This is Really About Estoppel Letters/Certificates

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So, what does it mean to be estopped? According to my copy of Black’s Legal Dictionary, Seventh Edition, “estoppel” is “[a] bar that prevents one from asserting a claim or right that contradicts what one has said or done before or what has been legally established as true.” That says it pretty well, but it doesn’t say it in my words: “Under certain circumstances, it doesn’t matter if something was true or false – if you said it was true, then, as far as you are concerned, you can’t later say: ‘it was false’ – if you said it was false, then, as far as you are concerned, you can’t later say: ‘it was true’.”

What are those circumstances? One is that a person holding your statement against you believed you and it was reasonable for the person to do so Another is that the person changed a relevant position based on your statement and you knew that the person would or might reasonably do so. And, the person was harmed because the facts were different than you said they were. There needn’t have been any consideration for giving the statement in the first place. This isn’t a matter of contract law. The estoppel doctrine is an equitable one and the statement could have been made within or outside of a contract or a contractual relationship.

Now, back to the Office Depot decision. If you don’t know “what” decision, go look at my immediately prior blog posting. The salient parts are as follows:

In the Office Depot case, Office Depot had a December 27, 2005 Lease. Under the Lease, the Landlord agreed not to lease any other premises to a tenant whose primary use at the time of its Lease was the sale, leasing, distribution or display of … school supplies. In November, 2006 “The School Box” opened at the same shopping center. As its name might suggest, it sold school supplies, but also sold other educational items, many that could and would be used outside of a school. In April of 2007, Office Depot delivered an estoppel letter to a prospective buyer of the shopping center. In it, it stated that “[t]o Tenant’s knowledge, Landlord is not in default in the performance or observance of any of its obligations under any terms or provisions of the Lease.” The buyer closed on its purchase in June. Office Depot sent a default letter to the new owner on December 6, 2007. It asserted that its Lease had been breached by the lease to “The School Box.”

This got to the Georgia courts. The estoppel letter issues were that the Buyer – now the Landlord – argued that Office Depot knew of the business being operated by The School Box but still said, in the estoppel letter, that the Landlord was not in default under the Lease. In the declaratory judgment action Office Depot filed to have the court say that the Landlord had breached its agreement to enforce Office Depot’s exclusive use rights, the Landlord argued that the estoppel letter barred Office Depot from seeking relief. In effect, the Landlord was saying that it didn’t matter whether The School Box’s use of its own premises violated the Office Depot Lease because Office Depot had told the Landlord that there were no violations of its Lease and, based on that “deemed fact,” it bought the shopping center. It claimed it would not have bought the shopping center had Office Depot been claiming that there was a violation.

So, what was Office Depot’s response? It argued that the Landlord could not have been reasonably relying on the estoppel letter because the Landlord, when it was doing its own due diligence examination of the property, knew there was a violation. This argument was refuted and rejected when it was shown that although the Landlord/Buyer knew of The School Box’s product mix, it didn’t see a problem. It also spoke with the local Office Depot store manager and the manager didn’t complain about the competition.

What’s the lesson? Don’t jump so fast to assume that an estoppel letter is innocent. It isn’t a pro forma task. It requires investigation. The party giving it has to realize that what is “says” may turn out to be a replacement for the “real facts.” On the other side, this case also reminds all of us that the recipient can’t expect that an estoppel letter will “erase” what the recipient really knows to be true. You can’t “paper” over a known problem by saying that even though you knew you were in default, an estoppel letter saying otherwise will “save” you. It won’t.

There are “weasel” words used in estoppel letters such as, “when it speaks of our knowledge, it means only what the janitor in our Athens, Greece sales office knows about our store in Athens, Georgia.” I don’t know of any cases that address the efficacy of such limitations. Does anyone out there know of any? Care to opine?

There is one more very, very interesting aspect of the Office Depot case, but that’s for next time.

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Comments

  1. Amen! I always counsel clients to take estoppel certificates seriously and have trained my clients to not sign these without my review. This case is more ammo for my warning to clients that, even if you do everything right, you can’t stop other people from suing you, or spinning the facts to assert something that was never intended.

  2. Bob Kaye says:

    What would be the effect of langauge added to an Estoppel stating, “In the event of any conflict between the terms recited in this Estoppel and those contained in the Lease, the Lease terms control. This Estoppel may not constititue an amendment to the Lease.” I generally do this to avoid accidental affirmation of incorrect dates or amounts, etc. I’m not sure what good it does in the Office Depot facts. Do recipients accept this qualification?

  3. Jack Levey says:

    In the earlier thread, I mentioned a similar Ohio case where the potential buyer noticed that Walmart was violating a supermarket tenant’s exclusive. The buyer asked the seller for comfort from the supermarket, who delivered a clean generic estoppel, without specicially mentioning Walmart or the exclusive. After the sale, the supermarket sued the buyer. The buyer defended on the basis of estoppel and waiver. The appellate court ruled there was no proof of waiver, and remanded for a determination whether the buyer acted reasonably in relying on a generic estoppel. See 2004-Ohio-411 (4th Dist. App. Scioto County) and the discussion in Ohio Real Estate Law (West Thomson Reuters) 45:1, 45:10, 45:14, 46:17. and 46:21. The court also makes some relevant observations about a subtenant’s ability to enforce the tenant’s exclusive.

    MORAL: If you spot an apparent default, or any other possible problem, flag it specifically in the estoppel and don’t rely on a generic estoppel to solve a known problem.

  4. This may be the law in Georgia, but it is not the law in California. California recognizes not just equitable estoppel but also the doctrine of “estoppel by contract”. This doctrine, codified at Sec. 622 of the California Evidence Code, creates a conclusive presumption that recitals in a written instrument are true. Issues of reasonable reliance or change of position are irrelevant under this rule.
    In the case of Plaza Freeway Limited Partnership v. First Mountain Bank (2000) 81 Cal. App. 4th 616; 96 Cal. Rptr. 2d 865, the court held that the facts recited in an estoppel certificate concerning the duration of a lease were conclusive on the parties, though all parties (and the court) agreed that those facts were not true.
    Though this doctrine is often referred to as “estoppel by contract” the presumption applies, as between the parties, to recitals in any written instrument. Thus, as the court explained in the Plaza Freeway case, the rule applies to an estoppel certificate which, though not a contract since it lacks consideration, is still an “instrument” falling within the rule.

  5. Rob Krapf says:

    I agree with Jack that it is a practical way to give the landlord or other addressee a lot of information that is not knowable just from the lease. Of course the real concern is the practice, more in financing than in purchases, of turning the estoppel certificate into a lease amendment by throwing in covenants that go well beyond mere statements of fact. As Ira’s summary of the Office Depot case noted, the recipient of an estoppel request has to be very cautious and not treat the certificate as a meaningless exercise. And, yes, I use weasel words when I can.

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