Many independent retailers and small business owners approach a landlord’s request for an estoppel certificate as an innocent formality. The documents are relatively brief and usually appear to state the obvious (rent, lease term, square footage, etc.). Nonetheless, lurking among the seemingly obvious are laws and inferences that may lead to unintended consequences that negatively impact lease rights and business operation. Understanding the purpose of an estoppel certificate and its effects is the first step to avoiding disaster.
What is an estoppel certificate?
In connection with a commercial lease, an estoppel certificate is a tool used by potential lenders and purchasers of real estate to confirm certain lease terms and to determine the status of any defaults under the lease. Purchasers and lenders rely on information in the estoppel certificate to value the property and to determine risks, liabilities and feasibility of purchasing the property or using the property as collateral for a loan. Estoppel certificates will often contain information that has the effect of modifying the lease.
What are the effects of signing an estoppel certificate?
A tenant who signs and delivers an estoppel certificate, as required under a commercial lease, is bound by the statements in the estoppel certificate, even if they vary from lease terms. As a result, the terms of an estoppel certificate can increase the tenant’s payment and performance obligations under the lease or take away certain tenant rights under the lease. Furthermore, the tenant may be bound by information in the estoppel certificate even if it is incorrect. Signing the estoppel certificate certifies that the tenant has reviewed and confirmed that the information is correct and agreed upon.
Statements in an estoppel certificate or failure to make certain statements can lead to loss of the right to sue the landlord for damages. For example, most estoppel certificates ask the tenant to either list any defaults by the landlord or certify that the landlord has not defaulted. The tenant may be legally barred from pursuing legal claims against the landlord in the future if the default or claim was not disclosed in the estoppel certificate.
Finally, if a purchaser or lender relies on statements in the estoppel certificate that are inaccurate, the tenant may be held responsible for loss and damages resulting from reliance on the inaccurate information.
What should tenants do when asked to sign an estoppel certificate?
The first step is to review the lease to determine the tenant’s obligations in connection with the request. As a practical matter, the obligations should have been reviewed by an attorney and limited as part of lease negotiation.
The next step is to thoroughly review all information for accuracy. This is extremely important. Having another person who is familiar with the lease confirm the accuracy is a good idea. As stated above, the tenant can be bound by all statements and material omissions, even if they are inaccurate. The tenant should not hesitate to correct inaccurate information.
Finally, do not hesitate to talk with the landlord or an attorney about estoppel terms that are of concern. Your business’s operation and success may be at risk.
This information should not be viewed or relied upon as legal advice. Consult with an attorney for advice particular to your situation.