In commercial real estate the tenant estoppel often comes up during the due diligence phase of an acquisition or during the underwriting of a loan. What exactly is a tenant estoppel and how does it work? Let’s dive in and take a closer look at the tenant estoppel.
What is a Tenant Estoppel?
What exactly is a tenant estoppel? By definition, an estoppel certificate is a “signed statement by a party certifying for another’s benefit that certain facts are correct, as that a lease exists, that there are no defaults, and that rent is paid to a certain date. A party’s delivery of this statement estops that party from later claiming a different state of facts.’’ Black’s Law Dictionary, 572 (7th Ed., 1999).
In other words a tenant estoppel is a certified statement by a tenant that verifies the terms and conditions and current status of their lease. Most commercial real estate leases require a tenant to provide an estoppel letter or certificate upon request and this is often a critical step during the due diligence phase of an acquisition and the also during the underwriting of a commercial real estate loan.
Why is this so important? The tenant estoppel provides proof of cash flow, which is ultimately what a potential investor or lender in a property is concerned with.
As an aside, the word “estop” simply means to prohibit, and a tenant estoppel is therefore a certificate that prohibits the tenant from taking a position contrary to what is stated in their certificate.
What’s in a Tenant Estoppel Letter or Certificate?
While the actual items required in a tenant estoppel will vary, here are some common points covered in a typical tenant estoppel letter or certificate:
- The commencement date of the lease.
- The date to which rent has been paid.
- That there are no defaults by either the landlord or the tenant.
- If there are defaults by either party, then a specification of these defaults will be required.
- Verification that the lease is unmodified and in full force and effect.
- If the lease has been modified, then the estoppel certificate will include a statement verifying what modifications have been made.
Most leases will have a provision requiring a tenant to provide a tenant estoppel letter or certificate upon request, however, the details of what is to be included in the actual tenant estoppel certificate can vary. The above items are usually a good starting point.
Conclusion
The tenant estoppel is a common item that often comes up during the due diligence phase of an acquisition and during the loan underwriting process. It’s used to provide a third-party insight into the relationship between a landlord and a tenant. In this short article we covered the purpose of the tenant estoppel and the basic items included.
I like the down and dirty snippets of the meaning of various commercial real estate terms. It is good to have a working understanding of the terms often used in the industry. I find it humorous that many people ask for Estoppel Certificates and don’t have a clue as to the function of the document. It might be a good idea to use examples for the readers to make it easier to apply the subject matter to their respective roles or understanding as to the need for certain documents.
So, I am buying a multifamily property with 80 units (working class tenants with jobs) what is the chance, during my due diligence period that I will receive 80 estopple certificates? The owner representative provides me with initial rent roles but indicates these are presumptions. True cash flow must be known to do the deal. Comments? .
You could also just get bank account statements and see if the amount credited each month for the last 12 mos ties to the rent roll, subject to some adjustments.
These are (typically) for commercial properties only.
Hey – great explanation of what it is, but I am still confused as to the purpose: Why not just give the lender the copy of the current active lease/amendments? Doesn’t the lender/investor require those anyway? You say that “The tenant estoppel provides proof of cash flow” but doesn’t a copy of the actual lease do this as well – as well as go into more detail about the terms?
By definition, an estoppel certificate is “[a] signed statement by a party (such as a tenant or mortgagee) certifying for another’s
benefit that certain facts are correct, as that a lease exists, that there are no defaults, and that rent is paid to a certain date.
A party’s delivery of this statement estops that party from later claiming a different state of facts.’’ Black’s Law Dictionary, 572
(7th Ed., 1999).
In other words, it is something provided by the tenant certifying that the lease is correct and that there are no defaults, etc.
Sounds like more pointless paper work to me !
If the seller claims no, or low security deposit then the new owner could get stuck paying a large deposit that the tenant has actually paid, or makes a claim to. The estoppel ‘stops’ them from claiming anything different than what is on the estoppel page. That piece of paper can translate inton$1,000’s if not handled properly.
My parents have been living in the same apartment for over 30yrs. My parents and a few other tenants sued the owner for not fixing the apartments when something was falling apart.. Now they gave them a Form (Tenant Estoppel Certificate) my parents are old and are afraid that this is a new contract or by signing this they can get evicted from the apartment.. PLEASE HELP!!
No it means that the current owner is trying to refinance the property
Must all items owned by the tenant be listed in the estoppel? Can the tenant indicate that responsibilities of the property owner cannot be charged back to the tenant?
Does the tenant have to sign an Estoppel Agreement? I was grossly misled by my landlord regarding the property. Can I use this as a negotiating tactic my not signing it until my demands are met? Please advise and Thank You, davidlrichter@outlook.com