In the Spotlight: Ordering Title Searches When Negotiating a Lease

As tenant's counsel, did you ever think it was good practice to order a title search when your client contemplated putting in expensive improvements or in other situations where the lease may have value? The cost is modest, and the information obtained by such a search can reduce the risk of your client's being hurt by unintended adverse title matters. It may never have crossed your mind that the failure to discuss this option with your client could amount to professional malpractice, except in the most obvious of circumstances. However, you may want to read Davin, L.L.C. v. Daham, 329 N.J. Super. 54, 746 A.2d 1034, a case decided by the Appellate Division of the Superior Court of New Jersey in 2000 before you decide to skip a discussion with your client as to whether a title search is needed.

The Case

In Davin, the tenant's counsel was sued for professional malpractice because the attorney did not advise his tenant-client that a title search should be obtained and reviewed before entering into a bagel shop lease in a four-unit commercial shopping center. Unfortunately for the tenant, failing to order a title search had unfavorable economic consequences. The property was in the process of being foreclosed while the lease was being negotiated. The existence of the foreclosure action would have been discovered had the tenant ordered a title search. Instead, the tenant spent over $125,000 in materials and labor to prepare the premises for occupancy, only to find that the lender was seeking to eject it from the space and terminate the lease.

The tenant sued its attorney for malpractice, and the Appellate Division of New Jersey's Superior Court held that the trial judge erred in granting a summary judgment motion submitted by the tenant's attorney and sent the matter back to the lower court to determine whether the lawyer should have ordered a title search in that particular instance. The court made this decision despite the fact that one expert opined that “ordering title work in this matter would have been an extraordinary step and one that is not ordinarily taken by thousands of other attorneys,” see Davin, supra. Thus, even if you were to conclude that other real estate attorneys would not order a title report, you may still be subjecting yourself to judicial scrutiny instituted by a tenant-client who has received news that its title is not what it thought it would be.

What Sum of Money?

A question could be raised: What sum of money should be the threshold amount that you should look at before you discuss leasehold title insurance with a client? Furthermore, what costs should you consider? If you just focus on the costs for tenant improvements, you could be in trouble. What about the costs for surveys, attorneys' fees, the expenses in obtaining zoning and other land use and operational approvals and permits, or the costs of environmental audits and tests? These costs, and others, can be substantial as well. In addition, is the standard different if you are representing a large or a smaller tenant?

Conclusion

It is likely that the more sensible approach is at least to mention to your client the risks involved if a client chooses not to incur the relatively nominal expense of obtaining a title search. This is especially true today when foreclosures are an everyday occurrence. Moreover, your client will more likely than not appreciate that you are trying to protect its interests and that you are not making “business decisions” for them.

Mark Morfopoulos is a Real Estate Attorney at Meislik & Meislik. He can be reached at http://www.meislik.com/.

As tenant's counsel, did you ever think it was good practice to order a title search when your client contemplated putting in expensive improvements or in other situations where the lease may have value? The cost is modest, and the information obtained by such a search can reduce the risk of your client's being hurt by unintended adverse title matters. It may never have crossed your mind that the failure to discuss this option with your client could amount to professional malpractice, except in the most obvious of circumstances. However, you may want to read Davin, L.L.C. v. Daham , 329 N.J. Super. 54, 746 A.2d 1034, a case decided by the Appellate Division of the Superior Court of New Jersey in 2000 before you decide to skip a discussion with your client as to whether a title search is needed.

The Case

In Davin, the tenant's counsel was sued for professional malpractice because the attorney did not advise his tenant-client that a title search should be obtained and reviewed before entering into a bagel shop lease in a four-unit commercial shopping center. Unfortunately for the tenant, failing to order a title search had unfavorable economic consequences. The property was in the process of being foreclosed while the lease was being negotiated. The existence of the foreclosure action would have been discovered had the tenant ordered a title search. Instead, the tenant spent over $125,000 in materials and labor to prepare the premises for occupancy, only to find that the lender was seeking to eject it from the space and terminate the lease.

The tenant sued its attorney for malpractice, and the Appellate Division of New Jersey's Superior Court held that the trial judge erred in granting a summary judgment motion submitted by the tenant's attorney and sent the matter back to the lower court to determine whether the lawyer should have ordered a title search in that particular instance. The court made this decision despite the fact that one expert opined that “ordering title work in this matter would have been an extraordinary step and one that is not ordinarily taken by thousands of other attorneys,” see Davin, supra. Thus, even if you were to conclude that other real estate attorneys would not order a title report, you may still be subjecting yourself to judicial scrutiny instituted by a tenant-client who has received news that its title is not what it thought it would be.

What Sum of Money?

A question could be raised: What sum of money should be the threshold amount that you should look at before you discuss leasehold title insurance with a client? Furthermore, what costs should you consider? If you just focus on the costs for tenant improvements, you could be in trouble. What about the costs for surveys, attorneys' fees, the expenses in obtaining zoning and other land use and operational approvals and permits, or the costs of environmental audits and tests? These costs, and others, can be substantial as well. In addition, is the standard different if you are representing a large or a smaller tenant?

Conclusion

It is likely that the more sensible approach is at least to mention to your client the risks involved if a client chooses not to incur the relatively nominal expense of obtaining a title search. This is especially true today when foreclosures are an everyday occurrence. Moreover, your client will more likely than not appreciate that you are trying to protect its interests and that you are not making “business decisions” for them.

Mark Morfopoulos is a Real Estate Attorney at Meislik & Meislik. He can be reached at http://www.meislik.com/.