Estoppel Certificate in Real Estate – Ultimate GuideSeptember 29, 2019
A lease memorializes in writing an agreement between a landlord and a tenant. Sometimes, property purchasers or lenders need to verify that the tenant actually observes the terms of the lease. Fortunately, an estoppel certificate (EC) provides this kind of verification. In this article, we’ll ask and discuss, what is an estoppel certificate, starting with an estoppel certificate definition. Next, we’ll lay out how estoppel letters work. Also, we’ll provide examples and samples of a tenant estoppel certificate. Additionally, we’ll specify what’s included in an estoppel letter, weigh its pros and cons, and review partnership by estoppel. Finally, we’ll tie ECs to multifamily financing and answer some frequently asked questions about estoppel in real estate.
What is an Estoppel Certificate?
Let’s start with the estoppel certificate definition as understood for estoppel in real estate.
Estoppel Certificate Definition
Black’s Law Dictionary (7th Ed., 1999) gives this definition for what is an estoppel certificate:
“A signed statement by a party (i.e., tenant or mortgagee) certifying for another’s benefit that certain facts are correct. These facts include that a lease exists, there are no defaults, and rent is due on a certain date. A party’s delivery of this statement estops that party from later claiming a different state of facts.”
Commercial real estate leases routinely include language that sets out the tenant’s obligation to fill out and sign an estoppel certificate. However, many residential leases omit estoppel certificate clauses.
Estoppel Certificate Contents
The estoppel certificate records specific information about a tenant, lease, and property. Typical contents include:
- Lease start and end date
- Lease terms, including renewals, extensions, and dates
- Rent amount and payment schedule
- Rights and responsibilities of either party in case of default
- Verification that the lease is in full force and effect, and is unmodified
- Details regarding deposits, including how collected, interest rate, return requirements, etc.
- Lease modifications, if any
Video: What is an estoppel certificate?
How Estoppel Letters Work
Estoppel certificates are important to certain real estate transactions, such as refinancings and purchases.
Purpose for Estoppel in Real Estate
The primary purpose of a tenant estoppel certificate is to verify cash flows. The certificate discloses the rents that tenants say they pay. This is important to lenders, buyers, and tenants:
- Lenders: Cash flow is critical for understanding whether a borrower can repay a loan. An owner seeking financing or refinancing might overstate rent revenues or hide rent concessions. Before lenders undertake the risk of lending to the borrower, they must perform their own due diligence verifying actual cash flows. Accordingly, lenders check to see if ECs reveal discrepancies between representations by the owner and tenants. Naturally, these discrepancies could change the loan offer or even scuttle it.
- Buyers: The buyer of an occupied, rent-producing property must formulate an informed bid price. Typically, the cap rate is central to developing a bid based on the property’s net income. Naturally, any misstatement of rent revenues distorts net income, and could cause the buyer to overbid. Tenant ECs are one form of a buyer’s protection against a seller’s misrepresentations or mistakes.
- Tenants: A tenant can use an EC to indicate any special understandings it has formed with the landlord. ECs also give tenants the opportunity to explain any claims they have against the landlord. Buyers and lenders may change their attitude toward proposed transactions due to this kind of information.
Procedures for Estoppel in Real Estate
Routinely, CRE leases contain an estoppel clause requiring tenants to fill out and sign ECs. Sometimes, the landlord will fill out the ECs on the tenants’ behalf, but tenants must still sign and date the ECs. Here is an example of an estoppel clause:
“From time to time the landlord may deliver an estoppel certificate to the tenant, providing a summary of pertinent clauses within the Lease. Tenant agrees to confirm said details, execute, and deliver back to the landlord within five (5) business days from receipt of the estoppel certificate. Failure to comply shall mean that the Tenant is in agreement with the terms of the estoppel certificate.”
In this example, the clause specifies that failure to return the EC signifies agreement. However, in other versions of the clause, the landlord may consider failure to sign the EC as evidence of default. Ominously, this could give the landlord a basis for terminating the lease and evicting the tenant.
Examples of Tenant Estoppel Certificates
The following is an example of an office building tenant estoppel certificate provided by LeaseRef:
- The term of the lease commenced on the 1st day of July 2017 and expires on the 30th day of June 2026, subject to the exercise of rights of renewal or extension as set out in the Lease.
- The Tenant is in possession of the Premises and is carrying on business in accordance with the terms of the Lease. The Premises comprises 2,355 square feet of Rentable Area.
- No one has altered or amended the Lease since its execution and is in full force and effect.
- The minimum rent will be $80,225.00 per annum effective July 1, 2017, in accordance with the terms of the Lease.
