What is the legal effect of an estoppel certificate or, in “shorthand,” an “estoppel”? “Estoppel” is a strange word. To understand its effect, try this non-defining, circular statement: “One who issues an estoppel certificate is then ‘estopped.’” Basically, the certifying person (or entity) is “stopped” from denying that what is said in the certificate is a fact. If one issues an estoppel saying that the traffic light was red, those reasonably relying on that certificate can act as if the light was red even if it wasn’t. In “leasing” terms, if a tenant delivers an estoppel in favor of a prospective successor landlord and that certificate says that the tenant has received all of the tenant improvement money due under the lease, the successor landlord can rely on that statement even if the tenant was mistaken. The tenant is “estopped” or “barred” from making a claim against the successor landlord for that money. The tenant, not the successor landlord, takes the risk of being wrong.
That’s right, to be “estopped” means to be “barred” from asserting a fact or making a claim inconsistent with a previously taken position. In the case of an “estoppel certificate,” the previously taken positions would be the statements in the certificate itself. On the other hand, to be able to rely on what is contained in an estoppel, one has to have been reasonable in doing so.
The obligation to deliver an estoppel is not imposed by law. It arises out of the contractual agreement. That means within the lease. So, the starting point to think about an estoppel is when the lease is being prepared. If a lease doesn’t require one party or the other to deliver a certificate, it isn’t a default to refuse to do so. It may not be appropriate to refuse or it may not be helpful (in the long run) to refuse, but it isn’t a default under the lease.
At this point, it would be a fair question to ask: “Why estoppels?”
A commercial real property lease is supported by a three-legged stool. One leg is the tenant; one is the landlord; and one is the lender. Without one of those legs, the stool won’t serve its purpose.
Estoppels may be bothersome or annoying, but they are needed to make or keep a healthy relationship among the three legs. Tenants need them when assigning their leases or when subletting space as well as when borrowing money against the lease. Landlords need them when selling the property or borrowing against the property. Lenders want them when lending against the property. All are legitimate purposes and all are contemplated when a lease is signed even if the lease doesn’t say so (even though it should). Given that the ability to finance a property or to finance a lease will depend upon (among any other things), delivery of an estoppel, it is akin to malpractice to leave a lease bereft of the requirement that an estoppel be delivered.
While it may be difficult at times to achieve them, harmonious relationships among all three legs are very worthwhile. Disputes should be limited to substantive matters, not over cooperation with one another. If there is no other reason to strive to maintain a harmonious relationship, keep the following in mind: “Turnabout is fair play.” There is no proper place for “revenge” in the estoppel process.
Furnishing estoppels is an administrative matter, not a substantive one. There may be items under dispute that will be covered by an estoppel, but responding to the request for the estoppel should not be one of them. And, it shouldn’t matter whether the lease requires one party or the other to furnish one. Estoppels are needed to support the property, to keep the stool upright, so to speak.
Experience informs us that the most common tension as between landlords and tenants about estoppels is that the requesting party often has made its request too close in time to when the certificate is needed. Sometimes that situation is inevitable; sometimes it is the result of carelessness. Regardless of the reason, the need for a quick response frequently causes unneeded tension. It may seem that landlords are those most often pressuring their tenants for a quick turn-around. That’s only because, by far, landlords request estoppels more frequently from tenants than tenants request them from their landlords.
Fundamentally, regardless of the reason the requesting party waited too long to make its request, landlord-tenant relationships should not be poisoned by a manufactured dispute based on how many days the lease might have set for a response. Just because a lease says that a tenant (or a landlord) has 20 days to furnish an estoppel doesn’t mean that it has to take 20 days. If the requesting party is in a crunch, it makes good sense for one leg of the stool, the tenant-leg or the landlord-leg, as the case may be, to hold up the stool. Basically, the golden rule is a good one to apply.
If a lease requires one party or the other to deliver an estoppel (and, it is wise and appropriate that the requirement be mutual), but the lease is silent as to “how quickly,” the “law” implies “within a reasonable time.” Obviously, it is better that a lease set a time limit. Ten days would be at the short end, 30 days would reasonable, though a little bit of a stretch. Fifteen days seems about right, but for large enterprises, that might be a little bit “tight” for the bureaucracy to assemble the information needed to complete the certificate.
Ruminations has a lot more to say about estoppels, especially about the law and process involved with them. But, we are going to hold off. Today’s blog is an adaptation of a chapter written for a forthcoming lease administration publication. Once that book is published, we’ll revive this topic, focusing on questions about qualifying statements, whether there is or should be an obligation to investigate, information collection, avoiding unwanted lease modifications, and appropriate limitations in the scope on an estoppel. We don’t have any influence over the publication schedule, so we’ll be waiting alongside of our loyal readers.