What is a Tenant Estoppel Certificate, and Why Is It Needed?
Tenant estoppel certificates are common in commercial real estate when leased properties are financed, refinanced, sold, or otherwise transferred. Tenants are often asked to sign certificates in order to confirm details of their lease for third parties.
The purpose of these certificates is to confirm the most pertinent details of a lease, usually for a third party that’s involved in the property transaction.
What is a Tenant Estoppel Certificate?
A tenant estoppel certificate is a legal document confirming the most pertinent details of a commercial lease. The tenant certifies that the stated information is correct, as a means of certifying lease agreements for third parties.
These certificates are most often used to pacify lenders, investors, and buyers that are becoming involved in a property. For example, estoppel agreements are standard practice when financing, refinancing, or transferring ownership.
The certificate effectively “estops,” or prevents, the tenant from later claiming any inconsistencies or discrepancies between the lease agreement and the estoppel certificate. It also serves as a way to confirm cash flow for property valuation.
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Why are Estoppel Certificates Necessary?
Third parties must rely on tenant estoppel certificates for multiple reasons. These certificates are used as a means of:
- Verification: By signing the estoppel certificate, the tenant confirms the accuracy of the lease terms, such as rent amount, security deposit, lease commencement and expiration dates, and any additional agreements between the landlord and tenant (see Inaccurate).
- Protection: When purchasing or financing a property, a buyer or lender relies on the landlord’s estoppel certificate to ensure that there are no hidden issues or discrepancies that may impact the property’s value or lead to legal disputes.
- Facilitate: Estoppel certificates help to streamline property transactions by providing crucial information to all parties involved, reducing the likelihood of misunderstandings or delays in the process.
While the property owner’s good word is certainly the main source of information, an estoppel certificate essentially confirms that the property owner is forthright with any lease details that they give to a lender, buyer or investor.
How to Obtain Estoppel Certificates
Estoppel certificates are frequently mentioned in commercial leases, and any particulars in a lease would supersede these generalities. Nonetheless, landlords can usually obtain estoppel certificates by:
- Draft: The landlord should create a document outlining the key details of the lease agreement that need confirmation from the tenant (see Be Included).
- Request: The landlord should provide the tenant with a copy of the estoppel agreement, along with a reasonable deadline to review and sign it. The deadline is often specified in a lease (e.g. 15 days).
- Follow Up: If the tenant does not respond within the given deadline, the landlord should follow up to ensure that the tenant understands the importance of signing the certificate and to address any concerns the tenant may have.
- Retain a Copy: Once signed, the landlord should keep a copy of the estoppel agreement for their records and provide a copy to any relevant parties, such as buyers or lenders. The tenant should have their own copy as well.
What Must Be Included in an Estoppel Certificate?
The contents of estoppel certificates generally aren’t dictated by law. A certificate should include any pertinent information contained within a lease. This normally includes lease details such as:
- Start date and end date of the lease
- Rent amount due and payment due date
- Security deposit amount and any applicable interest
- Renewals, extensions, or rights of first refusal (if applicable)
- Rent or other concessions (if applicable)
- Option to sublease or prohibition against it
- Any lease modifications or amendments
- Any additional agreements or handshake understandings
In addition to these, there should also be the tenant’s contact information should the third party need to reach out to the tenant for some reason.
Estoppel certificates also serve to confirm the status of the lease. They should include statements that the lease is fully in effect, and that no defaults exist. Any default ought to be noted, but landlords usually try to rectify potential default issues before drafting an agreement — it doesn’t help a landlord to have defaults when they’re financing or selling.
What Happens If an Estoppel Certificate Is Inaccurate?
Should an estoppel certificate and lease contradict one another, courts have been known to read each agreement and sort them out in the context of each other. In many cases, the estoppel supersedes a lease because the estoppel certificate is more recent.
For this reason, landlords and tenants should only sign estoppel certificates if all relevant information is included and accurate.
What Happens if a Tenant Refuses to Sign the Estoppel Certificate?
Some tenants may refuse to sign a commercial estoppel certificate for any of a myriad of reasons. Because any refusal can delay or complicate a transaction, landlords should be aware of the most suitable course of action in the event that a tenant refuses.
Failure to Meet Deadline
Most commercial leases have a clause that requires tenants to sign accurate estoppel agreements within a certain period after one is received. Should a tenant refuse or fail to sign within the stipulated window — and not provide a valid reason for doing so — the landlord might have a few courses of action:
- Complete the certificate as an “attorney-in-fact” for the tenant
- Complete the certificate assuming “silence is consent”
- Execute a specific monetary policy as outlined in the lease
Which of these is a permissible and suitable course of action depends on the specific lease and situation. Landlords should consult with a commercial property attorney in these situations.
Some tenants, particularly large national tenants, prefer to work with their own in-house forms for simplicity. A tenant occasionally will refuse to sign simply because they want to provide their own form.
In these situations, landlords should check whether the third party will accept the tenant’s form. Nothing must be done if the form is acceptable. If not, then a compromise must be worked out with the tenant.
If a tenant has grounds to decline based on inaccuracies, defaults or a landlord’s failure, then these issues should be worked out with the tenant if possible. A certificate can be signed if legitimate issues are noted on the certificate, but it’s preferable to reach an agreement before signing so that the information does needn’t to be included.
Wrapping Things Up
Tenant estoppel certificates maintain transparency and accuracy in lease agreements, particularly during property transactions such as financing, refinancing, or selling. If you’re a tenant or landlord in commercial real estate, make sure you understand the importance of these certificates — and the importance that they are accurate when signed.