An estoppel certificate is a document signed by a tenant that states what the current status is on their lease. In the tenant estoppel certificate, the tenant will confirm certain details of the lease, such as the amount of their rent payment and security deposit, to assist a third party in their due diligence. In most cases, the third party is either a buyer or a lender.
If you aren't an attorney, you may have a bit of difficulty deciphering the Black's Law Dictionary definition of an estoppel certificate. This breakdown should help clear things up.
Why do landlords request estoppel certificates?
An estoppel certificate is typically requested when the owner of a multifamily property is either selling or refinancing the property. It's an important piece of a buyer or lender's due diligence.
A property owner may be required to request an estoppel certificate from their tenants when they're selling the property. As part of their due diligence, the buyer will want to have a clear understanding of the leases they will be inheriting. The lender is also likely to want to review the tenant estoppel certificates before funding the deal.
If the investor is refinancing the property, they may be required to collect estoppel certificates from the tenants. The lender uses these to verify a few things:
- That the tenants are paying what the landlord says they are.
- That the lease terms match what the landlord has stated.
- That there are no pending disputes with any tenants that would majorly affect the cash flow needed to cover the loan payments.
Are tenants required to complete an estoppel certificate?
Whether or not a tenant is required to cooperate with their landlord's estoppel certificate requests depends on the terms of their lease agreement. If there is an estoppel agreement in the lease, the tenant is required to cooperate with their landlord's request. If they don't cooperate, they can find themselves in default of their lease.
If the rental agreement does not address any estoppel certificate requirements, a landlord can have a hard time getting tenants to cooperate. If it's not in the lease, the tenants aren't required to fill out the certificate.
Matt Wisniewski, CCIM, a commercial real estate broker with RE/MAX Commercial Group (NYSE: RMAX), has experienced the headache of tenants not wanting to turn in their estoppel certificates when he's trying to close on the sale of a property. Explaining these situations, he said, "It seems like you always have 80% of your tenants that are willing and happy to help. Then you have another 10% that are suspicious that you are trying to pull one over on them somehow, as many tenants have never seen an estoppel and as a whole, the real estate industry has done a poor job in educating them about the need for them. And then you have 10% that just ignore you completely, which really can be frustrating when you are on a deadline to close."
So how does a property owner handle tenants who won't cooperate? Wiskniewski says, "I have seen everything from threatening to sue them, even when they don't have any estoppel procedure language in the lease, to just paying the last few to drop the form off."
As big of a headache as it can be to enforce the tenant's obligation to complete the form, it's a necessary step. Tenants who think the landlord will just give up trying to collect it may be very mistaken and find themselves as a defendant in a lawsuit. If a tenant has any concerns with filling out the estoppel certificate, they should consult an attorney experienced in real estate law before simply refusing the sign.
What's in a tenant estoppel certificate?
Tenant estoppel certificates will vary depending on the type of property the tenants are occupying, and they're often more detailed when covering the terms of a commercial lease. The following are common sections found on the estoppel certificate form:
- Tenant's name.
- Tenant's contact information.
- Premises they're occupying.
- Lease start date.
- Lease end date.
- Monthly rent amount.
- Amount held as security deposit.
- Any amendments made to the lease.
- Any past-due rent owed.
- Any rent paid in advance more than 30 days.
- Any concessions the landlord has agreed to.
- Any work not completed by the landlord as required in the lease.
- Any defaults on the tenant's or landlord's part.
- Any defense the tenant claims to have for not fulfilling their obligations in the lease.