Landlords routinely request estoppel certificates from their tenants. Tenant estoppel certificates are signed statements requested by third parties (typically lenders or prospective purchasers of commercial real estate) in order to verify certain terms between the current tenant and landlord of the commercial real estate property, things that cannot be ascertained by simply reading the commercial lease agreement.. The estoppel certificate confirms that a valid lease exists, that the lease remains in full force and effect, that neither the landlord nor tenant are in default and that the rent is paid up. This allows for instance a prospective buyer of a shopping center to better evaluate the shopping center’s performance. Once a tenant verifies these details in the estoppel certificate, they cannot be later disputed. Potential purchasers of the commercial property rely on the certificates to evaluate the risks associated with purchasing the property and to determine an appropriate offering price.
What Information is Included in a Tenant Estoppel Certificate?
Typically, an estoppel certificate will ask a tenant to verify the following:
- The date of the commencement of the lease;
- That the lease has been unmodified and is in full force and effect or that it has been modified;
- The most current date in which rent is paid through; and
- That there are no defaults by the tenant or the landlord.
Other information that may be requested in an estoppel certificate includes the financial health of a tenant, the amount of any security deposit paid, the tenant’s ownership structure, or whether there is any ongoing litigation related to the tenant. Most of the time, but not always, landlords will attach a form of the estoppel certificate as an exhibit to the actual lease agreement to help avoid disputes that may arise in the future regarding what information should be provided by the tenant. It is in a tenant’s best interest to negotiate which information should be included in the estoppel certificate prior to entering into the lease. For example, information that can be determined by reading the lease or statements that modify the lease agreement in any way should be avoided.
The Importance of Responding to Requests for Estoppel Certificates
Commercial leases usually include a provision that requires tenants to return estoppel certificates within a specific number of days from the date requested. Upon the receipt of an estoppel certificate, tenants should promptly review the lease requirements regarding the timing of returning an executed certificate to the landlord and regarding the substance of the certificate. It is important to read the lease provision carefully because lease clauses most often state that the landlord may execute the estoppel certificate on the tenant’s behalf if the tenant fails to return the certificate within a specified deadline. While in most cases landlords won’t take advantage of this situation, there remains the potential that a landlord could ignore landlord breaches, create lease modifications such as rental increases or obligate the tenant in other unexpected ways. Once executed on the tenant’s behalf (because the tenant neglected to return an executed certificate), the tenant becomes bound to its terms, even if the information is inaccurate. Moreover, if a third party relies on inaccurate statements included in the estoppel, the tenant can be held liable for damages resulting from the inaccurate information. The estoppel certificate that is usually attached as an exhibit to commercial leases should offer tenants guidance regarding the extent of the information a landlord can add if the tenant fails to respond.
Whether concerned about estoppel certificates or the negotiation of a commercial lease in general, it is always best to consult with a San Diego commercial lease lawyer.