost of transportation of that personal property for the initial 25 miles incurred in connection with the relocation, and the reasonable cost of repairing the personal property damaged by reason of the removal and relocation. The costs referred to above shall not exceed in the aggregate the value of the personal property prior to its removal and relocation. The policy defines personal property as chattels and property that, because of its character and manner of affixing to the land, can be severed therefrom without appreciable damage to the property severed or to the land to which the property is affixed. Thus, most leasehold improvements would not be covered. (b) Rent or damages for use and occupancy of the land prior to the eviction that the insured as owner of the leasehold estate may be obligated to pay to any person having paramount title to that of the lessor in the Lease. (c) The amount of rent that, by the terms of the Lease, the insured must continue to pay to the lessor after the eviction from the land, or part thereof, from which the insured has been evicted. (d) The fair market value, at the time of the eviction, of the estate or interest of the insured in any sublease of all or part of the land existing at the date of the eviction. (e) Damages that the insured may be obligated to pay to any sublessee on account of the breach of any sublease of all or part of the land caused by the eviction. Concerns Raised by the Leasehold Policy In determining the value of the leasehold policy to tenants, the focus should be on what the insured needs to have the policy cover. Although a title commitment that has been prepared after a title search has been performed provides the information that the tenant needs in entering into the lease (those items noted above, such as who owns the property, what liens encumber it and what restrictions on use exist), the remedies contained in the final title policy really only adequately address one small segment of the leasing environment. Thus, the current remedies may provide adequate coverage where a tenant is, for example, leasing space in an office building, is not making any significant leasehold improvements and only needs protection from being forced to move, the costs incurred in connection therewith, and any increased rental costs due to the tenant having a particularly favorable lease rate. The remedies do not, however, adequately address the following situations that comprise a large portion of today s leasing transactions: E Ground leases. In these transactions, the owner is ground leasing land to the tenant who will then build its improvements on the land. In most of these situations the tenant will need to finance the improvements and thus, not only will the tenant need to know the status of title, the tenant s lender will also insist on obtaining lender s title coverage. Clearly, the remedies provisions contained in the leasehold policies do not adequately

12 address that situation. In many cases title insurers meet the insured s needs by issuing a standard owner s and lender s policy and just making an exception for the fee ownership interest of the ground lessor. E E Office or other leases where the tenant is investing significant amounts of its own money in leasehold improvements. Consider, for example, a law firm leasing several floors of an office building and investing millions of dollars of its own money in leasehold improvements in return for a favorable lease rate on the shell that it is leasing. Clearly the tenant needs coverage for the sums it is spending in making such improvements yet, just as clearly, the remedies provided in the current leasehold policy do not adequately compensate the tenant if it should be forced to vacate the space early because of a failure in the owner s title or termination of its lease by a superior lienholder. Leases that are being assigned to a buyer of a business where a significant portion of the purchase price for the business relates to the location(s) and the lease(s) that secure such location(s). Assume for example that a client is purchasing 50 fast food franchised restaurants, all of which are leased facilities. A large part of the purchase price is attributable to the favorable locations of those restaurants and both the buyer of the business and the buyer s lender will want to be certain that the buyer will be able to continue to operate out of those locations. Title insurance offers the perfect vehicle for the buyer and lender in determining what each needs to know from a title standpoint, but the remedies provisions in the current leasehold policy do not offer the financial protection that either the buyer or its lender need to make themselves whole should the buyer s interest in the location be terminated. Conclusion In each of the examples above, a different type of remedy needs to be provided. Attorneys need to know not only what title matters appear, but how the insured will be compensated should the tenant lose its interest. Perhaps the easiest example to deal with in the above scenarios is the ground lease where the tenant s interest is more akin to that of an owner and the remedies can be formulated accordingly. Probably the most difficult situation is the last one presented in which the buyer of a business wants financial protection if it loses its lease(s). Much of the business s value may be attributable to the goodwill associated with the locations and the buyer rightly wants coverage if that goodwill should be taken away due to a title defect. By contrast, title insurance companies are not in the business of insuring goodwill. Even if a number could be agreed on as to such goodwill, each location that the buyer is acquiring would likely have a different value attributed to it, and that is a number that frequently is not otherwise specified in the transaction. The difficulties presented by the complexity of different leasing arrangements and the underlying values attributable to the leases and the interests of the parties to the lease create a difficult dilemma for title insurers and attorneys representing tenants. As ALTA begins to revise its leasehold policies, it is these dilemmas that will need to be addressed and resolved if the title insurance industry is to develop coverage that adequately meets a tenant s needs

