An estoppel certificate is a term that is often used by commercial real estate investors, and deciphering what it means might take some time for novice investors. In this blog, we break down to you what an estoppel certificate is, why landlords request such certificates and the contents of a tenant estoppel certificate.
What is an Estoppel Certificate?
An estoppel certificate is a document signed by the tenant stating the current status of their lease in association with a property.
In the tenant estoppel certificate, the tenant generally confirms specific details of the lease, including the amount of the rent payment and the security deposit which they made before moving in, along with other information.
An estoppel certificate helps third parties conduct due diligence. Third-party can be anyone, and in most cases, he is either a buyer or a lender.
Why do Landlords Request Tenant Estoppel Certificates?
The two most typical use case scenarios when landlords request a tenant estoppel certificate are when the owner of a multi-family property is refinancing the property or selling it. An estoppel certificate is considered an essential piece of document undertaken for the buyer or lender’s due diligence.
In the first case where the property owner is selling the property, he will request an estoppel certificate from the tenant due diligence towards the property’s buyer. On the other hand, the buyer would like to have a clear understanding of the previous leases that the property has had before inheriting the same.
Similarly, when the property owner is trying to refinance the property, the lender would like to review the tenant estoppel certificate to understand the property’s income-generating capacity before thinking about funding the deal.
In a case where investors are trying to refinance their property, they may be required to collect estoppel certificates from their tenants and submit them duly on time to the lender.
What other things would lenders verify along with a tenant estoppel certificate?
Before funding a deal, here are some things a lender might like to verify along with a valid tenant estoppel certificate:
The lender will want to confirm if the tenants are paying what the landlord claims. That there are no impending disputes between the tendons and the owner, which might majorly affect the cash flow needed to cover the loan payments of the property.
That the terms of the lease are matching with what the landlord has stated. In essence, the lender tries to understand how the lease terms work and if the agreement between the tenants and the owner is bonafide.
Are tenants required to cooperate with the owner to produce valid estoppel certificates?
Whether or not tenants are required to cooperate with the landowner to produce an estoppel certificate largely depends on the lease agreement’s terms and the general relationship the tenant has with the owner.
In the case of an estoppel agreement in the lease, the tenant is required by law to cooperate with the landlord and honor their request by producing a valid estoppel certificate.
It is in the landlord’s best interest to always include the clause of estoppel certificate in their lease agreement so that they do not find themselves in trouble later when a tenant refuses to cooperate.
When the tenant does not cooperate, they can find themselves in default of their lease agreement, thus bringing themselves legal suit or action.
What should tenants do when they receive a tenant estoppel certificate request?
If you are a tenant and your landlord asked you to produce a tenant estoppel certificate, the first thing to do is review your lease and see what your impending obligations are. Having a look at your lease agreement might give you more idea on how to go about producing your tenant estoppel certificate.
If your lease agreement has a specific clause stating that you need to produce an estoppel certificate, you must strictly comply with it. Even in a case when your lease agreement does not outline it expressly, it is still recommended that you complete the tenant estoppel certificate request in your best interests.
For example, if your property’s rent has been lowered because you signed a lease and the landlord promised to have something fixed for you but hasn’t honored the promise – as a responsible tenant, you would want to make sure a new owner is well aware of this.
Similarly, as a responsible tenant, you must cooperate with your landlord in producing a valid estoppel certificate stating the condition of the property and all other terms and conditions of the rent or lease.
This also helps the lender determine the cash-generating capacity of the property and the landlord’s overall credibility.
In a case where you have an impending dispute with your landlord, you might want to discuss with your landlord before making any statements in the estoppel certificate.
Additionally, in a case where you feel confused about understanding the language and the terminologies used in the estoppel certificate form, it is recommended that you should consult a real estate professional. Take their expert advice as you do not want to agree on something you don’t understand or aren’t fully aware of.
In most cases, landlords cooperate with their tenants to pay for professional real estate experts’ fees while producing a tenant estoppel certificate, which is in the best interest of both – you, as a tenant, and your landlord.
How to handle tenants who you want corporate in producing a valid estoppel certificate?
As an investor, you might find yourself in a situation where your tenant is not willing to cooperate with you irrespective of whether or not you have included the estoppel certificate clause in lease agreements.
In such cases, it is best advised that landlords educate their tenants about the importance of estoppel certificates and ask them to cooperate before going ahead and showing them or threatening to sue them.
Most of the tenants are quick to understand that landlords will not give up easily, and they might find themselves as a defendant in a lawsuit. In a case where a tenant is confused about how to produce an estoppel certificate, landlords are expected to educate them or appoint an experienced attorney to carry out the procedure of an estoppel certificate.
What are the Contents of the Tenant Estoppel Certificate?
The contents of tenant estoppel certificates will largely depend on the type of property, and they can become more detailed when the property is commercial. Here are some standard contents that can be found on the estoppel certificate form:
- Name of the tenant
- Contact information of the tenant
- Address of the property they are occupying
- Lease start date
- Lease end date
- Monthly rental amount
- Amount paid as a security deposit
- Details of rent arrears or past rent that is not paid
- Details of rent which is paid in advance of more than 30 days
- details of the discounts are concessions that the landlord and tenant have agreed upon
- Details of the extent of work that is not completed by the landlord as per the agreement of the lease
- Any impending defaults on the side of tenants or landlords
Get in touch with Private Capital Investors for more as they are expert private commercial real estate lenders.
