An estoppel certificate is a document used in real estate for due diligence purposes to describe the current conditions of a lease agreement. It is mostly used when the landlord wants to sell the real estate or approaches a financial institution for financing/mortgage services. The buyer or the financial institution will want to know the current conditions with the tenants and their lease agreements as well as the current cash flows.
The estoppel certificate provides confirmation to the buyer from the tenants about the terms of the lease agreement, their rights and privileges, and any other arrangements in place. As the new owner, they will be assuming all of these. It summarizes the lease agreement and contains further agreements between the landlord and the tenants, including oral agreements, promises, and understandings that define their relationship.
For a financial institution wishing to collateralize a property, an estoppel certificate verifies that the tenants occupying the property confirm the landlord's information regarding their lease agreements is correct.
An estoppel certificate being a legally binding document is a serious document that you should fill accurately. All the contents of an estoppel certificate are deemed to be accurate and legally enforceable. You cannot challenge the contents of an estoppel certificate you have signed. If there arises any dispute as to the correctness of the information, it is not the landlord or the tenants to rectify this information. The courts will interpret the lease agreement together with the estoppel certificate to determine the correct position. Also, once complete, you cannot claim that the facts ascertained in the estoppel are not accurate.
An Estoppel certificate can also be known as:
- Tenant Estoppel Certificate
- Estoppel Agreement
- Tenant Rental Information Declaration
- Rental Information Questionnaire
Once signed, an estoppel certificate becomes a legally binding document.
Information contained in an estoppel certificate
- Tenant’s name and contact information and premises they are currently in
- Lease start and end date
- Amount of rent payable, any rent paid in advance, and any due rent not paid
- Important lease terms
- Any amendment to the lease
- Security deposit amount
- Protected tenancy status
- Any oral agreements in place
- Promises/concessions made by the landlord
- Anything that may lead to the tenants withholding future rent
- Any outstanding work on the property
The purpose of this information is to provide a complete picture of the existing relationship between the landlord and the tenant to avoid any surprises or new information that may crop up.
Is it a Requirement to Complete/Sign an Estoppel Certificate
Most lease agreements contain a clause that states that tenants must complete an estoppel certificate once raised. This applies widely in commercial real estate for commercial tenants. Failure to complete it and sign may be construed as a breach of the lease. It may lead to further action, including a notice to vacate. In some other cases, if a tenant fails to complete the document, the landlord does so on their behalf, and all information is taken as correct.
Almost all commercial real estate leases/rental agreements contain an estoppel certificate clause. This ensures that there will be a smooth handover in case of the property changing hands. In cases where the lease is silent on this issue, it would make sense for the tenant to complete it.
It is in your best interest as a tenant to complete the estoppel certificate as diligently as possible. Leaving out certain aspects of your agreements with your current landlord may be detrimental in the future once the new landlord takes over. For commercial tenants, this becomes even more important.
Some landlords and tenants have oral agreements in place on the use of the property. Some may have agreements on who pays for the property's maintenance, owning a pet, reduction in rent, parking slots, subletting, etc. These agreements are not captured in the lease; thus, the lease doesn’t fully capture the relationship. In such cases, an estoppel certificate comes in handy to highlight important areas of the lease and any further details.
If a tenant enjoys any privileged status under their current lease, they should put it in writing in the estoppel certificate.
How the Estoppel Certificate protects the different people involved
For the Landlord
The landlord may want an estoppel certificate when they want a real estate property transaction to go through. The new buyers want to know the status of the tenants and the cash flow, tenants’ status and other agreements. This document will help them make a decision whether or not to continue with the transaction. Once the transaction goes through, the estoppel certificate absolves the old landlord from any claims not covered in either the lease or the estoppel.
For cases where they are looking for funding from a financial institution, the estoppel certificate will help the landlord secure financing or mortgage based on the cash flow confirmed from the document.
For the Tenant
The estoppel certificate is important for the tenant as it gives you the chance to continue with the landlord-tenant relationship with the new landlord, just like with the old. You have the opportunity to affirm any existing agreements in place and to make aware to the new buyer of any material information that they ought to know.
Issues such as maintenance, security deposit, interest on the security deposit, payment of utilities, pets, subletting, roommates, etc. should be included in the document even when they are not outlined in the lease.
For a Financial Institution
The estoppel certificate helps financial institutions gauge the cash flow that a property generates. When a landlord is seeking refinancing or mortgage with a property leased out to tenants as collateral, the bank will use the estoppel certificate to determine the accuracy of the information provided regarding cash flow and future income. It will also be vital to gauge the risk involved. For instance, in a commercial property with a big anchor tenant, the risk is substantially higher if they decide to relocate. In such a case, the estoppel will detail the length of their lease and any other commitments they have made.
