What is a Tenant Estoppel Agreement?
A tenant estoppel agreement is a legally binding contract in which a commercial or residential tenant confirms the terms of a leasehold interest and binds themselves to the provisions of that lease – as well as the sale of any such leasehold interest. It is a way for landlords to ensure that tenants do not dispute what was set forth in a leasehold agreement, and it provides the transferring entity with a level of confidence that they are not buying the proverbial "pig in a poke." Essentially, it informs them of what the terms of the lease are so that they can properly evaluate the value of the interest they are purchasing.
An estoppel certificate is drawn up by interested parties to properly and conclusively point out the exact terms of a commercial or residential property lease , by way of a third party, such as a landlord (lessor) or lender (assignee), so that a current or future real estate buyer can easily reference the terms of an existing property lease and recourse, prior to making a monetary investment into the piece of property. The purpose of an estoppel agreement is to protect the buyer in a real estate transaction because the owner of the property can make unpredictable decisions with regard to the parcel. By having an estoppel agreement in place, the real estate buyer can see the terms of the lease with regard to the rental property and determine if the business is a viable investment or choice.
Core Elements of a Tenant Estoppel Certificate
A properly crafted tenant estoppel agreement will contain the following components:
Leases. The lease(s) to which the tenant’s estoppel relates should be identified, along with a provision that if those leases are amended, this certificate will still relate to the amended leases.
Rent. The amount of monthly base rent, along with the month in which the last payment was made and the amount of the last rent payment, must be included.
Breach of Obligations. The tenant must be asked to disclose whether or not, to the best of their knowledge, they are in default under any obligations of the lease.
Unpaid Amounts. The tenant must be asked to disclose whether or not, to the best of their knowledge, payments are due under the lease over and above the monthly rent, and if they are, the tenant must state what payments are due.
Pending Proceeding. The tenant must be asked to disclose whether or not they are aware of any proceeding pending against them relating to the lease.
Sublease Information. The tenant must be asked whether or not anyone other than the tenant is in possession of the premises, and if so, the identity of the individual or entity in possession of the premises.
Security Deposits. The amount of security deposit in the hands of the landlord must be disclosed.
Renewal and Extension. Any extension or renewal of the lease should be disclosed to the landlord.
Landlord’s Notice. The tenant must be asked to disclose whether or not he has received any written notice from the landlord that he is required to cure any default.
Claims Against the Landlord. Any known claims the tenant may have against the landlord for any reason should be disclosed.
Liens. Any adverse claims to any subleases, possessions, and/or rent payments associated with the tenant’s lease must be disclosed.
Tenant’s Authority. The tenant must certify that he has the authority to enter into the certificate and bind himself to it.
Tenant’s Signature. The tenant must have a duly authorized officer (e.g., if a corporation the President) execute the document.
Importance of Tenant Estoppel Agreements in Real Property Deals
Tenant estoppel agreements serve an important role in residential and commercial real estate sales, asks and closes by protecting the interests of the buyer or lender.
The agreement is essentially a letter or certificate signed by the tenant stating basic terms of the lease for the subject property. It will contain information about the specific terms of the lease, particularly its end date and the amounts owed by the tenant on a monthly basis. The seller or landlord will provide the tenant with the request for the agreement, likely through the real estate agent or attorney, and the tenant is then asked to respond to the request by signing the document.
While these requests might seem inconvenient to tenants at first, tenant estoppel agreements are ultimately in their best interest because the sale of the property is not going to happen if the tenants do not agree. If the buyer or lender does not have the proper assurances that the tenants are not behind on their rent, they might not be willing to go through with the deal. If the sale of a property is a relative certainty, tenants who have paid their rent on time and followed the other terms of their lease should have nothing to worry about and should sign the estoppel agreement.
This is especially true for tenants of commercial properties who have ongoing relationships with the property owner or landlord, as they are often entered into very long term leases and could have a lot to lose if the property is sold to someone who is not willing to honor the terms of the existing lease. The buyer will want to be assured that they can keep the tenant in place, and knowing that the tenant accepts the new buyer as their landlord via the estoppel agreement is a big factor in that decision.
Estoppel agreements will help buyers and lenders of residential properties as well, as a buyer will want peace of mind before moving forward with a purchase. Being assured that a tenant will honor a lease is essential when making a purchasing decision.
Keeping tenant estoppel agreements as part of the portfolio of elements that make up a residential or commercial real estate closing ensures that a deal can be closed with as few hiccups as possible.
Advantages of Tenant Estoppel for Landlords and Lessees
For landlords and property owners, tenant estoppel agreements offer a range of advantages. They can provide:
- Assurances in the event of a dispute.
- Easier leasing by offering potential new tenants corporation confirmations about a current tenant’s rental practices.
- The ability to pool assets by facilitating the sale or financing of properties.
- Easier dispositions by preventing fraudulent actions from tenants and making the coordination of the property’s operations easier.
- Points of reference for formal landlord-tenant communication.
Tenant estoppel agreements are equally advantageous to the tenant. They can provide:
- Optimized comfort by assuring tenants that none of their lease obligations will be altered.
- New options for dispute resolution.
