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