Estoppel Certificates: Achieving Certainty

By Manuel Fishman, Real Estate Attorney, Buchalter Nemer: In most every acquisition of a commercial property, the prospective buyer will require that the property’s tenants execute an estoppel certificate. Be sure the right language is included.

FishmanBy Manuel Fishman, Real Estate Attorney, Buchalter Nemer

In most every acquisition of a commercial property, the prospective buyer (and the prospective buyer’s lender) will require that the property’s tenants execute an instrument confirming various terms of their respective leases. That instrument is commonly referred to as an “estoppel certificate” because the tenant signing the certificate, and certifying various factual matters relating to the lease referenced in the certificate, is “estopped” or “barred” from later contradicting matters in the certificate—even if the lease is to the contrary.

The principal certification in any estoppel certificate is the definition of the lease referenced in the certificate, a detailing of any amendments thereto and a statement that there are no other amendments or modifications to the lease, other than as referenced in the estoppel certificate. One could argue that once that certification is given, nothing more needs to be said, as the prospective buyer can then read the lease and make their own determination of the lease’s terms. But there are matters that are not evident from the terms of the lease: (i) the actual term commencement date and expiration date, (ii) whether any rent has been paid in advance, (iii) whether the landlord has drawn on the security deposit, (iv) whether the landlord has completed all work required of them in connection with the delivery of the premises, and (v) whether the landlord is in default under the lease or whether the tenant claims any rights of offset or deduction against the rent, just to name a few. Creative lawyers can come up with other matters that need to be included in the estoppel certificate.

There are two basic rules to be guided by:

(1) Make sure the underlying lease contains the obligation of the tenant to sign an estoppel certificate. No lease form should be used without this obligation. If at all possible, make sure that the language contains words to the effect that “the tenant will sign an estoppel certificate containing such terms and certifications as the landlord may request.” Even if a form of estoppel certificate is attached to the lease, the clause governing estoppel certificates should allow for “such additional terms as the landlord (or its lender) may request.” And insert some period of time within which the tenant has to return the estoppel certificate to the landlord, because long delay times create difficulties in transactions. Before the owner proceeds with the sale of a building, they should check their leases and develop strategies to address problems before the contract is signed.

(2)  The general rule is that only the tenant is bound by the estoppel certificate, since it is the only party signing the certificate. But that is too simplistic. Usually the landlord (not the prospective buyer) prepares the certificate and includes the rent, security deposit, options to extend and other material terms, so that when the tenant signs the document, they are bound by (“estopped to contradict”) the specified terms. Landlords need to be careful. Clearly, if a tenant signs an estoppel certificate that states that the expiration date is Dec. 31, 2015, it cannot subsequently argue that the expiration date was June 30, 2016. But if a landlord completes the estoppel certificate and provides that the tenant has one option to extend but that option was previously exercised and is no longer effective, that error may be interpreted against the landlord and the prospective purchaser. Why? Because language in a contract is generally interpreted against the party who caused the ambiguity to exist, and the ambiguity in the foregoing example was caused by the landlord inserting the language in the estoppel.

There are published opinions where a landlord delivered an estoppel to a tenant with the statement: “Tenant has no options to extend or rights of first refusal, except as follows: ________.”  When the tenant does not fill in the blank, an ambiguity exists. Did the tenant mean to leave the blank empty because there are no options to extend or did they leave it empty because there are no options to extend except as otherwise provided in the lease, so that nothing has to be inserted?

Careful prospective buyers will do two things: (1) Not let their seller send out estoppel certificates without reviewing them or having a lawyer review them for conflicts with the lease, and (2) not send out an estoppel certificate with a blank, unless the word “none” is inserted in the blank.