13 [The following was prepared in 1975 at the time of the adoption of the 1975 Leasehold Policies. The general discussion remains relevant today] AMERICAN LAND TITLE ASSOCIATION LEASEHOLD POLICIES OF TITLE INSURANCE - AN EXPLANATION For many years, users of title insurance have raised questions relating to the insurance of leasehold estates in title policies. They have asked for guidelines in obtaining the proper amount of insurance, how the leasehold would be valued if lost, what incidental damages would be paid if the lessee were evicted, what rights under the lease were insured and other questions the insurer found difficult to answer. The reason the questions are difficult is that a leasehold estate is different from a fee simple estate ordinarily insured by title policies and the forms of policies are not as responsive to the insurance of a leasehold estate as they might be. Therefore, in order to serve its customers better and to provide an insuring vehicle which would be more meaningful to both insured and insurer than the standard forms of policies designed to insure any interest in realty, the American Land Title Association has adopted standard leasehold policy forms. It is the purpose of this memorandum to explain briefly their provisions. LEASEHOLD OWNER'S POLICY The American Land Title Association Leasehold Owner's Policy is identical to the ALTA Owner's Policy -Form B (the marketable form) except for the additional provisions referred to below. Basically, the Leasehold Owner's Policy differs from the Owner's Policy by the addition of language to the Schedule A description of the estate insured, by defining "leasehold estate" in Item 1 of the Conditions and Stipulations, by adding a method of valuation of the estate insured and by listing miscellaneous items of loss in the event of eviction. Schedule A is amended by adding a provision stating that the estate or interest insured is a leasehold estate as leasehold estate is defined in a new paragraph added to the Conditions and Stipulations. This definition will be discussed later. The leasehold estate insured is further described as the leasehold estate "created by the instrument referred to herein as the Lease." This reference to the lease ties the estate insured to the estate in the land created by the particular lease referred to. The blank space is then filled in with data relating to the Lease, including name of lessor, date of lease, recording data and the term of the lease. The term shown is especially important as shall be seen. Estates in the leased land owned by the lessee-insured in addition to the leasehold estate may be insured in the policy by listing them in the blank space, e.g., "fee simple estate in improvements situated on the land," after noting that the leasehold estate is in the land, less and except the improvements. However, only estates in land which should be valued as shown in Item 13 should be insured by this policy. For example, an option to purchase a fee simple interest in the land, even though contained in the lease, would not be properly valued by that method and should be insured under the regular owner's policy form. Also, the policy is not designed to insure nonleasehold estates in other tracts of land. For example, it should not be used to insure a leasehold estate in Tract A and a fee simple estate in Tract B. The Schedule A additions and the definition of leasehold estate to be added as Item 1 (g) under Definition of Terms of the Conditions and Stipulations must be considered together. This definition of leasehold estate causes the policy to insure against loss or damage to the right of possession created by the insured lease arising out of defects, liens and encumbrances insured against by the policy. A leasehold estate is often described as being

