Estoppel Certificates in Commercial Real Estate
An estoppel certificate is an important legal document in real estate transactions, particularly commercial real estate. It affirms the status of lease-related facts from one party to another, often in the context of a property sale or financing. Importantly, an estoppel certificate certifies certain facts and circumstances as of the execution date and typically does not impose any ongoing obligations or covenants by the tenant.
Black’s Law Dictionary describes an estoppel certificate as “[a] signed statement by a party, such as a tenant or a mortgagee, certifying for the benefit of another party that a certain statement of facts is correct as of the date of the statement, affirming that a lease exists, there are no defaults, and that rent is paid to a certain date.”
From the lender’s perspective, the estoppel certificate provides assurance that the property is not encumbered by landlord defaults or problematic tenants and estops the tenant from asserting any undisclosed pre-existing defaults. It also confirms that rent payments, which the lender relies upon for cash flow, will be made to the owner-borrower.
For prospective purchasers, it offers detailed information about the lease and premises, essential for due diligence, and ensures that the lessee will not later dispute the stated facts, thereby preventing future lease and premises condition disputes.
The certificate typically confirms: (1) the named tenant’s current lease; (2) the lease’s full force and effect; (3) the absence of any default under the lease; (4) that no advance rent has been paid; (5) no tenant’s charge, lien, or claim of offset under the lease; and (6) the absence of bankruptcy proceedings against the tenant.
Note: “An estoppel certificate legally binds the signatory to the statements made, preventing them from later claiming otherwise, so it’s important to pay attention to the details.”
Best Practice to Effectively Use an Estoppel Certificate Include:
- Tenants should review the estoppel certificate thoroughly to confirm the accuracy of all included information. This involves paying particularly close attention to any terms or provisions that do not align with the original or amended lease agreement.
- Any discrepancies or attempts to modify the terms of the lease through the estoppel certificate should be addressed. Tenants should not consent to changes that are not part of the lease, and they have the right to amend or delete incorrect information.
- In the event that blanks are present in the certificate, they should be filled with accurate details or marked as “N/A” if not applicable. Also, any exhibits referenced, such as the lease agreement and any amendments, should be physically attached to the certificate.
- The certificate often requires tenants to confirm that no defaults exist under the lease. It is essential to consider this statement carefully, taking into account any potential future defaults arising from unresolved maintenance or repair issues that the landlord is obligated to address.
- If uncertain about any confirmations the certificate asks for, tenants should feel free to add qualifying language such as “to my knowledge, as of the date of this estoppel certificate,” or, “to my knowledge, without having investigated,” or, “to the actual knowledge of ” that reflects their level of knowledge or investigation into the stated facts.
It’s important to note that even without a lease requirement, responding to an estoppel certificate request is prudent for maintaining good commercial real estate relationships and preventing future disputes.
By understanding the purpose of an estoppel certificate and by following these best practices, parties in a commercial real estate transaction can use estoppel certificates to effectively communicate and confirm critical lease information, thereby reducing risks and maintaining transparency between landlords, tenants, purchasers, and lenders. As always, it’s important to seek legal counsel regarding any binding documents or those that may impact your legal rights. Legal professionals can provide personalized advice tailored to your specific situation, ensuring that you understand the implications and obligations of such documents before you proceed.