Commercial real estate naturally involves a number of legal terms and systems by which to abide, some of which are more complex than others. One term you may come across is “estoppel.” In common law legal systems, an estoppel certificate is a judicial device in which a court can prevent a person from making a claim or going back on their word.
What Is an Estoppel Certificate?
In real estate, an estoppel certificate prevents a tenant or landlord from going back on their word. For instance, if a landlord agrees not to terminate a tenant’s lease as long as the tenant spends money on improving the property, an estoppel certificate could prevent the landlord from going back on their word and terminating the lease, even when the promise may not have been written into a contract.
What Is in a Tenant Estoppel Certificate?
In commercial real estate, a tenant estoppel certificate or tenant estoppel letter is a document that may be required to legally prohibit a commercial tenant from breaking a promise or going back on their word. The tenant estoppel certificate is signed by a tenant to verify the terms and conditions of the lease or agreement. In commercial real estate deals, someone involved in the deal might require a tenant estoppel certificate, such as in the case of multifamily buildings or single-tenant net leases. Sometimes, an estoppel certificate is required along with the security deposit.
A tenant estoppel certificate is a “due diligence item,” said Kyle D. Tucker, a real estate attorney with Eastman & Smith Ltd. For instance, Tucker mentions the lender/owner/tenant relationship. A lender will often want to complete their due diligence by making sure that the tenant is meeting lease terms and the landlord is not in default of their mortgage, so they would require tenants to sign a document, or estoppel, agreeing to those terms. As a result, the lender has some assurance that rent will be coming in, allowing the owner to make regular mortgage payments. This communication will usually be handled by the commercial mortgage broker you used to connect with a lender.
“A tenant estoppel certifies the lease documents,” added Jo-Ann Marzullo, a commercial real estate attorney at Ligris + Associates.
To put it more simply, Joe Muratore, co-founder and co-CEO of the real estate investment firm Graceada Partners, said that a tenant estoppel “is a verification of the lease.” Muratore added, “An estoppel provides a summary of the lease that says this lease is what you think it is.”
Some of the information that goes into a tenant estoppel certificate, Muratore said, includes, “What is your rent? What is your term? What costs are you responsible for? Are there any terms or conditions that we should know about?”
The phrase “tenant estoppel” is also used interchangeably with “estoppel letter” or “estoppel certificate.”
When Is an Estoppel Certificate Required?
An estoppel letter is most commonly used when a landlord wants to assure cash flow and prevent a tenant from breaking a promise. This benefits the tenant as well because the tenant is confirming that the landlord won’t change any agreed-upon terms. Essentially, an estoppel letter in commercial real estate is used in situations when both the landlord and tenant want to hold one another to their promises.
An estoppel letter is also common during due diligence and can be provided to investors during an acquisition so that investors have a certain level of confidence in their real estate investment. Other times, lenders might want an estoppel letter, also for a sense of confidence that the loan will be paid back. Both lenders and investors want your commercial real estate property to succeed and have good cash flow, and an estoppel letter provides some level of security, keeping landlords and tenants accountable.
Do You Need an Estoppel Certificate or Estoppel Letter?
An estoppel letter is not necessary in every real estate transaction, but it is recommended. If landlords, tenants, investors, or lenders need some additional security that certain promises will be kept, then they will often seek out an estoppel letter.
Tucker recommends always getting an estoppel letter before closing on a property, simply as part of your due diligence. “You want estoppel certificates prior to closing,” said Tucker. “You want, at closing, all parties to sign an acknowledgment of the lease’s terms.”
Muratore added, “no sophisticated purchase of a commercial property occurs without an estoppel.”
One example of when an estoppel letter comes in handy is if a landlord informs a tenant that rent has been reduced for whatever reason. Maybe utilities weren’t working, or there was construction in the building. The tenant can then point to the estoppel letter so that the landlord is “estopped” from trying to collect full rent.
In another example, let’s say a lender informs a debtor that their debt is forgiven. If the lender goes back on their word and tries to collect the debt, then the debtor can use the estoppel letter to stop the lender from doing so.
How to Get an Estoppel Certificate for Closing
To get an estoppel certificate for a commercial real estate closing, the first step would be to contact a commercial real estate attorney. You might also be wondering, “Is there an estoppel fee?” Estoppel fees can be anywhere from $0 to $500. You’ll also need to ask the association or management company if there are any fees to file the estoppel certificate. Then ask what the turnaround would be for them to review and sign. Essentially, though, your attorney will handle all the nitty-gritty details, putting together the document and making sure all of the correct paperwork is filed.
Tucker also recommends, if you’re a landlord who wants the tenant to sign an estoppel certificate, you can add a condition to the lease that “a tenant is contractually obligated to give you the estoppel.” Sometimes, a tenant for whatever reason might not want to sign an estoppel letter, and so if that’s important to you as a landlord, the best practice is to require an estoppel certificate as a condition of the lease.
It’s Always Good to Get an Estoppel Letter Before Closing
While estoppel letters aren’t mandatory, it is in the best interest of all involved parties to sign an estoppel letter before closing on a commercial real estate deal. The tenant estoppel assures that the terms of the contract are what you think they are, and it is an additional way to enforce the contract, ensuring everyone keeps their promises.