14 composed of dual interests, i.e., an estate for years in the land and contractual rights, such as a covenant to repair or maintain the premises by the lessor, which are interests in personalty. By defining the insured estate as the right of possession, the title insurer would make it clear that he is insuring the estate in land created by the lease but is not insuring the validity and enforceability of contractual rights in favor of the lessee-insured. For example, the title insurer would not be called upon to litigate the question of whether the covenant to paint the premises was enforceable against the lessor because color and type was not specified. The definition of leasehold estate causes the policy to inure against defects, etc., in the right of possession "for the term or terms described in Schedule A hereof." This permits the insurer to show under Schedule A not only the original term of the lease, but also any rights of extension or renewal granted by the lease. For example, after examination of the lease and determining that such rights are valid and enforceable, the insurer might add the following to the description of the lease in Schedule A: "said estate having a term of ten years from January 1, 1972, and an option to extend for a term of ten years from January 1, 1982." The definition of leasehold estate then states that such right of possession is subject to any provisions in the lease which limit such right of possession. This proviso excepts the conditions, restrictions and covenants in the lease which bind the lessee, such as the covenant to pay rent or not to compete. The next paragraph added to the Conditions and Stipulations is paragraph 13, which describes a method for evaluating the leasehold estate, if determining such value becomes necessary in computing loss or damage incurred by the insured. Title policies, including the Leasehold Owner's Policy, permit the insurer to protect the insured by removing defects in the title, which may be done through settlement with third parties in liquidated amounts, such as payment of outstanding judgments, tax liens,etc. However, it often becomes important in settling a claim to determine the value of the interest of the insured. Determining the value of a leasehold estate is more difficult than appraising a fee interest and is done on a different basis. Therefore, it was thought that it would be helpful to set forth an evaluation method in the policy. The method shown is that most often used by appraisers of leaseholds and is found in numerous cases involving condemnation of lessee's interests. Basically, the method is to determine, by appraisal or otherwise, the fair market value of the interest insured by the policy. This is the value of the rental which the interest should have at the time of computation. Under the provisions of this paragraph, the fair rental value of improvements will be considered whether they are leased or owned by the insured, as long as the insured's interest therein is shown under Schedule A of the policy. The first computation, then, will produce a fair market rent for the interest insured. Let us say, for example, that the appraiser states that the premises should rent for $10,000 per year. If there are five years left on the original term and there exists a valid option to extend for another five years, the fair market rental value is $100,000. The next computation involves examination of the lease to determine rent or other consideration required to be paid for the same period. In our example, let us assume that annual rental is $9,000. It can be seen that the lessee has bonus or annuity of $1,000 per year for ten years or $10,000, being the difference between fair market rental value and value of rent required to be paid. Since this bonus or annuity would be realized over the next ten years, the then present worth of this excess would be $10,000, discounted at a proper percentage. Applying a 6% discount rate for ten years would make the value of the leasehold estate $7,360. The next addition to the Conditions and Stipulations is paragraph 14, which sets forth some non-exclusive items of damage which, if incurred by the insured because of eviction due to title matters insured against,would be included in computing loss under the policy. These listed items are, hopefully, self-explanatory

15 While the Leasehold Owner's Policy does not provide an easy solution to the problem of the amount of insurance the lessee should obtain, the provisions relating to the valuation of the insured's interest and miscellaneous items of loss should be helpful to the insured and insurer in settling on the policy amount which would adequately cover the possible loss of the insured. LEASEHOLD LOAN POLICY Schedule A of the American Land Title Association Leasehold Loan Policy is identical to the Leasehold Owner's Policy except for the addition of an item describing the insured mortgage as now appears in the present ALTA Loan Policy. Also, Item 1.(g) "Definition of Terms and Item 12 "Valuation of Estate or interest Insured" in the Conditions and Stipulations are the same as those in the Leasehold Owner's Policy. However, Item 13 "Miscellaneous Items of Loss" would be meaningful only upon acquisition of the insured estate by the lender. Therefore, the first paragraph of this item in the Leasehold Loan Policy has been changed accordingly. The amount of the Leasehold Loan Policy could be based, as in the case of the present ALTA Loan Policy, on the amount of the loan secured by the insured mortgage. POLICY OF TITLE INSURANCE Issued by BLANK TITLE INSURANCE COMPANY SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTIONS FROM COVERAGE CONTAINED IN SCHEDULE B AND THE CONDITIONS AND STIPULATIONS, BLANK TITLE INSURANCE COMPANY, a Blank corporation, herein called the Company, insures, as of Date of Policy shown in Schedule A, against loss or damage, not exceeding the Amount of Insurance stated in Schedule A, sustained or incurred by the insured by reason of: 1. Title to the estate or interest described in Schedule A being vested other than as stated therein; 2. Any defect in or lien or encumbrance on the title; 3. Unmarketability of the title; 4. Lack of a right of access to and from the land; 5. The invalidity or unenforceability of the lien of the insured mortgage upon the title; 6. The priority of any lien or encumbrance over the lien of the insured mortgage; 7. Lack of priority of the lien of the insured mortgage over any statutory lien for services, labor or material: (a) arising from an improvement or work related to the land which is contracted for or commenced prior to Date of Policy; or (b) arising from an improvement or work related to the land which is contracted for or commenced subsequent to Date of Policy and which is financed in whole or in part by proceeds of the indebtedness secured by the insured mortgage which at Date of Policy the insured has advanced or is obligated to advance; 8. The invalidity or unenforceability of any assignment of the insured mortgage, provided the assignment is shown in Schedule A, or the failure of the assignment shown in Schedule A to vest title to the insured mortgage in the named insured assignee free and clear of all liens

