What Is An Estoppel Certificate? A Real Estate Must-Know

Learn what an estoppel certificate is, how it works, and why it’s important for your real estate business.

By
Nichole Stohler
|
Last Updated
November 29, 2023
What Is An Estoppel Certificate? A Real Estate Must-Know

In the dynamic world of real estate transactions, a seemingly small document holds significant power, shaping the security and clarity of lease agreements: the estoppel certificate. Imagine a safeguard that ensures both landlords and tenants stay bound by the terms they've agreed upon. Enter the estoppel certificate — a legal instrument wielding influence over property sales, refinances, and commercial leases. It's the silent sentinel standing between confusion and clarity, protecting all involved parties.

It's a document that not only verifies lease terms but also acts as a shield against misunderstandings and disputes. So, if you want to learn more about what estoppel certificates are, why they matter, their required contents, and how they benefit all parties, dive into the world of estoppel certificates — a vital cog in the machinery of real estate transactions, bridging gaps and ensuring stability.

What is an estoppel certificate?

An estoppel certificate, also known as an estoppel letter, is commonly used in real estate and mortgage activities when the landlord plans to sell the building or refinance the property. It confirms that tenants will keep their lease agreement terms under the new ownership and is part of the due diligence process in residential and commercial real estate transactions.

Upon providing information about the current status of their lease agreement, tenants need to sign the estoppel certificate to validate it. Once the information within the certificate has been validated, landlords are protected from tenants making contradictory claims about their lease agreement, as they have the confirmation of the current terms in writing.

Landlords' motivations for requiring estoppel certificates

Landlords lean on estoppel certificates for a variety of purposes, including:

  • To certify all lease details and verify that tenants honor obligations. The certificate confirms terms like rent, duration, and verbal agreements.
  • To facilitate transactions by providing lease information to buyers, lenders, and investors evaluating the rental property.
  • To protect landlords' interests legally. Signed certificates prevent future tenant claims of different lease terms. Landlords have written proof that will help prevent misunderstandings.
  • To evaluate tenants' financial stability. Lenders and investors rely on the certificates to confirm tenants' ability to pay rent consistently.
  • To keep lease information up-to-date. Certificates capture any amendments or changes to the original agreement.

Are tenants required to complete an estoppel certificate?

Whether tenants must complete an estoppel certificate depends entirely on the provisions in their lease agreement.

If the lease contract contains language mandating that the tenant sign and return an estoppel certificate when requested, they are legally obligated to comply. Refusing to provide a complete and accurate certificate in such cases would violate the lease.

However, involvement is voluntary if the agreement does not expressly require participation. In these situations, tenants should thoroughly review the document to understand any risks before signing. Recommended steps include carefully examining the contents, confirming all details match lease terms, and potentially consulting a real estate attorney.

What's in a tenant estoppel letter?

These legally binding certificates contain a comprehensive overview of the rental agreement details. Standard contents include:

  • Tenant's full legal name and contact information.
  • Lease start and end dates, including any provisions for renewal or termination.
  • Rental amount, frequency of payments, and any provisions for monthly rent abatement or adjustments.
  • Security deposit details, including the initial amount and any deductions made.
  • Any modifications or amendments to the original lease agreement.
  • Information on any improvements or alterations the tenant makes to the leased premises.
  • Confirmation of rent payment status, including any outstanding balances.
  • Disclosure of ongoing litigation or disputes involving the tenant and the landlord.
  • Any additional agreements or concessions between the tenant and the property owner that impact the lease terms.
  • Details of any subleasing or assignment arrangements.
  • Any other relevant information or representations made by the tenant that may affect the lease terms.

Property types that require an estoppel certificate

Now let's explore the types of properties that often require an estoppel certificate:

Multifamily properties

Multifamily properties like apartment complexes or condominium buildings need estoppel certificates to verify certain details about each tenant's lease, such as the terms, rent amounts, security deposits, and any outstanding balances.

Residential properties

Residential real estate encompasses single-family homes, townhouses, and other similar dwellings. Frequently, properties require estoppel certificates when they belong to a homeowners' association (HOA) or when a community with specific covenants, conditions, and restrictions governs them.

In the case of residential properties, obtaining an estoppel certificate validates the property owner's compliance with the HOA rules and regulations, outstanding dues, assessments, and any pending litigation related to the property.

Commercial real estate

Commercial property types, including offices, retail stores, warehouses, or industrial facilities, require an estoppel certificate to validate commercial leases.

These certificates verify the details of commercial lease terms for potential buyers and lenders. It allows them to evaluate a tenant's financial standing by confirming lease details like rental rates, concessions, maintenance obligations, and any outstanding balances like unpaid back rent payments.

Estoppel certificates also require disclosing any ongoing legal disputes between the commercial tenant and landlord. It gives prospective buyers and lenders greater awareness of potential risks or liabilities related to inheriting new commercial tenants through property acquisition.

Accounting for off-lease arrangements

While formal lease agreements contain the primary tenancy terms, landlords and tenants often make supplementary verbal agreements that significantly impact the rental experience. When creating a tenant estoppel certificate, it's important to document any informal arrangements not mentioned in the written lease.

