One of IPG’s clients experienced a delay in finalizing a building purchase due to the building owner’s difficulty in obtaining tenant estoppel certificates 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.
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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))
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.
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.
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:
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.
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.
