Estoppel Certificates

Estoppel certificates can offer landlords security and peace of mind when changes take place in leasing or financing. They confirm lease details, rent payments, and potential claims, especially during property sales or refinancing. 

This article will cover the purpose and components of estoppel certificates, including what landlords need to know to utilize this important part of the due diligence process in real estate transactions. 

What is An Estoppel Certificate? 

An estoppel certificate, also called an estoppel letter or tenant estoppel certificate, is an agreement signed by a tenant acknowledging and indicating the current status and conditions of their lease. The estoppel legal principle prevents the tenant from claiming a change in the agreement later. 

Tenant estoppel certificates are common when commercial and multifamily properties change hands, to ensure that the commercial lease agreement terms are properly reflected in the estoppel agreement before prospective buyers take on a new commercial tenant. However, they can be useful during residential transactions as well. 

Estoppel certificates play a vital role during the real estate sales or mortgage refinancing process, ensuring clarity on lease terms. When a landlord makes plans to refinance their mortgage or sell a property with tenants to another investor, they will often require tenants to sign an estoppel certificate. This legal document confirms that the current tenants will keep their leases and all the conditions/terms within under the new ownership or mortgage.  

Why are Estoppel Certificates Used? 

Estoppel certificates are part of the due diligence process that all landlords must undergo during real estate transactions involving existing tenants. They protect landlords in case a tenant later tries to claim that their lease agreement did or did not include certain terms. 

Since the tenant confirms the status of their lease by signing the estoppel certificate, they therefore can’t claim later that its terms weren’t valid or correct.  

The buyer in a real estate transaction might also want estoppel certificates. This is because before a buyer takes over any existing leases, they usually want to know the status of active leases and the terms and conditions of each one. 

Contents of an Estoppel Certificate 

Estoppel certificates typically include: 

• The names and contact information of all parties in the lease agreement 
• Property address 
• Residential or commercial lease details, like the start and end dates, the monthly rent, and the security deposit 
• Any defaults in the lease terms 
• Any unpaid rent owed to the landlord 
• Existing renewals or upcoming terminations 

• Any verbal or informal agreements between the landlord and tenant 
• A record of all lease alterations and amendments (or confirmation that the lease has not been changed) 
• Any work, repairs, or renovations the landlord promised the tenant or are required by the lease and have not yet been completed. 
• Verification that the lease terms are the same as those outlined in the estoppel letter. 

Use Cases for Estoppel Certificates 

Below are a few instances in which estoppel certificates might be needed. 

• The landlord’s tenant wants to sublease the property, so the landlord prepares an estoppel certificate to ensure the tenant and the new subtenant are aware of the status of the lease beforehand. 
• The landlord is selling the property and wants to document things that were verbally agreed on between the landlord and tenant but never formally put in writing (e.g., parking spaces, subletting arrangements, pets, etc.) 
• The landlord is selling the property wants to clarify any maintenance promises or agreements that aren’t documented (e.g., the landlord had promised to paint the exterior). This keeps the new buyer in the know about previous arrangements. 
• A new buyer wants to purchase a commercial property currently governed by an operating document (e.g., a reciprocal easement agreement). The buyer might want to check with the other party in the operating agreement to ensure the owner has been making all necessary payments and terms are being upheld for commercial leases. 

Estoppel certificates can be beneficial for the tenant as well. For example, let’s say your tenant has a verbal agreement with you that allows her to have a pet, even though the lease has a ‘no pets’ clause. If you sell the property to another investor, the new landlord may go with the original terms of the lease and not allow the tenant to keep their pet. By having your tenant sign an estoppel certificate before the transition, she can be sure her pet allowance is included. Without one, she can’t be sure that the new buyer will uphold the verbal agreement she had with you. 

Tenant Obligations Regarding Estoppel Certificates 

Tenants’ cooperation is needed for estoppel certificates in most cases. 

1. Reviewing and confirming the estoppel terms

The tenant’s main obligation is to fact-check the estoppel certificate. 

Tenants who have received estoppel certificates should take a few hours to go over it and compare it with their current lease to identify any inconsistencies. Is there anything in the estoppel letter that contradicts the lease? Are there any informal or verbal arrangements/agreements that aren’t in the estoppel letter but should be? This includes conversations that may have happened over email or phone calls. If so, the tenant should reach out to you to resolve the inconsistency before signing. 

Inconsistencies often include informal agreements like parking arrangements, storage space, subletting, temporary rent adjustments, common area maintenance and upkeep, reduced rent in return for a service performed by the tenant, etc. 

2. Signing the estoppel certificate

Are tenants required to sign estoppel certificates? In some cases, yes. If the landlord included a provision in the original lease agreement that says tenants must sign estoppel certificates, then the tenant will be obligated to sign it. Including such a clause is generally a good idea. 

If estoppel certificates are not mentioned in your lease, you’ll need to consult state and local laws to verify whether tenants are legally obligated to sign them if there is no mention in the original lease agreement. 

In some cases, tenants can incur penalties for refusing to sign estoppel certificates. These may include: 

• Financial penalties or fees 
• Automatic approval upon failure to return 
• The landlord may have the right to sign it on the tenant’s behalf 
• The tenant may be held liable for damages incurred by the landlord due to the tenant’s refusal to sign it. 

Give tenants a few days to read and sign them before starting to collect estoppel certificates and considering a tenant’s failure to do so a breach of contract. Provide them with a timeframe so they know how long they have to read, sign, and return it. 

Impact of Estoppel Certificates 

Estoppel certificates are legally binding. For this reason, both parties should take the time to carefully review them and compare their details with those in the original rental agreement. 

Information should be as accurate and complete as possible to protect both parties legally during the real estate sale and transition to new owner. There are usually no risks to signing one as long as the information is accurate and agreed on by both parties. 

Conclusion 

Estoppel certificates are usually a straightforward and beneficial step in a property transaction to ensure that tenants and buyers are treated fairly. They require some up-front preparation and reviewing for both parties, but their benefits are worth the effort.