One of IPG’s clients experienced a delay in finalizing a building purchase due to the building owner’s challenge in obtaining tenant estoppel statements from all tenants. Typically encountered during the due diligence of an acquisition or the loan underwriting process in commercial real estate, the concept of tenant estoppel often raises questions.
What exactly is a tenant estoppel certificate, and how does it function? This article explores the intricacies of tenant estoppel and its role in real estate transactions.
Estoppel Certificate Definition
When acquiring commercial property, both the prospective buyer and lender often require a specific legal document that confirms various lease terms. This document is known as a “tenant estoppel certificate.”
The purpose of a tenant estoppel certificate is to have the tenant affirm key details about their lease. By signing this certificate, the tenant officially acknowledges certain aspects of the lease agreement. Consequently, they are ‘estopped’, or legally prevented, from later denying or contradicting these acknowledged facts.
Defined formally, a tenant estoppel certificate is a “signed statement by a party, such as a tenant or mortgagee, which verifies for the benefit of another party that certain facts are accurate. These facts include the existence of a lease, the absence of defaults, and the accurate rent paid up to a specified date.
Issuing this statement legally binds the party to these stated facts, preventing them from subsequently asserting a different set of circumstances.” (Sourced from Black’s Law Dictionary, 572 (7th Ed., 1999))
What is an Estoppel Certificate?
In more understandable words – The tenant estoppel agreement is a certified document signed by a tenant that verifies the terms and conditions and current status of their lease.
Many commercial real estate leases require a tenant to provide the estoppel letter or the certificate when requested, and that is very often a critical step during the due diligence phase of acquisition as well as during the underwriting of the CRE loan.
Landlords take Estoppel Agreements very seriously, due to the sale not being able to be completed without the agreement. It’s advised that tenants take it equally as important.
But – why is it that important? It provides proof of cash flow which is what a potential investor or lender in a property wants to see and is concerned with.
The word “stop” means to prohibit, so the tenant estoppel clause is a sort of a certificate that prohibits the tenant from taking a position contrary to one that is written in the certificate.
What Is the Purpose of an Estoppel Certificate?
The tenant estoppel certificate serves to deliver precise and legally binding details concerning a tenant’s lease responsibilities and entitlements. Its primary function is to aid buyers and lenders in making well-informed decisions by verifying a property’s financial health and identifying any potential risks or liabilities. Essentially, it acts as a tool for ensuring clarity and preventing misinterpretations during property transactions, contributing to more efficient negotiations and seamless closure processes.
What Does a Tenant Estoppel Certificate Contain?
The principal certification in any estoppel agreement is the definition of the lease type, a list of detailed amendments, and a statement that no other amendments or modifications can be made to the lease.
If the definition of what is an estoppel certificate is clear now, let’s look into the actual items required in tenant estoppel agreement do vary, but there are some common points usually covered in a typical tenant estoppel letter or certificate:
- The commencement date of the lease
- Date to which the rent is paid
- Statement of no defaults by the landlord or the tenant
- If there is a default by either party, a specification is required
- Verification that lease is unmodified and in full force and effect
- If it is modified, then the tenant estoppel clause has to include a statement verifying what modifications were made
- Confirmation that tenant has the option to lease or use any other space in the building (if so)
- Security deposits and interest rates
- Confirmation that landlord is not in bankruptcy
- Contact information of both parties: addresses, phone numbers, email addresses
When it comes to estoppel real estate leases might include a provision requiring a tenant to provide the tenant estoppel certificate when requested, although the exact details and terms of what’s included in the tenant estoppel agreement greatly differ. All the points stated above represent a good starting point.
How A Tenant Estoppel Letter Protects Tenants, Landlords, and Buyers
When someone is trying to buy a property from your landlord, the buyer needs to do their due diligence through the tenant estoppel certificate. They just want to ensure that the terms of the lease are “set in stone”, and avoid unexpected liabilities and expenses.
Without a signed tenant estoppel certificate, your landlord has no obligation to uphold this agreement. However, when you sign the estoppel real estate buyer/leaser won’t have any doubt over the proper enforceable clauses.
A tenant estoppel certificate contains several pieces of information that identify the tenant and the landlord, such as the address of the apartment you are renting, the start date and end date of your lease, and any prepaid rents, and/or security deposits.
An estoppel letter also highlights whether either party has defaulted any responsibility or right under the lease duration. This estoppel agreement will also contain detailed information on any existing renewals or extensions.
What Happens If Someone Refuses to Sign Tenant Estoppel Letter?
If a tenant refuses to sign the estoppel statement, a landlord may reserve the right to sign it for you as your agent, or the landlord can consider your failure to sign as an acknowledgment that the statements within the certificate are indeed accurate.
In the worst-case scenario, there may be financial penalties and/or fees that your landlord charges you. If your landlord has included language directed in the estoppel agreement request, it’s best to sign the letter after reviewing the specific clauses and contingencies.
Two Rules Guiding The Creation Of Estoppel Agreement
Lawyers can come up with many other matters that can be included in the tenant estoppel certificate but there are two basic rules to be guided by.
Firstly, we need to make sure the underlying lease contains the obligation of the tenant to sign an estoppel certificate. No lease form and agreement can be used without its proper obligation.
If it’s possible, the text should contain words addressing that the tenant will sign an estoppel certificate and that he/she has been acquainted with the terms that the landlord requests.
All of the clauses governing estoppel agreement should allow for additional terms that the landlord (or its lender) may request, and give some period of time within which the tenant needs to return the estoppel certificate to the landlord. Long delays can result in difficulties in transactions.
The second rule says that only the tenant is bound by the estoppel certificate since he/she is the only party signing the certificate. Usually, the landlord includes the rent, security deposit, options to extend, and other material terms in the agreement so that they are bound too.
The landlord completes the estoppel certificate and provides the option to extend to the tenant, but that option was previously exercised and is no longer effective. This error can be interpreted against the landlord and the purchaser because the language in a contract is generally interpreted against the party who caused the ambiguity to exist.
A tenant estoppel certificate is of great importance when dealing with rental properties, specifically in the case of commercial real estate.
It ultimately protects you from being liable for any discrepancies stated in lease terms after a sale has been made and it improves your ability to negotiate favorable terms by reassuring potential buyers cash flow.
Don’t Let it Scare You
If you’re ever unsure about what an estoppel certificate entails, don’t hesitate to reach out to your landlord or the IPG team. Most landlords are more than willing to discuss and clarify any doubts you might have. Open and clear communication can easily clear up any issues, making it simple to get a tenant estoppel agreement signed with little fuss.
At IPG, we’re dedicated to demystifying the commercial real estate process for our tenants. If you have questions or need further clarification, you can always consult our glossary of terms or follow us on LinkedIn for more insights.