- The amount of prepaid rent or security deposit currently held by the Landlord is $160,000.00.
- The landlord has paid in full all inducements, tenant improvement allowances and rent-free periods.
- To the best of the Tenant’s knowledge, the Premises have been complied in accordance with the obligations of the Landlord. The Tenant is not claiming any deduction, abatement or set-off of any rent payable, nor any counterclaim or defense against the enforcement of its obligations required under the Lease.
- There is no existing default or breach of the Lease on the part of the Landlord of which the Tenant has notice or of which it is aware.
- There is no agreement between the Tenant and the Landlord, other than that contained in the Lease, pertaining to the obligations of the Landlord and the rights of the Tenant relating to the use and occupation of the Premises by the Tenant.
- To the best of the Tenant’s knowledge, there is no litigation, or governmental or municipal proceedings commended or pending or threatened against the Tenant with respect to the Premises or which, if decided against it, would adversely impair its ability to comply with the terms of the Lease.
Naturally, the language for different types of property or various real estate asset classes, such as a multifamily home, will differ in some respects.
Estoppel Certificate Forms
You can purchase ECs online from a form vendor, such as Agreement Forms.org. Usually, these forms are state-specific. Some forms give you great latitude in specifying the contents, while others are simple boilerplate. These forms might be sufficient for some leases. However, it probably makes sense to have your lawyer draft a tenant estoppel certificate tailored to your specific requirements.
What to Include in Estoppel Certificates in Real Estate?
An EC can include the following:
- Identification of the property, landlord and tenant.
- The lease is either unmodified, or if modified, details of the modification.
- The lease start date and end date.
- Options to extend the lease.
- Tenant’s rights to lease or use additional space.
- Tenant’s option to purchase the leased property.
- Acknowledgment of landlord or tenant default.
- The minimum rent or base rent payable.
- Renunciation of any agreement involving free rent.
- Details about any posted security deposit.
- Details about paid and prepaid rent.
- Status of improvements and maintenance obligations that the landlord has promised.
- Notice of tenant bankruptcy or any litigation regarding the property.
- Prohibition against lease modification without the new owner’s written consent.
Pros and Cons
ECs are fairly benign and do not have any real cons. The pros involve the ability to verify cash flows and tenant agreements. The biggest problem occurs when a tenant refuses to sign an EC, for whatever reason. In the worst case scenario, the landlord can evict a non-compliant tenant. Usually, the landlord assumes that the tenant’s failure to sign an EC constitutes tacit agreement.
Partnership by Estoppel
The term “estoppel” has many legal uses and contexts. For example, “partnership by estoppel” refers to legally binding partnerships that arise without formal agreement. Do not confuse partnership by estoppel with tenant estoppel or other uses.
It is standard practice for a lender to condition approval of multifamily refinancing upon receipt of all tenant ECs. Normally, this should be no problem since standard leases contain an estoppel clause mandating compliance. Therefore, ECs should not be a major factor in choosing a refinancing source. Instead, it’s much more important to choose a lender that can provide prompt, professional service and good terms.
How Assets America® Can Help
Assets America® offers multifamily financing and refinancing starting at $5 million, with no upper limit. Contact us for a free, no-obligation consultation regarding your multifamily refinancing needs. We can be reached at 206-622-3000.
Frequently Asked Questions
Who pays for the estoppel letter?
The landlord always pays for the EC because it is the party that benefits. That is, the landlord needs the ECs to sell or refinance the property. Therefore, it is only right that the landlord cover EC costs.
Do tenants have to sign an estoppel agreement?
If the lease contains an estoppel clause, then the tenant must sign the EC. Normally, the clause may allow the landlord to sign on tenants’ behalf if they don’t respond by the deadline. Naturally, without an estoppel clause, the tenant can refuse to sign, but this is very much the exception.
What is the purpose of an estoppel certificate?
An EC verifies that the landlord’s representations about a property’s tenants are correct. Specifically, an EC confirms how much rent the tenant pays, the terms of the lease, and any outstanding agreements. Typically, lenders and buyers rely on ECs for due diligence to confirm cash flows.
Can anyone revoke an estoppel certificate?
Yes, a court can revoke an EC. This can happen when the landlord sues a tenant for filling out an inaccurate EC. For example, the tenant might claim certain rent concessions that are incorrect.
What is a promissory estoppel?
Promissory estoppel is a legal term. It signifies that promises are enforceable, whether or not the promises involve formal consideration. Promissory estoppel is important when the promisee relies on a promise to its detriment.