Estoppel Certificates: Be Careful What You Sign

Posted by David Lindner on May 16, 2013

If you are a landlord or tenant, or you represent landlords or tenants, then you are probably familiar with estoppel certificates. While estoppel certificates are commonplace in commercial leasing and often treated as simple “form” documents, they can have significant consequences if their terms and provisions are not fully understood. For example, a tenant who executes an estoppel certificate without fully reviewing and understanding it may be giving up the right to assert important defenses to potential landlord claims under the lease.

Before we talk about what specifically should or should not be in an estoppel certificate, let’s take a moment to review exactly what an estoppel certificate is and why landlords ask their tenants to sign them in the first place. Most leases require the tenant to provide the landlord with an estoppel certificate upon request. Lenders and purchasers typically require a landlord to obtain an estoppel certificate from the major tenants of a property, or a specified percentage of tenants, upon a sale or refinancing of the property. Estoppel certificates are a significant issue in a sale or refinancing because they provide independent verification to the buyer or lender of the cash flow from the tenants’ rent payments. They also help the buyer or lender identify any lease defaults or disputes with tenants that could cause a problem after closing.

In some cases, the lease will say exactly what information will be required to be included in the estoppel certificate. In other cases, the lease will contain little detail about the contents of the estoppel certificate. To avoid disputes about the content of the estoppel certificate, a good practice is to attach the actual form of estoppel certificate as an exhibit to the lease. Most often, the required information will include (a) the date of commencement; (b) a statement that the lease is unmodified and in full force and effect, or stating what modifications have been made; (c) the date to which rent has been paid; and (d) that there are no defaults by either party except as specified. If the landlord financed tenant improvements, then the estoppel certificate may state the remaining amount of the tenant improvement allowance. Depending on the buyer or lender’s requirements, there may be additional information or representations requested. The lease will typically require that the tenant return the executed estoppel certificate within a certain number of days after the landlord’s request. If the tenant fails to return the estoppel certificate in a timely fashion, the lease may give the landlord the right to execute the estoppel certificate on the tenant’s behalf.

By signing the estoppel certificate, the tenant “estops,” or prohibits, itself from taking a position contrary to what it stated in the certificate. Therefore, it is important to verify all the factual statements set out in the estoppel certificate and make sure they are true, and not too broad or overreaching. The tenant or tenant’s counsel should review the estoppel certificate against the lease requirements to make sure the statements in the estoppel certificate are consistent with what is required under the lease. The tenant must also pay close attention to the timeframe for responding, since failure to respond by the deadline may be a default under the lease.

The danger in certifying to something that is not accurate is that the tenant may be giving up the right to contest it at a later time. For example, a tenant who signs an estoppel certificate stating that there are no landlord defaults may have a difficult time later if it comes to light that there was a landlord default, even if it was unknown to the tenant at the time, during the period covered by the estoppel certificate. Therefore, the tenant or tenant’s counsel may try to limit the statements in the estoppel certificate by stating that they are true “to the best of tenant’s knowledge.” Above all, it is essential that the tenant confirm the accuracy of all the statements in the estoppel certificate prior to signing.

Contact the author of this article: David J. Lindner

Beware of These Lease Renewal Traps

Posted by David Lindner on February 15, 2013

A typical written lease agreement has a lease term that is specified as a number of months or years, or that extends from a certain commencement date to a certain termination date.  It is not uncommon, though, for a tenant to remain in possession of the premises beyond the expiration of the specified term.  When the tenant holds over beyond the term specified in the lease, a number of questions arise.  For instance, can the tenant be evicted immediately or is he entitled to stay for another term?  If he cannot be evicted immediately, how long is he permitted to stay and under what terms?  The answers to these questions turn on both the lease language and the conduct of the parties.

In Ohio, a tenant who holds over beyond the term of the lease is known as a “tenant at sufferance.”  The landlord has the option either to treat the tenant at sufferance as a trespasser and immediately file an eviction action, or hold the tenant at sufferance to a new lease term.  What sometimes happens, however, is that the tenant continues paying rent to the landlord and the landlord continues accepting it, even though the lease term has expired.  In such a case, the law treats the tenant’s continued payment of rent as an offer to hold over for an additional term, and the landlord’s acceptance of rent constitutes an acceptance of that offer.