16 The Company will also pay the costs, attorneys' fees and expenses incurred in defense of the title or the lien of the insured mortgage, as insured, but only to the extent provided in the Conditions and Stipulations. [Witness clause optional] BLANK TITLE INSURANCE COMPANY BY: PRESIDENT SECRETARY BY:

17 EXCLUSIONS FROM COVERAGE The following matters are expressly excluded from the coverage of this policy and the Company will not pay loss or damage, costs, attorneys' fees or expenses which arise by reason of: 1. (a) Any law, ordinance or governmental regulation (including but not limited to building and zoning laws, ordinances, or regulations) restricting, regulating, prohibiting or relating to (i) the occupancy, use, or enjoyment of the land; (ii) the character, dimensions or location of any improvement now or hereafter erected on the land; (iii) a separation in ownership or a change in the dimensions or area of the land or any parcel of which the land is or was a part; or (iv) environmental protection, or the effect of any violation of these laws, ordinances or governmental regulations, except to the extent that a notice of the enforcement thereof or a notice of a defect, lien or encumbrance resulting from a violation or alleged violation affecting the land has been recorded in the public records at Date of Policy. (b) Any governmental police power not excluded by (a) above, except to the extent that a notice of the exercise thereof or a notice of a defect, lien or encumbrance resulting from a violation or alleged violation affecting the land has been recorded in the public records at Date of Policy. 2. Rights of eminent domain unless notice of the exercise thereof has been recorded in the public records at Date of Policy, but not excluding from coverage any taking which has occurred prior to Date of Policy which would be binding on the rights of a purchaser for value without knowledge. 3. Defects, liens, encumbrances, adverse claims or other matters: (a) (b) (c) (d) (e) created, suffered, assumed or agreed to by the insured claimant; not known to the Company, not recorded in the public records at Date of Policy, but known to the insured claimant and not disclosed in writing to the Company by the insured claimant prior to the date the insured claimant became an insured under this policy; resulting in no loss or damage to the insured claimant; attaching or created subsequent to Date of Policy (except to the extent that this policy insures the priority of the lien of the insured mortgage over any statutory lien for services, labor or material); or resulting in loss or damage which would not have been sustained if the insured claimant had paid value for the insured mortgage. 4. Unenforceability of the lien of the insured mortgage because of the inability or failure of the insured at Date of Policy, or the inability or failure of any subsequent owner of the indebtedness, to comply with applicable doing business laws of the state in which the land is situated. 5. Invalidity or unenforceability of the lien of the insured mortgage, or claim thereof, which arises out of the transaction evidenced by the insured mortgage and is based upon usury or any consumer credit protection or truth in lending law. 6. Any statutory lien for services, labor or materials (or the claim of priority of any statutory lien for services, labor or materials over the lien of the insured mortgage) arising from an improvement or work related to the land which is contracted for and commenced subsequent to Date of Policy and is not financed in whole or in part by proceeds of the indebtedness secured by the insured mortgage which at Date of Policy the insured has advanced or is obligated to advance

18 7. Any claim, which arises out of the transaction creating the interest of the mortgagee insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws, that is based on: (a) the transaction creating the interest of the insured mortgagee being deemed a fraudulent conveyance or fraudulent transfer; or (b) the subordination of the interest of the insured mortgagee as a result of the application of the doctrine of equitable subordination; or (c) the transaction creating the interest of the insured mortgagee being deemed a preferential transfer except where the preferential transfer results from the failure: (i) (ii) to timely record the instrument of transfer; or of such recordation to impart notice to a purchaser for value or a judgment or lien creditor

19 SCHEDULE A [File No. ] Policy No. Date of Policy [at p.m.] Amount of Insurance $ [Premium $ ] a.m. 1. Name of Insured: 2. The estate or interest in the land which is encumbered by the insured mortgage is the leasehold estate, as leasehold estate is defined in Section 1(h) of the Conditions and Stipulations of this policy, created by the instrument herein referred to as the Lease which is identified as follows: 3. The leasehold term insured is: 4. Title to the estate or interest in the land is vested in: 5. The insured mortgage and assignments thereof, if any, are described as follows: [6. The land referred to in this policy is described as follows:] If Paragraph 6 is omitted, a Schedule C, captioned the same as Paragraph 6, must be used

