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What is an estoppel certificate in a commercial lease, and why is it required?

by on General

On Behalf of Lanard and Associates | Aug 4, 2016 | Firm News

An estoppel certificate is a statement signed by a tenant that a commercial lease agreement exists, that specific facts of the agreement are valid, that no defaults exist and that they agree to pay rent on a particular date to the landlord. In short, it outlines the nature of the relationship between the landlord and tenant.

Commercial landlords typically require tenants to provide an estoppel certificate upon request as a “due diligence” item. For instance, the landlord may need to prove to a lender, investor or potential buyer of the entire site that the terms of the lease with the tenant are enforceable and that the tenant is current in all financial obligations. This is then relied upon by the landlord’s lender or potential buyer to validate that all the anticipated rents that the landlord has said are deposited monthly will be deposited and that the term of the lease will be in place for the specified time period.  By signing the document, the tenant is essentially verifying the conditions and status of the lease.

Facts contained in an estoppel certificate

Estoppel certificates define the type of lease in question, detail any amendments, and provide a statement that no other modifications can be made. While the items required in these documents vary, here are some standard components generally included:

  • The dates when the lease begins and ends
  • The rent amount and due date
  • Statements from the tenant and landlord that no defaults exist
  • If defaults occur, specifics are required
  • Confirmation that the lease is in effect and contains no modifications
  • If modifications exist, they must be spelled out
  • Verification that the tenant may lease or use other space in the building
  • Security deposit amount and interest rates
  • Contact information for tenant, including physical addresses, email addresses and phone numbers

While these items represent a logical starting point, specific details and terms differ widely depending upon the nature of the lease. That’s why it is advisable to consult an experienced commercial lease attorney before signing a commercial real estate lease agreement.

How are all parties protected?

An estoppel certificate gives landlords, investors and lenders additional security that the tenant’s promises will be kept. They also benefit tenants as the document confirms that the landlord will not change any agreed-upon terms to the lease.

If your landlord is negotiating with a potential buyer for the property, the estoppel certificate is part of the buyer’s due diligence to ensure continued cash flow and identify and confirm the lease terms. Having that assurance helps them avoid unforeseen expenses and liabilities.

The document also contains details on future lease renewals or extensions. It can also identify red flags, such as whether either party has breached any responsibilities or given up any rights over the duration of the lease. Without a signed estoppel certificate, a potential buyer of the site from the landlord will not have written confirmation that the leases with all the tenants at the site and the rents will continue.

What happens if the tenant doesn’t sign or return an estoppel certificate?

Most standard commercial leases include a provision that the tenant must complete an estoppel certificate and return it to the landlord within a short amount of time, such as 15 days. The lease also states what information must be provided in the certificate. If the tenant does not return the document by the deadline, some leases allow a landlord to:

  • Complete the estoppel certificate themselves as the tenant’s “attorney-in-fact.”
  • Deem the tenant’s failure to return the document as an admission that everything stipulated in the certificate is correct, or “silence is consent.”
  • Collect a specified monetary penalty from the tenant.

In most cases, tenants obligated to sign an estoppel certificate under the lease terms must do so to avoid a landlord pursuing legal remedies. However, tenants are generally not required to sign an estoppel certificate if no such provision exists in the lease.

Tenants may also be reluctant to sign the document when they have legitimate disputes with landlords. This can occur when tenants believe the landlord has failed to live up to their responsibilities under the lease agreement. In these cases, it is often better for landlords to negotiate a resolution with the tenant as it is not to their benefit to submit estoppel certificates to lenders or prospective buyers that contain alleged defaults or failures on their part.

Finally, a tenant’s objection may result from the type of form the landlord provides for the estoppel certificate, preferring to use their own version. This can happen when the tenant is a franchisee of a large retail or business chain that prepares its own documents and wants to avoid forms provided by others. In these cases, landlords should ask the lender or potential buyer if the tenant’s form is acceptable. If not, the parties will likely need to negotiate.

Commercial tenants must do their due diligence as well

For tenants, estoppel certificates usually highlight significant facts contained in the lease agreement. This information includes the start and end dates of the lease, options and deadlines to renew or extend, the amount of rent and how it is calculated, whether rent payments are up to date, along with many other vital facts.

Lenders and prospective buyers rely on this information to set a purchase price for the property, negotiate other key terms and calculate the short- and long-term benefits of the arrangement. The estoppel certificate, in many ways, provides a foundation for the relationship between you and your current as well as any future landlord.

It is essential to seek an experienced commercial lease attorney to determine the facts included in an estoppel certificate, the accuracy of the information and for drafting the correct language to protect you and your business.