Estoppel Certificates and Why They Are Important!
Introduction:
Whenever I sell a property and represent either the seller or buyer, I make sure to always (100%) ask for tenant estoppel certificates. I do this regardless of whether or not my clients ask for it. From the seller side, I make sure to provide this protection for them just in case there is a dispute after escrow closes and the buyer or tenant wants to make a claim against the seller for reasons that are now disagreed upon between the new buyer and the tenant. If I'm representing the buyer, I make sure my client get tenant estoppel certificates to make sure all factors relied upon by the buyer are verified and stops the tenant from asserting other claims that may not be true and thus hurt my client. In the grand scheme of things, in the course of buying and selling real estate where tenants are involved, estoppel certificates can loom large during the escrow period and also after the sale is completed. Therefore, it is always better to have them than not have them. Buyers often want them, and lenders often require them. The only time estoppel certificates are not needed is when there are no tenants on the property. In other words, when the property is 100% vacant.
So, what is an Estoppel Certificate?
An estoppel certificate is a legally binding document where the tenant represents or promises certain things and verify certain things contained within their lease agreement. The items typically included in an estoppel certificate includes the following:
1. The lease start and end dates
2. The current rent amount including any amounts paid up to date. For example: rent is currently paid up to a certain date, like the end of the current month.
3. Verification of security deposits (if any) being held by landlord received from the tenant.
4. Any options to extend lease at the end of lease term and the terms of such options to extend or renew.
5. Any modification to the original lease terms.
6. If tenant and landlord are in any pending lawsuits or disputes...etc.
7. Identification of any lease guarantors.
8. If the premises has been altered, modified, or improved in any way that is different from when the lease was originally executed.
9. Is tenant or its guarantor currently involved in any bankruptcy proceedings?
10. Is tenant currently the occupant or has the premises been sublet to anyone else?
11. The square footage of the lease premises.
It is important to note that good lease agreements always include them and they require the tenant to complete one as a requirement of the lease contract. This requirement is necessary because tenants oftentimes either knowingly or unknowingly don't understand them and sometimes just flat out refuse to complete it. The required language in a lease agreement basically compels the tenant to cooperate or else face the possibility of the landlord completing one on their behalf and holding them liable for it or giving the landlord the power to declare a breach on the lease which can result in lease termination. I've never seen this happen, but it's certainly in some lease agreements. Here is an example of the estoppel certificate clause in the AIRCRE Lease Agreement:
"16. Estoppel Certificates.
(a) Each Party (as "Responding Party") shall within 10 days after written notice from the other Party (the "Requesting
Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "Estoppel Certificate" form published by the AIR Commercial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party.
(b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such 10 day period, the Requesting
Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party's performance, and (iii) if Lessor is the Requesting Party, not more than one month's rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party's Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. In addition, Lessee acknowledges that any failure on its part to provide such an Estoppel Certificate will expose Lessor to risks and potentially cause Lessor to incur costs not contemplated by this Lease, the extent of which will be extremely difficult to ascertain. Accordingly, should the Lessee fail to execute and/or deliver a requested Estoppel Certificate in a timely fashion the monthly Base Rent shall be automatically increased, without any requirement for notice to Lessee, by an amount equal to 10% of the then existing Base Rent or $100, whichever is greater for remainder of the Lease. The Parties agree that such increase in Base Rent represents fair and reasonable compensation for the additional risk/costs that Lessor will incur by reason of Lessee's failure to provide the Estoppel Certificate. Such increase in Base Rent shall in no event constitute a waiver of Lessee's Default or Breach with respect to the failure to provide the Estoppel Certificate nor prevent the exercise of any of the other rights and remedies granted hereunder.
(c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall within
10 days after written notice from Lessor deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past 3 years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth."
As you can see, the AIRCRE lease contains very strong wording to ensure that the tenant cooperates in completing an estoppel certificate once requested.
Once the tenant completes and sign the estoppel certificate, it binds the tenant to the statements included because third parties like buyers and lenders are relying on the information contained within the certificate to make decisions that may put their investment at risk. From the seller side, tenant estoppel certificates reduces the risk of "failure to disclose" factors that may have been accidently omitted; and from the buyer side, the buyer reduces his/her risk by being aware of factors that may influence his/her buying decision and at what price to complete the sale.
If you want to read more about estoppel certificates and a court case actually involving estoppel certificates, then click on the following link.
https://www.portersimon.com/tenant-estoppel-certificates-a-peak-behind-the-curtain/
Wayne Brown
Senior Broker
DRE #00914550
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