What is an Estoppel Certificate and what purpose does it serve?

The purpose of an Estoppel Certificate:

If a landlord is selling or leasing out a piece of commercial real estate (as in an apartment building) they will often be required to show proof to the buyer that they are making an income off of the building (since that is often mainly the reason why it is being purchased). In that case, they will produce an Estoppel Certificate for each of the tenants occupying the premises, that have been signed and dated (by the tenants), stating that they pay their rent on time, the terms of the lease, and what it the agreed rent price is.
In some cases, a landlord will have a tenant sign the certificate when they move in, in case they are in the process of selling the property. In most cases, however, the landlord will just ask the tenants to fill and sign the forms if the occasion arises.

Definition of an Estoppel Certificate:

A written form that gives confirmation that the tenant occupies the property, and what their rental agreement is.

According to Black’s Law Dictionary, 572 (7th Ed., 1999), it is a “signed statement by a party certifying for another’s benefit that certain facts are correct, as that a lease exists, that there are no defaults, and that rent is paid to a certain date. A party’s delivery of this statement stops that party from later claiming a different state of facts.’’

What does an Estoppel Certificate include?

Each certificate has different guidelines and wording, and therefore they are not all the same, but they do all include a certain amount of similar content:

 

  • Confirmation that the tenant occupies the premises.
  • The amount of the rent, the security deposit, and the length of the lease.
  • When the lease began.
  • Date when the rent is required to be paid by.
  • Confirmation that neither the tenant or the landlord has defaulted on any part of the agreement.
  • If one party has defaulted, then how and why needs to be specified.


What you should expect to see as part of an Estoppel Certificate:

Below is a sample of the wording that an Estoppel Certificate usually contains:

 

Within ten (10) days following any written request which Landlord may make from time to time, Tenant shall execute and deliver to Landlord or mortgagee or prospective mortgagee a sworn statement certifying: (a) the date of commencement of this Lease; (b) the fact that this Lease is unmodified and in full force and effect (or, if there have been modifications to this Lease, that this lease is in full force and effect, as modified, and stating the date and nature of such modifications); (c) the date to which the rent and other sums payable under this Lease have been paid; (d) the fact that there are no current defaults under this Lease by either Landlord or Tenant except as specified in Tenants statement; and (e) such other matters as may be requested by Landlord. Landlord and Tenant intend that any statement delivered pursuant to this Article 25 may be relied upon by any mortgagee, beneficiary or purchaser, and Tenant shall be liable for all loss, cost or expense resulting from the failure of any sale or funding of any loan caused by any material misstatement contained in such estoppel certificate. Tenant irrevocably agrees that if Tenant fails to execute and deliver such certificate within such ten (10) day period Landlord or Landlords beneficiary or agent may execute and deliver such certificate on Tenants behalf, and that such certificate shall be fully binding on Tenant.”

Estoppel Certificates are most often used in sale transactions or commercial lending. Because they are required for the transaction to be completed, the tenant has little or no say as to whether or not they want to fill the form out (in many cases the lease agreement has a clause that mandates it). However, since it considered a routine practice there is hardly ever any concern when filling in and confirming the documentation.

Even though there is not much of a choice on the tenant’s side if they wish to fill the form out or not, they can take steps to make sure that they protect their interests. And as such, it is highly recommended that before filling out any documentation they seek legal advice to confirm that everything is accurate and there is no miscommunication or misunderstanding before they sign any documents.

Does an Estoppel Certificate really get used?

So, do people actually use Estoppel Certificates? Although in the commercial real estate world things are not as rigid as they use to be, there are certain documents that continue to be necessary to provide (mostly in the case of buyers) peace of mind. If a property is being purchased for the income value it is important to confirm that income 100%.
Using Estoppel Certificates is simply one part of the process that encompasses doing due diligence in real estate practices and mortgage activities.

In conclusion.

For landlords:
Even if they are not planning on selling or leasing their property in the near future the unexpected could always happen and it’s optimal to be prepared. This is best done by simply including a note in the lease that mandates that if need be the tenants will sign an Estoppel Certificate. They should be sure to point this out to the tenants at the time of signing the lease.


For tenants:
When signing the lease be sure to check for any and all mandates. If the occasion does arise where you are asked to sign an Estoppel Certificate that is a great time to bring up any concerns or issues that you have with the lease, or your agreement in general since at that time the landlord is more likely to listen and fix the issues rather than have them written down.

The tenants should also be fully aware that they have the opportunity to make any edits to the certificate and be sure to make sure that nothing is incorrect, since if misinformation is put down they may be held liable. Seeking legal advice is highly recommended.

For buyers:
If buying or leasing a commercial property that they expect to gain income from it is highly recommended that the buyer seek confirmation of the income in the form of an Estoppel Certificate. That way they have legally binding confirmation and can feel at ease knowing that the income from the property has been confirmed by both the tenants and the landlord.

Last note.

Yes, Estoppel Certificates have their place. And although it is a routine practice to include them in a lease or sale, they should be not only be required but thoroughly read over and reviewed to make sure that they are accurate before any papers have been signed.