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Estoppel Certificates or Letters: Basic Principles to Know

Dec 15, 2022, 16:21 PM
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Think you've already learned all there is to know about estoppel certificates or letters? Think again: In order to achieve mastery in any field, a brief refresh on the most fundamental basics can often be indispensable.

For some, you may be tempted to overlook this brief recap as you’ve dealt with this part of the job for longer than some have been alive. A word of caution, though: it's easy to let the most basic of knowledge slip through the cracks. Plus, to truly demonstrate to your tenant clients that you are a seasoned professional, a basic working knowledge of estoppel certificates and letters is not only helpful, but critical.

“Estoppel,” according to the dictionary is “a legal bar to alleging or denying a fact because of one’s own previous actions or words to the contrary.” Simply put, estoppel prevents someone from doing or saying something contrary to what they previously did or said.

In a typical industrial, office, and even retail lease, estoppel letters or certificates are required to be executed by the tenant in the event of a sale or refinance of the property. A new buyer or lender receiving a well-drawn and complete estoppel letter then has confidence that the lease is in order and the lease payments will continue uninterrupted; and that the new buyer will not be surprised by claims of (prior) landlord default.

The typical lease clause addressing estoppels will require a tenant to provide an estoppel document upon landlord’s request. In cases where the tenant fails to sign an estoppel letter within a fixed time period, the lease language often provides that the landlord then has the right to sign the estoppel document for the tenant.

The estoppel certificate or letter often appears as a lease exhibit, although some leases promise only that the tenant provide an estoppel certificate “in its usual form.” The body of the lease typically qualifies that the landlord’s right to request and the tenant’s duty to sign the document are subject to a buyer or lender who may want their own estoppel form substituted. The most important element in an estoppel letter or certificate should be a statement by the tenant that the attached copy of the lease is a true, correct, and complete copy. Somehow, this element is often overlooked.

Estoppel forms are typically prepared by the seller or landlord attorney and included in the lease (or in the purchase and sale document). In some cases, the contents are the subject of some negotiation. In terms of getting these documents signed and delivered, the landlord’s property manager or the seller’s listing broker will often be responsible for getting the document signed and returned. Here, an understanding of the purpose of the estoppel certificate is key.

From a broad perspective, the document is useful to help investors during the due diligence phase of a property purchase to complete their underwriting process with confidence. In contrast, when tenants hesitate or refuse to sign an estoppel letter, this may indicate that a problem exists. A tenant has leverage at this time, and may be able to call out a landlord for default or a broken promise and compel the landlord—who is trying to complete a sale a refinance of the property—to meet its obligations.

Keeping these basic principles in mind regarding estoppel documents will enhance the tenant or landlord representative’s reputations in their clients’ eyes.

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