At times tenants (particularly those renting commercially) will receive an estoppel certificate from their landlord during the course of leasing a property.
If you’re a tenant and you have received an estoppel certificate from your landlord, you may be unsure exactly what it is, what it’s for, and whether or not you are obligated to sign it. Usually, tenants will be asked to complete or sign an estoppel agreement when their landlord is seeking a loan or selling a property and needs to prove cash flow and the status of any active leases.
While receiving an estoppel certificate may at first seem confusing, it’s in a tenant’s best interest to carefully address the estoppel and complete it. This is because it allows current tenants to either deny or confirm information that your landlord may be sharing with a third party, as well as to verify the terms of their lease and any agreements they may have with the current landlord.
What Is an Estoppel Certificate?
An estoppel certificate, also known as an estoppel letter, is a document used for due diligence in real estate activities. It is designed to thoroughly describe and determine the relationship between a tenant and their landlord when the landlord is attempting to negotiate with a third party when selling or collateralizing their property. Typically, an estoppel certificate provides information about lease terms, rental amount, tenancy status, utility payments, and so on.
Are Estoppel Certificates Important?
A tenant estoppel is considered important for two primary reasons. Firstly, it provides prospective lenders or purchasers accurate information about the tenants, and secondly, it assures potential buyers that tenants will not make later claims that are inconsistent with what is written in the estoppel.
Tenant estoppel certificates are most commonly used in the world of commercial real estate, as they provide proof of cash flow, which is something of concern to a potential lender or investor. They’re rarely used in residential real estate because usually the terms are accurately and thoroughly covered in the lease. In residential real estate, the rental period is usually much shorter and often less expensive than in commercial real estate, making an estoppel significantly less important. For example, the terms of a residential rental are traditionally twelve months. In contrast, the owner of a small restaurant or store will often have a longer-term and costlier commercial lease.
However, just because it is uncommon to see tenant estoppels in residential real estate does not mean that it never happens. There are even situations where it would be beneficial to have residential tenant estoppels, such as in instances of the sales of privately owned apartment buildings.
Should You Always Sign a Tenant Estoppel Certificate?
Typically speaking, if a tenant estoppel is filled out accurately, they usually don’t produce any risks for the tenant. However, they should never be used in place of a lease and shouldn’t repeat any clauses stated in the original lease, as this leaves room for ambiguity or misinterpretation. It’s vital that tenants thoroughly read through the terms outlined in an estoppel certificate to ensure that they are aware of the agreements and that they don’t find themselves in a situation where they are in violation of the contract.
If it is written into the terms of a lease that a tenant is required to complete an estoppel certificate, they are legally bound to do so. If they do not, they can be in breach of the lease and face eviction. In the world of commercial real estate, it’s often in the tenant’s best interest to complete an estoppel certificate, as it may cover important aspects of the relationship not outlined in the original lease. Because this is a legally binding document, issues can easily arise over any inaccuracies. Therefore it is of the utmost importance that a tenant estoppel certificate covers every provision as accurately as possible.
The most common points included in a tenant estoppel are:
- When the lease started
- Whether there are any defaults by the landlord or tenant
- The date to which rent has been paid
- Verification that the lease is in effect
- Any modifications made to the lease
Due to the varying nature of different types of commercial real estate, tenant estoppels differ greatly in the clauses that they include. However, due diligence should be taken by all parties to ensure that the estoppel covers terms discussed that are not outlined in the original lease.
Other examples of what an estoppel certificate may include are:
- Use of a parking spot
- Use of onsite storage
- Whether or not pets are allowed
- Use of a backyard or outdoor area
- Whether or not the tenant has permission to sublet parts of the property
- Extensions or renewals of the lease
How Estoppel Certificates Protect Tenants and Buyers
Frequently, there is a relationship between a landlord and a tenant where the tenant is allowed to undergo certain actions that are verbally agreed upon, but not included officially in writing. For example, say you rent an apartment that has a “no pets” clause in the lease, but your landlord told you she would let you keep your cat. If that landlord then went to sell the property, and the new investors did not have information via a tenant estoppel certificate regarding you being allowed to have pets, you may find yourself having to give up your furry friend. This is why it’s in a tenant’s best interest to accurately review the terms of their original lease and a tenant estoppel certificate, as it ensures that a new landlord or buyer understands any terms previously agreed upon.
For a buyer, requesting that tenants complete estoppel certificates can protect you from unpleasant surprises once you purchase the property, as it eliminates any doubts that could arise over enforceable clauses.
What To Do If You Receive a Tenant Estoppel Letter
If you receive a tenant estoppel agreement, don’t just sign it without thinking, as this could set you up for legal consequences or misunderstandings down the road. The best thing is to check the terms of your lease, which will tell you when you are required to complete the certificate by, or even if you have to sign it at all. Do your due diligence and thoroughly read through the terms outlined to check for any inconsistencies. You’ll want to check for any and all agreements you have made with your landlord that were never written down or recorded, and then ensure they are included in the tenant estoppel certificate.
Be sure not to immediately sign an estoppel without ensuring that you are comfortable and aware of everything it states. Signing an estoppel could effectively over-ride or interfere with your original lease agreement, which means that if you sign thinking that your rights are covered by what was stated in the lease, you might be in for a nasty surprise. You could forfeit some of your rights as a tenant, so unless you are completely comfortable and certain of the clauses included in the estoppel, don’t just sign your rights away!
Be aware of estoppels that modify or add any additional terms not already agreed upon. There have been instances of estoppels that waive rights to lease renewals, change the rent due date or amount, and even state that work has been completed by a landlord when it has not. These are all instances that show why you should never sign without understanding fully what you are agreeing to. Remember, once the contract is signed, it is legally binding.
Estoppel Certificates Bottom Line
Estoppel certificates are most commonly used during the due diligence stage of the acquisition of commercial real estate, or during the underwriting process. Lenders and investors need to understand the full extent of relationships with tenants. Still, it’s also equally important for tenants, particularly long-term tenants, as it ensures that the terms of the deal are understood and met by everyone involved.