For Potential Buyers
For potential buyers, the estoppel certificate shows the tenant's current status, lease, rental agreements, cash flows from the property, and any other agreements they have in place with the landlord. This helps potential buyers decide if they want to continue with the acquisition in light of the information contained therein.
In addition to this, the estoppel certificate ensures that the tenants don’t have any claim against the landlord.
Listen to this video to learn more on how an Estoppel Certificate protect the different parties in a real estate deal.
When should A Tenant sign an Estoppel Certificate?
As a residential or commercial tenant, you may receive a request from your landlord or their agent to fill and sign an estoppel certificate. In most cases, you are unlikely to be at a disadvantage by signing the document if you take your time to confirm that everything in the document is accurate. You are more likely to benefit by putting in writing any material agreements that you have entered with the landlord not captured in the lease.
The first thing to do before anything else is to consult your lease. Find out if it has an estoppel certificate clause and what it says. If there is one, there will be timelines stipulated on when you should do it. Take time to note any consistency and inconsistencies that exist between the lease and estoppel certificate and note them down.
Finally, put in writing any agreements or understanding you have that are not captured in the lease. These may include owning a pet, free use of a parking slot, subletting, living with a housemate, agreements of payment of utilities, any maintenance work agreement in place, etc.
Most tenants are apprehensive about signing an estoppel certificate as they have never seen such a document before. Even though their lease may have a clause to that effect in it, being a rare document, it is not always understood. Further, as a landlord, when requesting tenants to sign an estoppel certificate, always take a moment to explain what it is and why they are doing it.
To Notarize or not Notarize the Estoppel.
Some financial institutions require that the estoppel be notarized to guarantee that the information contained in it is correct. In such a case, the tenant or their representative who will be signing the estoppel needs to present themselves before a notary public with their identification documents. This legitimizes the estoppel. As a landlord, you may need to incentivize the tenant to do so.
Common mistakes people make with estoppel certificates
- Failure to sign the estoppel in the stipulated time
This mostly applies to commercial tenants. They may be apprehensive about signing an estoppel certificate, and the decision-making process may take a while. In most cases, the lease stipulates the number of days that an estoppel certificate should be signed and delivered. If this time lapses, then you may be defaulting on your obligations as a tenant
- Signing the certificate without confirming if all the details are correct
This is a serious mistake that can lead to legal and financial consequences. You cannot dispute what you signed against in estoppel. This document overrides even the lease. Ensure any details are correct and add any further agreements, promises, concessions you have made with the landlord after signing the lease. If the landlord has defaulted on any of his obligations, note them down as well.
- Using the estoppel as an opportunity to sneak in non-existing agreements
Some sneaky landlords do this to hoodwink tenants into agreeing to some new provisions that may significantly alter the lease provisions. It is not advisable to do so. However, tenants need to read both the estoppel and the lease to notice if there are any inconsistencies. If unable to do so, contact a lawyer or a real estate agent to help you with this.
Estoppel Certificates FAQs
Is an estoppel certificate a legally binding document?
Yes, the estoppel is a legally binding document that holds more weight than even the lease. Always ensure all details contained in it reflect the accurate relationship between the landlord and the tenant
Are estoppels used for residential tenants?
They are more common with commercial tenants but are still used for residential real estate. Most commercial leases have an estoppel clause that stipulates the obligations of both the landlord and the tenant
Will an estoppel disadvantage the tenant or the landlord?
If done in good faith and drafted property, the estoppel doesn’t disadvantage either party. In any case, it restates the important terms in the lease, captures any new agreements, concessions, amendment, understanding, and puts it in writing.
As an investor in real estate, how important is the estoppel certificate
As an investor, you can’t solely rely on what the seller is saying regarding the cash flow and other agreements in place on the property in question. An estoppel certificate is the only way you can get information from tenants in the property regarding their relationship with their landlord. Remember, you will be inheriting all obligations that the current landlord has.
As a landlord, can I prevent the tenants from putting in any adverse information on the estoppel?
If you have been in dispute with a tenant or have defaulted on some of your obligations, it is advisable to try and resolve all outstanding issues before requesting them to sign the estoppel. If they write any adverse information, it may put you at a disadvantage when negotiating for a sale or for financing.
An estoppel certificate is an important real estate document whose main aim is to summarize the essential details in the lease as well as other additional information that may not be captured in the lease. As a landlord, you should always include a clause in the lease agreement that stipulates that your tenants should sign an estoppel certificate in case it is ever needed.
For commercial and residential tenants, an estoppel certificate doesn’t put you at any disadvantage whatsoever. As a matter of fact, it helps put in writing additional material agreements/promises that are not captured in the lease. In case of the property changing hands, the new landlord will be obliged to honor these agreements. Ensure that the document is filled as accurately as possible. If there is ever a dispute, both the lease and the estoppel certificate will be used as evidence of the facts. In some instances, the estoppel certificate overrides the lease if there is a conflict in interpretation.