When this offer and acceptance occurs, the length of the holdover tenancy is determined by looking to the rent payment provisions of the expired lease. Where the expired lease provided for payment of rent on a monthly basis, the holdover tenancy is treated as a month-to-month lease, which may be terminated upon 30 days’ notice by either party.  If the lease provides for annual rent, then the holdover term is from year-to-year.

In Kazmaier v. Fat Jacks, LLC, 2010 Ohio 3627, P4 (Ohio Ct. App., Wood County Aug. 6, 2010), the landlord brought an eviction action against the tenant, which had held over beyond the lease expiration date.  The court ruled that the landlord, by continuing to accept rent after the lease had expired, had agreed to an additional holdover term and therefore could not bring an eviction action until that term had expired.  Looking at the payment provisions of the expired lease, the court found that the holdover was on a year-to-year basis because the rent, although payable in monthly installments, was nevertheless stated as yearly rent.

Landlords will often dissuade tenants from holding over by including in the lease an express provision governing holdovers.  This provision may provide that the rent during any holdover term increase to 150% or even 200% of the rent payable in the immediately prior term.  Additionally, a landlord should pay close attention to the rent payment provisions of the lease so that a holdover tenancy is limited to a month-to-month term, rather than year-to-year.  While it is tempting to accept a check from a tenant after the lease has expired, a landlord must be aware that by doing so he inadvertently may be renewing the lease term.

Of course, leases often contain express renewal provisions.  For example, the tenant may have the option to extend the term of the lease for a certain number of additional periods by providing written notice to the landlord a certain number of days or months prior to the expiration of the current term.  The renewal terms will typically be upon all the same terms and conditions of the current lease, except that rent will be increased.  The rent increase may be stated as a fixed amount, a percentage, or be based upon increases in the Consumer Price Index.  Another option is to state that rent for any renewal period will be the “fair market rent,” which then must be agreed upon by the parties or determined through an appraisal process. 

The automatic renewal clause is another possibility, but something both landlords and tenants should consider carefully before including in a lease.  An automatic renewal clause states that if neither party affirmatively cancels the lease, the term will automatically renew for another term, thus creating a perpetual lease.  If the parties are not diligent about giving the required notice to terminate, they may find themselves bound to an additional term when they may have thought the lease was about to expire.  A trap for the unwary in using an automatic renewal clause is that even though the stated term may be just one year, the fact that it is a perpetual lease makes it in reality a lease that is in excess of three years.  In Ohio, all leases over three years must be notarized to be effective.  Therefore, if the parties fail to notarize a lease with an automatic renewal clause and the rent is monthly rather than yearly, the lease will be construed as a month-to-month lease.

As you can see, if the parties do not pay sufficient attention to these lease renewal issues, they risk ending up with a result different than what was intended.  Both landlords and tenants should give careful thought to what they are trying to accomplish and be sure to consult with their attorneys concerning the technical details of the lease renewal so they do not fall victim to one of these traps.

Contact David J. Lindner

I Have A Judgment Against My Tenant For Unpaid Rent - Now What?

Posted by David Lindner on July 16, 2012

Attorney Matthew Duncan presents the following article on collecting judgments against defaulting tenants: 

When rental property owners file a lawsuit to evict a tenant (called a forcible entry and detainer action), the complaint typically contains a second cause of action for unpaid rent.  Depending upon the amount of rent that is left unpaid by the tenant, it may or may not make economic sense for the property owner to pursue collection of the rent once a tenant has been properly evicted.  In Ohio, separate hearings are held to determine the issues of whether the property owner is entitled to retake possession of the property from the tenant and the amount of rent and other damages that the tenant owes to the owner. 

