Considered boilerplate, lease provisions addressing estoppel certificates are often glossed over during negotiations (or ignored entirely). However, estoppel certificates are important documents in the event a Landlord wants to sell or finance its property. With a bit of consideration during lease negotiations, estoppel clauses can meet a landlord’s needs without being an undue burden to its tenant.
The primary function of an estoppel is to provide a lender or prospective purchaser factual information to which it may not otherwise have access absent solely relying on the assertions of the landlord. Unlike other real property documents like mortgages that can be obtained by public record, leases and the information they contain are generally not available to the public. Further, lease terms are often altered over time either intentionally by a written amendment, or unintentionally through the conduct of the parties. Finally, a lease may not contain all of the information a lender or prospective purchaser requires, such as in the instance of a commencement date which is determined after the lease execution by the happening of an event (i.e., completion of construction build-out).
From a Landlord’s perspective, it is important to ensure that its tenants execute and deliver estoppel letters in a timely manner, as a loan or sale closing may be continent upon receipt. Tenants do not want to be bound to execute a future document whose content is unknown, particularly if faced with a lease default for failure to do so. Although these two positions may appear to be in conflict, by working together parties should find resolution through crafting a provision that delineates, to the extent possible, the information that will be contained in the estoppel certificate, limits the queries to statements of fact and establishes clear delivery requirements.
Typical items required in an estoppel certificate include the commencement and expiration of the lease term, any options to renew the lease, the amount of rent and additional rent currently being paid, the amount of any security deposit paid, whether the tenant has any rights of first refusal or purchase options, whether contingencies, conditions and obligations of landlord under the lease have been satisfied and whether any defaults exist. An estoppel may also be the appropriate instrument to confirm or disclose any additional relevant factual information about the tenant, such as its financial health, ownership structure or involvement in litigation. Finally, the estoppel should, in every case, clearly establish all of the documents comprising the lease, whether by specifically listing each document or attaching them as an exhibit to the estoppel. If the estoppel certificate is limited to factual inquiries such as those stated above, tenants are less likely to need extensive legal review and negotiation prior to execution and thus are more likely to agree to shorter delivery windows.
Spending a bit of time up front during lease negotiations to discuss and clearly define the expectations related to an estoppel certificate is ultimately beneficial to all parties. Lenders and prospective purchasers receive important information from an uninterested party. Tenants need only provide easily obtainable or known factual information within a reasonable time. Landlords spend less time acting as a go-between and can focus on the other transaction documents.