Examples of key details that you may have agreed upon verbally include:

  • Subletting arrangements.
  • Exclusive outdoor space usage.
  • Pet permissions.
  • Rent payment adjustment for maintenance.
  • Storage area access privileges.
  • Designated parking spaces.

Capturing these supplemental agreements provides a comprehensive view of all obligations and rights negotiated between the tenant and landlord. The estoppel certificate should reflect the full scope of the rental relationship, both written and verbal.

What happens if the tenant doesn't sign or return an estoppel certificate?

Refusing to sign an estoppel agreement can create significant issues for both the tenant and landlord:

  • Transactions hindered: Not having a signed estoppel certificate delays or complicates lease-related transactions like property sales, refinancing, or lease assignments. These deals rely on the estoppel for accurate lease details.
  • Potential lease violation: Depending on the lease terms, failing to sign an estoppel letter may breach the agreement if participation is required, prompting fines, fees, or even eviction.
  • Limited tenant protection: Without a signed certificate, tenants lose a key form of documentation for their lease. As a result, tenants are less protected in lease disputes and have limited recourse.
  • Lack of clarity on lease status: With no clear tenant validation, ambiguity exists around lease commitments and obligations between tenant and landlord.

If the tenant refuses to sign the estoppel letter, landlords can consider the following options before escalating matters:

  • Provide the tenant more time to review the estoppel certificate and voice any concerns. Offering an extension can help gain cooperation.
  • Suggest reviewing the estoppel certificate together and have the tenant propose edits to reflect their understanding. Showing that you value their opinion can result in an agreement.
  • As a last resort, consult an attorney to pursue legal action if the tenant blatantly violates a lease requirement. But in many cases, simply maintaining open communication can yield a resolution.

Overall, this gives landlords alternatives to explore if a tenant won't sign initially. With some flexibility and patience, a resolution may be reachable.

How are all parties protected?

By verifying details and preventing disputes, estoppel certificates create a transparent and secure real estate environment. These certificates provide distinct protections for the following stakeholders:

Landlords, investors, and lenders

The estoppel certificate offers additional security to landlords, investors, and lenders by confirming the tenant's commitments and promises outlined in the lease. It makes sure that both the landlord and tenant will adhere to the agreed-upon terms and conditions, assuring that their investment will continue to generate stable cash flow. This document helps mitigate the risk of unexpected changes or disputes that could impact the landlord's financial interests.

Tenants 

For the tenant, estoppel certificates provide protection against any unilateral changes to the lease terms by the landlord. Tenants can confirm that the terms of their lease agreement will remain unchanged, granting them stability and preventing any unforeseen modifications that could negatively impact their rights or obligations by obtaining a signed estoppel certificate.

Prospective buyers

During property transactions, potential buyers conduct due diligence to assess the viability and profitability of the investment. The estoppel certificate plays an important role in this process, as it confirms existing lease terms, tenant financial obligations, and stability. This information is necessary for buyers to evaluate the property's cash flow, identify potential risks or liabilities, and make informed decisions. The estoppel certificate protects potential buyers from unexpected expenses or legal issues arising from undisclosed or misrepresented lease terms.

Overall, estoppel certificates promote transparency and trust between all parties by requiring upfront validation of lease details, security deposits and tenant commitments. This creates a more secure environment for rental property transactions and operations.

Understanding the estoppel certificate

Estoppel certificates enable smooth deals and prevent avoidable disputes in real estate transactions. They provide a legally binding verification of lease terms that protects the interests of landlords, tenants, buyers, and lenders.

While requirements vary based on specific lease agreements, obtaining a tenant estoppel certificate lets all parties benefit from the upfront confirmation of rental details and obligations.

Knowing the purpose of estoppel agreements, the key contents, the types of properties impacted, and the consequences of not participating, you can now navigate transactions with increased confidence.

Estoppel certificate FAQs

Is an estoppel legally binding?

Yes, an estoppel certificate is legally binding. Tenant estoppel certificates confirm the terms, conditions, and any additional agreements or arrangements. Estoppel agreements are typically relied upon by landlords, investors, lenders, or potential buyers.

What happens if the information in an estoppel certificate is inaccurate? 

If the information in an estoppel certificate is inaccurate, it can lead to disputes, breach of contract claims, and potential legal consequences for the party responsible for providing the inaccurate information. The affected parties may need to work towards resolving the inaccuracies, which could involve revisions, corrections, or legal actions to rectify the situation.

Are there specific timeframes or deadlines associated with the submission of estoppel certificates?

The specific timeframes and deadlines for submitting estoppel letters or certificates can vary depending on jurisdiction, type of transaction, and parties involved. Consult the relevant real estate law, lease agreements, or contracts governing the situation to determine any specific timelines or deadlines that apply.

Nichole Stohler

Nichole co-founded Gateway Private Equity Group, with a history of investments in single-family and multi-family properties, and now a specialization in hotel real estate investments. She is also the creator of NicsGuide.com, a blog dedicated to real estate investing.

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