The initial hearing on the issue of whether or not the property owner is entitled to evict the tenant is generally a short proceeding that takes place soon after a forcible entry and detainer action is filed.  However, a tenant has twenty-eight (28) days from the date that he or she is served with the complaint to file an answer in response to the second cause of action for unpaid rent.  (Ohio Rule of Civil Procedure 12)  If the tenant fails to file an answer within that time, it is advisable for the property owner to file a motion for default judgment with the court, asking that a judgment be entered against the tenant for the balance of rent and damages that are then owed under the lease agreement.  Depending upon the local rules of the court that hears the case, some courts require that you submit an affidavit supporting the amount of rent and damages owed by the tenant, while others do not.  Some courts will also require the appearance and testimony of the property owner at a hearing on the second cause of action for unpaid rent even when a tenant has not filed an answer in the case. 

In the event that the tenant does file an answer to the complaint, a hearing will be held by the court at which the property owner must present testimony and evidence to prove the amount of liability that is owed by the tenant.  The tenant also has the opportunity to present testimony and evidence concerning what amounts are owed under the lease, if any.  The court will then make a ruling on the amount owed by the tenant in the form of a judgment. 

Obtaining a judgment gives you a court’s ruling that you are entitled to collect a certain amount from the tenant, but is in no way the last step in attempting to collect payment from the tenant.  In order to begin trying to collect the judgment, a certificate of judgment lien should be recorded in the county in which the former tenant now resides.  Judgment liens attach to any real property owned by the judgment debtor in the county in which they are recorded.  Judgment liens only attach to property owned by the debtor at the time that the lien is filed.  In Ohio, judgments and judgment liens are good for five (5) years and then must be renewed as provided in Ohio Revised Code Section 2329.07. 

In the event that you do not have information concerning the former tenant’s assets, such as place of employment, bank accounts or vehicle information, it is advisable to conduct a debtor’s exam of the tenant.  A debtor’s exam must be scheduled through the court, which will serve the tenant with a notice to appear at the courthouse to answer questions about their assets.  As part of the debtor’s exam notice, you may also include a list of requested documents for the debtor to bring with them, such as tax returns, bank account statements, vehicle titles and wage payment records.  It is advisable to have an attorney conduct the debtor’s exam for you. 

If you know your former tenant’s place of employment through a debtor’s exam or from other sources, a wage garnishment is one of the more effective ways to collect a judgment.  Your local clerk of courts will have a form to use for wage garnishments.  After a wage garnishment notice is issued, the tenant’s employer must file an answer stating whether the person is employed there and whether there are any garnishable wages available to you.  Up to 25% of a person’s wages can be garnished by creditors.  In the event that another creditor is already garnishing the tenant’s wages, you will have to wait until your garnishment becomes effective.  Additionally, debts such as child support payments take precedence for garnishment by law.

A judgment debtor’s bank accounts may also be attached to pay a judgment in a procedure similar to a wage garnishment.  Again, your local clerk of courts has forms available to use for bank account attachments.  In order to be able to attach a judgment debtor’s bank account, you will need to know at what bank their accounts are located, and will need to serve said bank with the attachment request.  The bank must then file an answer with the court stating how much money was in the account at the time that the attachment was filed.  If there is money in the account that is not otherwise exempt from attachment by law, the bank should issue a check to the clerk of courts for the amount in the account, provided that it is less than or equal to the amount owed under your judgment.

A generally less effective means of collecting a judgment is through attachment of personal property.  This procedure involves having the local sheriff attach and appraise personal property owned by your judgment debtor and to auction the property at a sheriff’s sale.  There are numerous exemptions to this procedure found in Ohio Revised Code § 2329.66.  Motor vehicles are the most common type of personal property sold through an attachment.  Unless the motor vehicle is valuable enough to cover a significant portion of your judgment, it is generally not worthwhile to pursue this collection route given the considerable time and expense involved in this procedure.

Once you have gone through the trouble of obtaining a monetary judgment against someone, it is generally advisable to investigate what assets they might have to pay off the judgment.  The options described above are the most common, though not necessarily the only legal means of collecting a judgment.  It is advisable that you seek legal counsel to determine what collection options might be the most feasible for your particular circumstances.