20 SCHEDULE B [File No. ] Policy No. EXCEPTIONS FROM COVERAGE This policy does not insure against loss or damage (and the Company will not pay costs, attorneys' fees or expenses) which arise by reason of: PART I 1. [POLICY MAY INCLUDE REGIONAL EXCEPTIONS IF SO 2. DESIRED BY ISSUING COMPANY] [VARIABLE EXCEPTIONS SUCH AS TAXES, EASEMENTS, CC & Rs, ETC.] Note: If there are matters which affect the title to the estate or interest in the land described in Schedule [A][C], but which are subordinate to the lien of the insured mortgage, Part II of Schedule B must be added, or Part I of Schedule B must contain the following statement: "Matters which affect the title to the estate or interest, but which are subordinate to the lien of the insured mortgage" PART II In addition to the matters set forth in Part I of this Schedule, the title to the estate or interest in the land described or referred to in Schedule [A][C] is subject to the following matters, if any be shown, but the Company insures that these matters are subordinate to the lien or charge of the insured mortgage upon the estate or interest:

21 CONDITIONS AND STIPULATIONS 1. DEFINITION OF TERMS. The following terms when used in this policy mean: (a) "insured": the insured named in Schedule A. The term "insured" also includes (i) the owner of the indebtedness secured by the insured mortgage and each successor in ownership of the indebtedness except a successor who is an obligor under the provisions of Section 12(c) of these Conditions and Stipulations (reserving, however, all rights and defenses as to any successor that the Company would have had against any predecessor insured, unless the successor acquired the indebtedness as a purchaser for value without knowledge of the asserted defect, lien, encumbrance, adverse claim or other matter insured against by this policy as affecting title to the estate or interest in the land); (ii) any governmental agency or governmental instrumentality which is an insurer or guarantor under an insurance contract or guaranty insuring or guaranteeing the indebtedness secured by the insured mortgage, or any part thereof, whether named as an insured herein or not; (iii) the parties designated in Section 2(a) of these Conditions and Stipulations. (b) "insured claimant": an insured claiming loss or damage. (c) "knowledge" or "known": actual knowledge, not constructive knowledge or notice which may be imputed to an insured by reason of the public records as defined in this policy or any other records which impart constructive notice of matters affecting the land. (d) "land": the land described or referred to in Schedule [A][C], and improvements affixed thereto which by law constitute real property. The term "land" does not include any property beyond the lines of the area described or referred to in Schedule [A][C], nor any right, title, interest, estate or easement in abutting streets, roads, avenues, alleys, lanes, ways or waterways, but nothing herein shall modify or limit the extent to which a right of access to and from the land is insured by this policy. (e) "mortgage": mortgage, deed of trust, trust deed, or other security instrument. (f) "public records": records established under state statutes at Date of Policy for the purpose of imparting constructive notice of matters relating to real property to purchasers for value and without knowledge. With respect to Section 1(a)(iv) of the Exclusions From Coverage, "public records" shall also include environmental protection liens filed in the records of the clerk of the United States district court for the district in which the land is located. (g) "unmarketability of the title": an alleged or apparent matter affecting the title to the land, not excluded or excepted from coverage, which would entitle a purchaser of the estate or interest described in Schedule A or the insured mortgage to be released from the obligation to purchase by virtue of a contractual condition requiring the delivery of marketable title. (h) "leasehold estate": the right of possession for the term or terms described in Schedule A hereof subject to any provisions contained in the Lease which limit the right of possession. 2. CONTINUATION OF INSURANCE. (a) After Acquisition of Title. The coverage of this policy shall continue in force as of Date of Policy in favor of (i) an insured who acquires all or any part of the estate or interest in the land by foreclosure, trustee's sale, conveyance in lieu of foreclosure, or other legal manner which discharges the lien of the insured mortgage; (ii) a transferee of the estate or interest so acquired from an insured corporation, provided the transferee is the parent or wholly-owned subsidiary of the insured corporation, and their corporate successors by operation of law and not by purchase, subject to any rights or defenses the Company may have against any predecessor insureds; and (iii) any governmental agency or governmental instrumentality which acquires all or any part of the estate or interest pursuant to a contract of insurance or guaranty insuring or guaranteeing the indebtedness secured by the insured mortgage