- Improved landlord-tenant relations, by ensuring landlords will be aware of their obligations.
- Certain clarifications on disputes and third-party duties regarding security deposits and rent renewals.
Common Issues and Misinterpretations
A common misconception is that an estoppel agreement serves as some type of addendum to the lease and that the tenant can alter the lease terms through modifications to the estoppel statement. The estoppel agreement is not a substitute for the lease, nor is it a modification to the lease. It is a stand-alone document signed by a tenant attesting that its understanding and perception of the lease terms is correct as stated in the estoppel agreement.
Failure to sign the estoppel agreement is not grounds for terminating the lease. At most , it would be grounds for terminating the landlord’s consent obligation and advancing a default claim notice under the terms of the lease.
The scope of landlord liability for statements contained in the estoppel agreement may be disputed depending on the specific language in the agreement. This issue is particularly problematic if there is a predecessor landlord or some type of management company involved in lease administration as the estoppel agreement may contain language that extends the liability well beyond the successor landlord.
Making matters worse, a tenant may include inaccurate information in the estoppel agreement and adopt a take-it-or-leave-it attitude with the buyer or lender who is requesting the estoppel agreement. Unfortunately, the tenant may do this with no immediate consequence, acquiring an unintended benefit at the expense of the buyer or lender.
Preparing and Implementing a Tenant Estoppel Agreement
The steps for preparing and executing a comprehensive tenant estoppel agreement are as follows:
Prepare Draft Tenant Estoppel Agreement. The process often begins by the purchaser preparing a draft estoppel agreement that is sent to the tenant for review. However, in order to be comprehensive, it’s preferable for the seller to provide the purchaser with a draft of its lease and other documents it deems material under the circumstances, which is what a seller commonly agrees to include in its leases. The tenant estoppel agreement should also identify any other material information a purchaser needs, which the seller is contractually obligated to provide.
Review and Negotiate. The purchaser will almost always expect that the tenant review the tenant estoppel agreement with its counsel (since it does not want the purchaser to rely on the tenant’s representations in the agreement unless they are true and it’s possible that the purchaser would be responsible for covering damages that result from false representations). Depending on the circumstances, the purchaser may insist on more detailed confirmations, or have additional exceptions based on its due diligence (e.g., floor plans or photographs that document the condition of the premises not included with a tenant estoppel agreement).
Execute. Once finalized, the tenant and seller typically execute the tenant estoppel agreement.
Confirm Sale. Finally, once the closing occurs the tenant will probably not immediately notify the purchaser of this change, so the seller should send a notice of change of landlord to the tenant.
Legality and Considerations
Signing a tenant estoppel agreement carries important legal implications for both landlords and tenants. A tenant’s signature on an estoppel letter can result in the tenant potentially being bound by the representations and warranties contained in the estoppel.
The crux of the issue is whether, if a tenant does not comply with the estoppel, it may be sued for breach. The simple answer is yes, and the risk of liability is significant. Even if the tenant has ostensibly complied with the request for an estoppel, this should be considered very carefully because of the potential damages that may result if the agreement turns out to be untrue. The tenant could be liable for both consequential and punitive damages, and the landlord may lose its deal — sometimes a deal is quickly done on the premise of a good faith signature from the tenant.
To avoid this dire situation, a tenant may wish to clearly articulate that the tenant is replying based solely on factual information in its possession and information contained in applicable lease files, price and terms etc. may not have been updated. The tenant should further provide that any omission or failure to correct or complete information completed by the landlord may constitute any waiver of the tenant representation and/or warranty. This way, at least the tenant has some inkling that if the information proves to be erroneous, it may have some protection from liability because the tenant may be able to show that they specifically excluded document review and landlord efforts beyond their last recording .
The question then becomes, who can sign? Does the signing tenant even have authority to sign? Who in the tenant organization has authority to bind’? Who in the tenant organization actually has any knowledge of the accuracy of the representations? Depending on the sophistication of the tenant, the tenant representative may have literally no idea what he or she is signing. They could be exposed for signing off on a misrepresentation or, worse yet, the building owner may be able to charge the tenant for attorney’s fees or consequential damages for signing off without actual knowledge…meanwhile, the tenant who actually prepared the estoppel letter could be insulated from all liability. Having insufficient information to provide a proper attestation may be an argument in some jurisdictions to consider, but generally speaking, the tenant representative is in a fiduciary relationship with the tenant and it may be impossible to argue that the tenant representative didn’t act "in good faith."
One of the reasons landlords request estoppels is to protect themselves in the event a tenant defaults or there is a dispute over the lease. In the event the tenant is no longer occupying the space, the landlord may be more likely to blame the tenant than itself. The estoppel may be used by the landlord to prove how much the tenant originally paid, thereby limiting any counterclaim that the landlord had improper notice of a rent increase, or similar litigation issues. In the event the tenant is no longer occupying the space, the landlord may be more likely to blame the tenant than itself. It may be used by the landlord to prove how much the tenant did (or did not) pay, thereby showing any counterclaims or offsets are exaggerated, and limit any counterclaim that the landlord had improper notice of a rent increase, or similar litigation.