Title insurers take note: the D.C. Court of Appeals says taxes on long-term ground leases can’t be sidestepped by creative deal structuring.
On Sept. 25, the District of Columbia Court of Appeals affirmed that Commonwealth Land Title Insurance Company, as subrogee for its insured COMM 2013-CCRE12 K STREET NW, LLC, was liable for over $1 million in transfer and recordation taxes related to a ground lease at 2900 K Street NW. The case began in 2013, when Lano/Armada Harbourside, LLC sold five condominium units to Allegiance 2900 K Street LLC for $39 million. The sale was documented in a “Bargain and Sale Deed,” which stated that Lano/Armada reserved a leasehold interest in the property. On the same day, Allegiance and Lano/Armada executed a separate “Ground Master Lease,” granting Lano/Armada a leasehold estate expiring in August 2043, with options to extend up to 117 years. The lease required rent payments starting at $1,375,000 per year, increasing annually.
Lano/Armada submitted only the deed for recordation, along with a tax return reflecting the transfer of fee simple interest, and paid $1,131,000 in taxes. The ground lease itself was not recorded, and no taxes were paid on it at that time. The next day, Lano/Armada executed a deed of trust with Cantor Commercial Real Estate Lending, L.P., granting a security interest in the leasehold for a $39.5 million loan.
In 2019, after a series of assignments and a default, COMM 2013-CCRE12 K STREET NW, LLC acquired the leasehold interest and attempted to record a foreclosure deed. The Recorder of Deeds refused, noting that the long-term ground lease had never been recorded or taxed. Commonwealth Land Title Insurance Company, as subrogee for COMM 2013, paid the overdue taxes “under protest” and sought a refund.
Commonwealth argued that the ground lease was not a taxable transfer but a retained interest, and that the statute of limitations for tax collection had expired. The court disagreed, holding that the ground lease was a separate, taxable transfer of a leasehold interest, not a mere retention of rights by the seller. The court found that under D.C. law, a leasehold interest of thirty years or more must be recorded and is subject to transfer and recordation taxes. The court also held that the statute of limitations for tax collection did not begin to run because no proper tax return had been filed for the ground lease at the time of the original transaction.
For the insurance industry, the case is a wake-up call. Title insurers like Commonwealth are often responsible for ensuring that all taxes and recording requirements are satisfied in complex real estate transactions. If these obligations are missed, insurers may be forced to pay significant sums themselves, as happened here. The decision highlights the need for title insurance professionals to closely scrutinize every aspect of a deal – especially when long-term ground leases are involved – and to advise clients accordingly. It also underscores the broader compliance and risk management responsibilities that come with insuring commercial property interests.
While the decision did not discuss specific insurance policy clauses, it makes clear that title insurers are not immune from the consequences of overlooked tax and recording requirements. As commercial real estate deals become increasingly sophisticated, this ruling is a timely reminder for insurance professionals to keep compliance at the forefront.
