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

An estoppel certificate confirms the terms of an existing lease, protecting the rights and interests of landlords, tenants, and buyers in real estate transactions. This article explores its significance, how it is used, and the legal implications of its completion or non-compliance.

By
Nichole Stohler
|
Last Updated
June 3, 2024
What Is An Estoppel Certificate? A Real Estate Must-Know

Imagine you’re on the brink of purchasing a commercial building, and the seller assures you that all tenants are current on their rent and that there are no disputes. But how can you be sure without any formal documentation?

This is where an estoppel certificate comes into play, benefiting both the landlord and the tenant by providing formal documentation. An estoppel certificate, often called an estoppel letter, is a document that confirms the terms of an existing lease agreement, protecting the rights and interests of all parties involved.

This article discusses the intricacies of an estoppel certificate, why it holds significance for landlords, tenants, and prospective buyers, and the implications of its completion or non-compliance.

What is an estoppel certificate?

An estoppel certificate is used in real estate and mortgage activities, especially when the landlord plans to sell or refinance the property. It confirms that tenants will adhere to their lease terms under new ownership and is part of the due diligence process in both residential and commercial transactions.

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

Reasons landlords require estoppel certificates

Landlords rely on estoppel certificates for several key purposes:

  1. Verification of lease details: These certificates certify the specifics of a lease, such as rent amount, lease duration, and any verbal agreements, ensuring tenants adhere to their obligations.
  2. Transaction facilitation: They provide essential lease information to potential buyers, lenders, and investors who are assessing the property, streamlining property transactions.
  3. Legal protection: By having tenants sign these certificates, landlords secure written confirmation of the lease terms, which protects against future claims by tenants about different terms and helps prevent misunderstandings.
  4. Financial evaluation: The certificates are used to assess tenants’ financial stability, which is crucial information for lenders and investors to determine the reliability of rent payments.
  5. Lease updates: They help maintain current records by documenting any changes or amendments made to the original lease agreement.

Advantages of estoppel certificates in real estate transactions

Beyond landlords, estoppel certificates offer significant advantages to other parties involved in real estate transactions, such as buyers and lenders. They play a vital role in ensuring transparency and minimizing risks, making them indispensable in property transactions:

  • For buyers: They provide a clear and verified account of the existing lease terms, ensuring there are no undisclosed agreements that could impact the property’s value. This level of transparency allows buyers to make well-informed purchasing decisions.
  • For lenders: These certificates confirm the financial reliability and lease obligations of tenants, thereby minimizing the risk associated with property loans. They also streamline the transaction process and enhance the efficiency of securing financing.

Are tenants required to complete an estoppel certificate?

Whether residential 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 estoppel certificate required, 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 agreement terms, and potentially consulting a real estate attorney.

What's in a tenant estoppel certificate?

A tenant rental information declaration is a document a tenant completes and signs when a rental property is up for sale. This document requests information about the rights and privileges of existing tenants, including rental amount, lease terms, protected tenancy status, oral agreements with the landlord, amendments to written lease agreements, promises made by the landlord, and agreements concerning the payment of utilities.

These legally binding certificates contain a comprehensive overview of the details of the rental agreement. 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 terms of the lease.

How to prepare an estoppel certificate

Creating an accurate and thorough estoppel certificate is essential for landlords and tenants. Follow these steps:

  1. Review lease agreement: Start by reviewing the current lease agreement to ensure all terms and conditions are clear.
  2. Gather necessary information: Collect details such as lease start and end dates, rent amount, security deposit, and any modifications.
  3. Fill out the certificate: Complete the estoppel certificate form with the gathered information, ensuring accuracy.
  4. Cross-check details: Verify all information against the lease agreement to avoid discrepancies.
  5. Tenant review and signature: Have the tenant review the certificate for accuracy and sign it.
  6. Notarization (if required): Some certificates may need to be notarized. Check the requirements and proceed accordingly.
  7. Submit the certificate: Provide the completed and signed certificate to the requesting party within the stipulated timeframe.

By following these steps, landlords and tenants can ensure the estoppel certificate is accurate, reducing the risk of future disputes and facilitating smooth property transactions.

