What’s The Purpose of a Tenant Estoppel?
Kenwood recently completed its second property sale in its 24-year history. As part of the normal sale process and the due diligence performed by the buyer, we were required to provide an estoppel certificate for each tenant to execute.
This is a routine and common practice in commercial real estate transactions and financings. As a tenant at a commercial property, you may be unfamiliar with an estoppel certificate and its purpose. However, please recognize that you will eventually be asked by your Landlord to sign a tenant estoppel certificate. If you have not seen one before, and wondering what that is, why it is important, and why you must sign it, we’ll explain it to you.
What’s An Estoppel All About?
First, an estoppel is typically needed both during a property sales process as well as anytime that a property is being financed. It is a document that summarizes the contractual terms of your relationship with your Landlord.
Second, the estoppel helps establish a relationship between you, as the Tenant, and the owner’s lender, which otherwise doesn’t exist. A lease establishes a contact between a Landlord and a Tenant. A loan establishes a relationship between a Landlord and a lender. But since the lender has no relationship directly with a Tenant and is relying on information provided by the Landlord to support the loan, the estoppel provides a means for the lender to confirm the Landlord’s data about the lease.
Third, an estoppel isn’t intended to be a lease amendment. It isn’t the appropriate document to modify lease terms, rental rates, or to add terms to the lease that haven’t been previously negotiated. Its purpose is to confirm already existing information, terms, and conditions.
Fourth, an estoppel typically contains the following information:
- Lease dates – When did the lease term commence? When does it expire?
- Rental rates – What is the current rental rate?
- Abated rent – Does the lease provide for any free rent that hasn’t already been used up?
- Square footage – What is the area that you lease?
- Defaults – Are there any current defaults that should be disclosed?
- Security deposits – Is your Landlord holding a security deposit and what is the amount?
- Prepaid rent – Have you paid any rent in advance?
- Options for renewal, termination, or building purchase – Do you have an option to renew your lease? Do you have the ability to terminate your lease prior to lease expirations? Do you have a right of first offer or right of first refusal on additional space or to purchase the building? If so, what are the terms?
- Outstanding tenant improvements that Landlord has not completed – Has your landlord performed all work stipulated in your lease? If not, what is outstanding?
What Should A Tenant Do When They Receive An Estoppel?
When you receive an estoppel certificate from your Landlord, there are few things you should do.
First, find a copy of your lease and compare the information in the estoppel to your lease terms to make sure that all the information is accurate. If you can’t find your lease, your Landlord can provide a copy to you. Then, if you find any differences, you should note them on the form. Delete anything that would change or add new terms to your lease. An estoppel is not supposed to be an amendment to your lease or a waiver of your rights. That being said, make sure all dates are correct and any options you have are included.
Second, recognize that you have a specific time frame to review and execute it. This is typically 5-10 days.
Third, estoppels frequently need to be notarized. Don’t forget to complete this portion.
Fourth, most tenants don’t need to spend money to engage an attorney to review an estoppel. Since it just summarizes terms already agreed to and doesn’t modify anything, there shouldn’t be any surprises in it. If you still are uncomfortable signing it without having an attorney review it, you should certainly engage one.
Tenant estoppel certificates do not have to be intimidating. It is actually a very routine document that is usually part of a transaction. Call your landlord if you have any questions or need an explanation. Most landlords would be happy to have those conversations with you. With good and open communication, it is possible to resolve any issues you may have and achieve the goal of producing a signed estoppel with minor effort.
At Kenwood, we are here to help our tenants understand the confusing commercial real estate process. If you have any questions, please check out our glossary of terms and videos, or follow us on LinkedIn. If you’re interested in becoming a part of the Kenwood Community and leasing space in one of our properties, please let us know.