Contact Matthew Duncan for more information.

Attorney David Lindner Quoted in Plain Dealer Rental Article

Posted by David Lindner on July 10, 2012

Attorney David Lindner of Buckingham Cleveland was quoted in a recent Plain Dealer article discussing issues that tenants should be aware of when signing a lease.

Guarantor of Commercial Lease May Be Liable for Attorneys' Fees

Posted by David Lindner on July 11, 2011

Buckingham Attorney Clay Keller analyzes the following recent Ohio case in which a guarantor was held liable for the landlord's attorneys' fees:

The use of a guarantee for a commercial lease is sometimes employed when a landlord seeks additional recourse to secure payment of rent in the event of a default under the lease. As illustrated by a recent appellate decision by the Ohio Fifth District Court of Appeals in Strip Delaware L.L.C. v. Landry’s Restaurants, Inc., et al. (2010) 191 Ohio App.3d 822, the liability of a guarantor can be extensive and go well beyond just payment of what would be commonly understood to constitute “rent” due under the lease.  In the Strip Delaware case the landlord, The Strip Delaware, L.L.C., entered into a lease with Landry’s Seafood House-Ohio, Inc., which was the tenant.  The parent corporation of the tenant, Landry’s Seafood Restaurants, Inc., a Delaware Corporation (“Landry’s) executed a separate guarantee agreement with the landlord concerning the lease.

On appeal Landry’s argued that it was not liable to pay the landlord’s attorney fees which it incurred in the subsequent lawsuits field after the tenant defaulted.  Landry’s argued it only executed a separate guarantee agreement which did not expressly make it liable for the payment of attorney fees.  The appellate court flatly rejected Landry’s argument and affirmed the trial court’s award of a judgment in favor of the landlord and against Landry’s for attorney fees in the amount of $133,908.66, plus interest at the rate of 18% from June 9, 2008, when the trial court entered the original judgment granting attorney fees.

This case illustrates an all too common problem that arises in the context of commercial guarantees whether the same are used in a lease or some other commercial transaction document. When a guarantee agreement or guarantee provision is made part of the transaction, the party executing as “guarantor” does not fully understand or appreciate what it is agreeing to pay in the event of a default by the tenant or primary obligor. Oftentimes the misunderstanding is the difference between a “business understanding” of what is being agreed upon as compared to the legal significance of what is actually set down in writing and executed by the parties. For example, in everyday usage the term “rent” is commonly understood to mean the amount that must be paid per month for rental of the property at issue and perhaps it also includes associated CAM (common area maintenance) charges. The term “rent,” however, can have a far broader meaning depending upon how it is defined in the lease. As one would expect, if a dispute progresses to litigation involving a commercial lease, what had been discussed in the negotiations, or what the parties believe was the agreement, will not be given any consideration by the court if the issue is covered by clear and unambiguous provisions in the written lease.

In the Strip Delaware case the guarantee agreement executed by Landry’s did not specifically say anything about Landry’s being liable to the landlord for payment of its attorneys’ fees in the event the landlord became involved in litigation due to the tenant’s default. But, the lease broadly defined rent to mean: “[e]xcept as provided to be paid by Landlord, Tenant shall pay any and all rents and sums of money or charges required to be paid by tenant under this Lease (collectively the ‘Rent’).” The lease further provided that in the event the landlord had to bring suit for “recovery of rent or any other amount due” the losing party would be liable to pay the prevailing party its expenses, attorneys’ fees and court costs. 

After analyzing the definition of “rent” in the lease and the language utilized in the guarantee agreement the trial and appellate courts both concluded that the guarantee agreement executed by Landry’s made it liable for payment of landlord’s attorney fees plus 18% interest, in addition to the other amounts recoverable by the landlord.

Accordingly, cases like Strip Delaware illustrate the importance of having a thorough understanding of what all the technical aspects of a commercial lease mean before it is executed so that if a problem later arises the parties, including any guarantor, are not subjected to unpleasant surprises regarding their respective rights and obligations under the lease.