In the commercial real estate world, a sometimes overlooked document during the due diligence phase of any transaction involving leases or rental agreements is an estoppel certificate. My office recently received a phone call from a very confused tenant. The tenant was a long-term tenant who had negotiated two 3-year extensions from the prior owner of the building. The extensions were memorialized in writing and well known to the original landlord and the tenant.
The tenant was calling because the building had been recently sold and the new owner had approached the tenant about negotiating a new rent amount or agreeing on a move-out date. The tenant was confused since his extension was about to take effect for another 3-years at a pre-negotiated rate. After nearly a year of legal wrangling and thousands of dollars spent, the tenant got to stay under the exact terms he had already agreed to.
After some calls to the key players involved, we learned that the new owner had no clue about the 3-year extensions. The buyer and seller of the building had not asked the tenant to execute an estoppel certificate. If an estoppel certificate had been requested, the tenant would have certified its understanding of the lease, the remaining term, rates, and so forth.
An estoppel certificate is a signed certificate by a tenant stating that a lease (or other contract) is in good standing. This document is needed when a party is buying a building with one or more tenants. An estoppel certificate then is generally executed by the tenants.
Why does a buyer of a property want an estoppel certificate? To avoid confusion and escape having the unnecessary hassle and the expense of what happened to our client.
An estoppel certificate provides assurances that the understanding of a lease is in fact what the parties believe. It allows the buyer to confirm that the terms and conditions in the lease agreements, seller’s books, and accounts are what is actually happening.
An estoppel certificate is generally drafted by the seller’s or landlord’s lawyer and contains one or all of the following terms:
Most commercial leases specify that an estoppel certificate must be provided. Generally, the tenant, if asked, must provide one within ten days of written request. Failing to provide the estoppel certificate can be a default under the lease.