22 (b) After Conveyance of Title. The coverage of this policy shall continue in force as of Date of Policy in favor of an insured only so long as the insured retains an estate or interest in the land, or holds an indebtedness secured by a purchase money mortgage given by a purchaser from the insured, or only so long as the insured shall have liability by reason of covenants of warranty made by the insured in any transfer or conveyance of the estate or interest. This policy shall not continue in force in favor of any purchaser from the insured of either (i) an estate or interest in the land, or (ii) an indebtedness secured by a purchase money mortgage given to the insured. (c) Amount of Insurance. The amount of insurance after the acquisition or after the conveyance shall in neither event exceed the least of: (i) the Amount of Insurance stated in Schedule A; (ii) the amount of the principal of the indebtedness secured by the insured mortgage as of Date of Policy, interest thereon, expenses of foreclosure, amounts advanced pursuant to the insured mortgage to assure compliance with laws or to protect the lien of the insured mortgage prior to the time of acquisition of the estate or interest in the land and secured thereby and reasonable amounts expended to prevent deterioration of improvements, but reduced by the amount of all payments made; or (iii) the amount paid by any governmental agency or governmental instrumentality, if the agency or instrumentality is the insured claimant, in the acquisition of the estate or interest in satisfaction of its insurance contract or guaranty. 3. NOTICE OF CLAIM TO BE GIVEN BY INSURED CLAIMANT. The insured shall notify the Company promptly in writing (i) in case of any litigation as set forth in Section 4(a) below, (ii) in case knowledge shall come to an insured hereunder of any claim of title or interest which is adverse to the title to the estate or interest or the lien of the insured mortgage, as insured, and which might cause loss or damage for which the Company may be liable by virtue of this policy, or (iii) if title to the estate or interest or the lien of the insured mortgage, as insured, is rejected as unmarketable. If prompt notice shall not be given to the Company, then as to the insured all liability of the Company shall terminate with regard to the matter or matters for which prompt notice is required; provided, however, that failure to notify the Company shall in no case prejudice the rights of any insured under this policy unless the Company shall be prejudiced by the failure and then only to the extent of the prejudice. 4. DEFENSE AND PROSECUTION OF ACTIONS; DUTY OF INSURED CLAIMANT TO COOPERATE. (a) Upon written request by the insured and subject to the options contained in Section 6 of these Conditions and Stipulations, the Company, at its own cost and without unreasonable delay, shall provide for the defense of an insured in litigation in which any third party asserts a claim adverse to the title or interest as insured, but only as to those stated causes of action alleging a defect, lien or encumbrance or other matter insured against by this policy. The Company shall have the right to select counsel of its choice (subject to the right of the insured to object for reasonable cause) to represent the insured as to those stated causes of action and shall not be liable for and will not pay the fees of any other counsel. The Company will not pay any fees, costs or expenses incurred by the insured in the defense of those causes of action which allege matters not insured against by this policy. (b) The Company shall have the right, at its own cost, to institute and prosecute any action or proceeding or to do any other act which in its opinion may be necessary or desirable to establish the title to the estate or interest or the lien of the insured mortgage, as insured, or to prevent or reduce loss or damage to the insured. The Company may take any appropriate action under the terms of this policy, whether or not it shall be liable hereunder, and shall not thereby concede liability or waive any provision of this policy. If the Company shall exercise its rights under this paragraph, it shall do so diligently. (c) Whenever the Company shall have brought an action or interposed a defense as required or permitted by the provisions of this policy, the Company may pursue any litigation to final determination by a court of competent jurisdiction and expressly reserves the right, in its sole discretion, to appeal from any adverse judgment or order. (d) In all cases where this policy permits or requires the Company to prosecute or provide for the defense of any action or proceeding, the insured shall secure to the Company the right to so prosecute or provide defense in the action or proceeding, and all appeals therein, and permit the Company to use, at its option, the name of the insured for this purpose. Whenever requested by the Company, the insured, at the Company's expense, shall give the Company all reasonable aid (i) in any action or proceeding, securing evidence, obtaining witnesses, prosecuting or defending the action or proceeding, or effecting settlement, and (ii) in any other lawful act which in the opinion of the Company may be necessary or desirable to