An unreleased mortgage or other encumbrance on a leasehold interest does not impair marketability of title to the fee if the leasehold has expired or has been terminated.
Comment 1: The validity of a leasehold mortgage is dependent on the continued existence of the lease that constitutes the security. If that lease has expired for any reason, so also has the security ceased to exist. Thus, an unreleased mortgage secured by an expired or terminated lease is of no further force or effect. Marketability of title is not impaired by virtue of such a mortgage, and no release of mortgage is required. The same rule applies to involuntary encumbrances that may have been lodged against the expired or terminated leasehold interest.
Comment 2: Where the leasehold encumbrance is on a lease that appears to have expired by its own terms, the title examiner must still take exception for the encumbrance unless the title examiner can verify that the lessee is no longer in possession, since any extension of the lease, even if only by oral agreement, may cause the leasehold encumbrance to remain in effect. In addition to expiring in accordance with its terms, a lease can also terminate before its expiration. A variety of circumstances can operate to terminate a lease, the most common termination resulting from the issuance of a notice to quit following nonpayment of rent or a court order terminating the lease. Mallets Bay Homeowner’s Association, Inc. v. Mongeon, 2017 VT 27 (2017).
Comment 3: An encumbrance on the tenant’s leasehold expires if the lease is terminated and the tenant no longer has an interest in the leasehold. Leases may be terminated upon mutual agreement of the parties, or upon the tenant’s abandonment of the premises or by a judgment of eviction. The title examiner’s problem is that none of these events is likely to be evidenced in the land records. In the absence of such evidence, the title examiner must continue to carry the leasehold encumbrance as an exception to title.
Comment 4: In the circumstance where there is an agreement between the tenant, tenant’s lender and landlord, the abandonment of the leased property by the tenant should not be relied upon as evidence of the termination of the tenant’s lender’s rights in the absence of an agreement by the lender.
History
September 2024: Standard was added.