Ordering Title Searches When Negotiating a Lease: Is the Failure to do so Malpractice?

  • Published: December 21, 2008
  • By Mark Morfopoulos

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 give the tenant piece of mind that it is acting in a commercially diligent manner. The notion that the failure to discuss this option with your client could amount to professional malpractice, except in the most obvious of situations, may have never crossed your mind. But 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.

In Davin, tenant’s counsel was sued for professional malpractice because the attorney did not advise his tenant/client that it should order a title search before it entered into a lease to operate a bagel shop in a small four-unit commercial shopping center. Unfortunately for the tenant, this omission had adverse economic consequences. The landlord’s interest in the property was in the process of being foreclosed during the course of negotiations to finalize the lease. The existence of the foreclosure action would have been discovered if the tenant had 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 them from the space and terminate the lease. The Superior Court, Appellate Division 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. This holding was made 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 “everyone else isn’t doing it, so why should I,” you may still be subjecting yourself to judicial scrutiny instituted by a tenant who has received news that its title is not what it thought it would be.

A question could be raised: what sum of money should be the threshold amount that a lawyer should look at before you discuss leasehold title insurance with a client? And 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, or 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? It is likely that the more sensible approach is to at least mention to your client the risks involved if a client chooses not to incur the nominal expense of obtaining a title search. This is especially true today when foreclosures are an everyday occurrence. Further, 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.