In evaluating the feasibility and profitability of a potential investment, it’s crucial for a prudent buyer to conduct a comprehensive review of all property leases. Such an examination allows the buyer to verify the property’s cash flow and identify any potential risks or liabilities. However, determining whether tenants are indeed adhering to their lease obligations or if the lease documentation provided by the seller is complete and up-to-date, poses a challenge. This is where the estoppel certificate comes into play.
An estoppel certificate is “[a] signed statement by a party (such as a tenant or mortgagee) certifying for another’s benefit that certain facts are correct, such as that a lease exists, that there are no defaults, and that rent is paid to a certain date. A party’s delivery of this statement estops that party from later claiming a different state of facts.” Black’s Law Dictionary (11th ed. 2019). Essentially, it provides a legally binding verification of key lease terms, minimizing surprises or misunderstandings after the transaction is completed. Once signed by the tenant, the tenant is bound by the representations made in the estoppel certificate and cannot later take a contradictory position.
Standard components of an estoppel certificate typically include:
- Confirmation that the lease is in full force and effect without modifications
- Lease commencement and expiration dates
- Any extension options and their terms
- Amount of the security deposit
- Current rent payable, including base rent and additional rent
- Date through which rent has been paid
- Confirmation of no defaults or circumstances constituting a default
- Confirmation of no offset claims by the tenant
- Absence of options or rights of first refusal/offer to purchase the property
- Current contact information for the tenant
Most commercial leases include a requirement that tenant complete and sign an estoppel certificate within a certain period of time following landlord’s request. Typically, a tenant will cooperate with this process to avoid a lease default and landlord’s pursuit of legal remedies. Some leases also allow a landlord to act as the tenant’s attorney-in-fact and complete the estoppel, or allow the landlord to deem tenant’s failure to timely sign and return the document as an admission that everything stated therein is correct.
In cases where a lease doesn’t mandate an estoppel certificate or a tenant refuses to provide one, the seller can step in and provide it. Although a seller-executed estoppel certificate isn’t legally binding on the tenant, it does offer the buyer some additional reassurance. Moreover, if the seller provides false information, the buyer retains the right to sue for breach of representation.
Tenant estoppel certificates serve as a vital tool in a commercial buyer’s due diligence process, offering insight into the investment potential and helping to mitigate risks.
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