Common mistakes in estoppel certificates

Even experienced landlords and tenants can make mistakes when completing estoppel certificates. Common errors include providing incomplete information, such as missing details that can invalidate the certificate.

It's crucial to ensure all required fields are accurately filled out. Another frequent mistake is including inaccurate lease details; it's essential to double-check lease terms, rent amounts, and dates to avoid discrepancies.

Additionally, failing to review lease documents thoroughly can lead to inconsistencies between the estoppel certificate and the lease agreement. Finally, ignoring off-lease arrangements is a common oversight; including any verbal agreements or side arrangements provides a complete picture.

Avoiding these mistakes ensures a smoother transaction process and protects both parties from future disputes.

Legal implications

Estoppel certificates hold significant legal weight in real estate transactions. For example, consider a tenant who claimed they had no outstanding rent payments. If an estoppel certificate later revealed unpaid balances, the tenant could face legal consequences for providing false information. This highlights the importance of accuracy and the potential legal ramifications of inaccuracies.

Inaccuracies or omissions in these documents can lead to legal disputes, financial liabilities, and breach of contract claims. For landlords, an accurate estoppel certificate provides protection by affirming the lease terms and tenant obligations, ensuring no hidden issues arise during property sales or refinancing.

For tenants, it secures their rights and lease terms, preventing landlords from making unauthorized changes. Therefore, both parties must ensure the information is correct to avoid potential legal and financial consequences.

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 and security deposit amounts, 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. They allow them to evaluate a tenant's financial standing by confirming lease details like rental rates, concessions, maintenance obligations, and any outstanding balances, such as 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 essential 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.

Timeframes associated with the submission of estoppel certificates

In transactions where estoppel certificates are required, the timing and deadlines for submission can vary significantly based on several factors. These factors may include the jurisdiction's legal requirements, the terms outlined in the lease agreement or contract, and the parties' specific needs in the transaction.

  1. Lease agreement provisions: Often, lease agreements contain clauses specifying the timeframe within which tenants must provide estoppel certificates upon request from the landlord or new property owner. These provisions may outline submission deadlines to ensure the timely completion of due diligence processes.
  2. Sale or refinancing timeline: In property sales or refinancing transactions, there are typically established timelines for completing due diligence activities, including obtaining estoppel certificates. Deadlines for submitting estoppel certificates may be aligned with key milestones in the transaction timeline to facilitate a smooth and timely process.
  3. Legal requirements: Some jurisdictions may have specific statutes or regulations governing the submission of estoppel certificates in real estate transactions. These laws may stipulate timeframes or deadlines for providing estoppel certificates, ensuring compliance with legal requirements, and protecting the interests of all parties involved.
  4. Negotiated agreements: In certain cases, parties involved in a real estate transaction may negotiate specific deadlines or timeframes for submitting estoppel certificates as part of the overall terms of the deal. These negotiated agreements reflect the parties' mutual understanding and agreement regarding the timing of documentation submission.
  5. Lender or investor requirements: Lenders or investors involved in real estate transactions may have their own requirements and timelines for obtaining estoppel certificates as part of their due diligence process. These requirements may be communicated to all parties involved in the transaction to ensure timely compliance.

Landlords, tenants, buyers, sellers, and other stakeholders must be aware of any specific timeframes or deadlines associated with submitting estoppel certificates in their transactions.

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 lease documentation. As a result, they are less protected in lease disputes and have limited recourse.
  • Lack of clarity on lease status: Without clear tenant validation, lease commitments and obligations between tenant and landlord are ambiguous.

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. However, in many cases, simply maintaining open communication can yield a resolution.

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

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 benefits all parties by confirming rental details and obligations upfront.

You can now confidently navigate transactions by knowing the purpose of estoppel agreements, the essential contents, the types of properties impacted, and the consequences of not participating.

Important Note: This post is for informational and educational purposes only. It should not be taken as legal, accounting, or tax advice, nor should it be used as a substitute for such services. Always consult your own legal, accounting, or tax counsel before taking any action based on this information.

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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