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An estoppel certificate in real estate is a summary of the pertinent clauses found within a lease, and verified by signature of the tenant. The purpose of such an estoppel letter is to allow the landlord to confirm to potential purchasers the high-level details of each commercial lease for the property, so they can make a more informed decision about purchasing the building.
The estoppel certificates signed by the tenants of the property verify the future cash flow, length of lease terms, and any outstanding claims and defaults.
Unless otherwise stated and agreed to in your lease, it is always a cost to the landlord, since they are the party that benefits from the completion and verification of the estoppel certificate.
Most landlords will also make the process as frictionless as possible, by filling in the key details so the tenant only needs to verify the items, and not fill them in.
The landlord benefits as he is able to sell the building more quickly and for a maximum price with completed estoppel letters, and the purchaser can make a more informed decision.
As signing the estoppel is a representation of material items within your lease, it is crucial that your lease be reviewed to ensure the estoppel agreement is accurate.
If you sign the estoppel certificate and it contains false information, that validation in the estoppel letter could override rights you have in the lease.
For example, if you have an exclusivity right but the estoppel certificate says there is no exclusivity in your lease, then that accidental confirmation could eliminate that exclusivity right you had (Piggy Wiggly of Mansfield, Inc. v. Wolpert Assoc.).
Want some help to review your estoppel certificate? If so, click HERE.
Although a tenant estoppel certificate is not a contract, your lease is, and it likely has wording surrounding your duties to execute estoppels in a timely manner.
It may also have wording that stipulates what happens if you fail to execute the estoppel within the deadline.
The common clauses are:
1) The landlord effectively has power of attorney and signs on your behalf.
2) You are in default of the lease.
3) The landlord signing on your behalf sounds like it is harmless, but what if there is false information in the estoppel? You would not want to put yourself in a position to dispute any items with the future landlord.
The second clause is much worse for tenants. It is very landlord-favorable and is designed to provide a strong incentive for tenants to comply with the estoppel retrieval process, but could also be used as a reason for a landlord to cancel a lease.
However, it is actually more common for a lease to not mention estoppel certificates at all, rather than for a tenant to be in default.
The tenant signs the estoppel certificate and returns to the landlord. The landlord may sign the estoppel certificate or may draft a separate letter for the potential buyers warranting that all estoppel certificates are accurate.
Both documents are important and misunderstood. An SNDA agreement comes into effect when a landlord defaults on its loan obligations and a tenant wants to remain in the space unaffected.
You can find out more about SNDAs here: What is an SNDA?
In never hurts to insert a clause that states that the foregoing was answered to the best of the tenant's knowledge - this will help protect you somewhat if there are any future disputes.
It is also wise to clear up any ambiguities, disputes or verbal agreements within the estoppel to ensure any special rights you have are added to the estoppel in writing, so that the new owner will be aware of those rights before purchasing.
Examples would include free parking, reserved parking, free after hours HVAC use, pets allowed in the office, expansion rights, etc.
It is worth a discussion with your landlord. Since the value of a building is directly tied to the length of the lease contracts, extending your lease could benefit the landlord by increasing the sale price.
In exchange, the landlord may be willing to trade off some free rent immediately, or provide you a tenant improvement allowance or more flexible expansion rights.
Keep in mind that if the landlord has issued estoppel letters, then the building may be sold fairly quickly and time is of the essence.
Also keep in mind that the landlord is under no obligation to renegotiate with you, and you should not try to use the estoppel certificate as leverage to get a new deal - just ask the landlord if it may be mutually beneficial to work out a new lease prior to selling.
Estoppel certificates have a timeline associated with them, so the landlord can provide the to the prospective purchasers in a timely fashion to help ensure a quick and smooth sale of the building.
Ten business days is common and reasonable.
Not all leases provide instructions on what has to happen when a landlord provides an estoppel certificate, even though it is to the landlord?s benefit to provide such a clause.
Here is a sample clause, and it would be worth looking through your lease to find a clause like this:
From time to time the landlord may deliver an estoppel certificate to the tenant, providing a summary of pertinent clauses within the Lease. Tenant agrees to confirm said details, execute, and deliver back to the landlord within five (5) business days from receipt of the estoppel certificate. Failure to comply shall mean that the Tenant is in agreement with the terms of the estoppel certificate.
Here is what a tenant estoppel certificate form looks like:
And here are the clauses in that estoppel template:
1. The term of the lease commenced on the 1st day of July, 2017 and expires on the 30th day of June, 2026, subject to the exercise of rights of renewal or extension as set out in the Lease.
2. The Tenant is in possession of the Premises and is carrying on business in accordance with the terms of the Lease. The Premises is comprised of 2,355 square feet of Rentable Area.
3. The Lease has not been altered or amended since its execution and is in full force and effect.
4. The minimum rent will be $80,225.00 per annum effective July 1, 2017, in accordance with the terms of the Lease.
5. The amount of prepaid rent or security deposit currently held by the Landlord is $160,000.00.
6. All inducements, tenant improvement allowances and rent-free periods have been paid in full.
7. To the best of the Tenant?s knowledge, the Premises have been complied in accordance with the obligations of the Landlord. The Tenant is not claiming any deduction, abatement or set-off of any rent payable, nor any counterclaim or defence against the enforcement of its obligations to be performed under the Lease.
8. There is no existing default or breach of the Lease on the part of the Landlord of which the Tenant has notice or of which it is aware.
9. There is no agreement between the Tenant and the Landlord, other than that contained in the Lease, pertaining to the obligations of the Landlord and the rights of the Tenant relating to the use and occupation of the Premises by the Tenant.
10. To the best of the Tenant's knowledge, there is no litigation or governmental or municipal proceedings commended or pending or threatened against the Tenant with respect to the Premises or which, if decided against it, would adversely impair its ability to comply with the terms of the Lease.
Then there would be a spot for the tenant to sign and date.
The problem is that most tenants are so busy running their business that reading the lease to verify that the estoppel certificate reflects the lease is a low priority.
Landlords require the prompt co-operation of tenants to execute and return back estoppel certificates in order to sell or refinance buildings. It can also be beneficial to tenants to clear up any disputes or renegotiate leases (although this is rare) during this time.
If you are in possession of a tenant estoppel certificate, it would be wise to complete the form as soon as possible and return it to your landlord.
By the way, did we mention that Lease Ref offers an Tenant Estoppel Certificate Review Service? Simply upload your lease with the estoppel certificate or letter and we are happy to review and verify that they match.
All you need to do is select the Bronze Package.