Estoppels – Why? What? How A Red Light Becomes A Green Light

Print
Print Friendly

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.

Print

Comments

  1. Mordy Bobrowsky says:

    I’ve yet to see a landlord actually able to rely on an estoppel in any meaningful way. In every situation I’ve seen with a dispute involving an estoppel, the estoppel has been virtually meaningless and the tenant successfully brought in extrinsic evidence to support its position. Am I the only one? Has anyone on the landlord side seen different?

  2. Lewette Fielding Esq. says:

    Mordy — The landlord has to make sure that the estoppel certificate has both the landlord and the mortgagee named. If the certificate provides that the tenant certifies to the named lender (and not the landlord) – then the landlord will have a difficult time relying on the estoppel certificate in litigation with the tenant. Tenant will claim that its statements are only applicable to the lender and not the landlord.

    • Mordy Bobrowsky says:

      In the circumstances I’m referring to, the estoppel were properly addressed and worded (and landlord reasonably relied on it, etc etc), yet the tenants still were able to treat them as meaningless. In one case, there had been a previous dispute over a CAM cap. When we purchased, we specifically addressed this in the tenant’s estoppel, getting the tenant to confirm that the way it was being treated and billed by the existing landlord was correct. Notwithstanding that, after we purchased the tenant stopped paying per billing and brought forward the broker who had been involved in the original deal 10 years before and was suddenly willing to back up tenant’s version. Long and short – treat estoppels for what they’re worth – which isn’t much.

  3. Only a third party should be able to rely on the contents of an estoppel, such as the lender or prospective purchaser, A savvy tenant should never address the estoppel for the benefit of the landlord. Why should the tenant be barred against a future claim against the landlord due to a mistaken statement contained in the estoppel? There is no basis for the landlord to unilaterally require the tenant to wipe the slate clean, so to speak.
    Conversely, the landlord should not address an estoppel for the benefit of the tenant, rather only to a third party.

    • I’m with you CJS. The estoppel should only be binding as between the tenant and the third party (lender or buyer) for whose benefit it is really issued. Years ago, after an audit by my client’s accounting department found that the landlord had overcharged my client for merchants dues by a very significant amount. In response, the landlord’s lawyer waived a recent estoppel in my face which had cleared the landlord of any defaults. We got the landlord to refund the overcharge despite the lawyer’s attempt to use the estoppel as a “gotcha”. Since that experience and following Andy Herz’s scholarly article on that subject, I revised my standard estoppel clause to restrict reliance to the third, unrelated party. The estoppel must not be used to amend the lease or to save a landlord from a tenant’s mistakes.

      • Absolutely, the estoppel should be a shield not a sword only protecting third parties against unknown circumstances that cannot be determined by reviewing the lease and against fraud or concealment of relevant facts committed by the non-issuing party to the lease. Unfortunately, like SNDAs, the party preparing the form oftentimes attempts to include subject matter that has nothing to do with the true purpose and intent of the document. It sometimes irritates or amuses me (depending on my mood) when the attorney that prepared the document becomes indignant because I strike out irrelevant or inappropriate material representations, warranties or modifications to the lease that compromise my client.

  4. Agree with CJS. Whenever I’m representing a tenant, I attempt to qualify most of the certifications by reference to the tenant’s actual knowledge and I include the following paragraph at then end:

    “Notwithstanding anything contained herein, Tenant reserves: (a) any audit rights it has under the Lease or at law or equity relating to, among other things, Tenant’s share of real estate taxes, common area maintenance expenses, and insurance expenses, and the right to assert a claim with respect thereto; and (b) the right to challenge acts performed or committed by landlord with respect to which approval of Tenant was required but not sought or obtained. The statements contained herein are not affirmative representations, warranties, covenants or waivers, and Tenant shall not be liable on account of any information herein contained notwithstanding the failure of Tenant, for any reason, to disclose correct and/or relevant information. However, Tenant shall be estopped from asserting any claim or defense against Lender or Purchaser, as the case may be, to the extent: (a) such claim or defense contradicts the statements contained herein; and (b) Lender or Purchaser, as the case may be, has acted in reasonable reliance upon such statements without knowledge of facts to the contrary. References herein to the “actual knowledge” of Tenant means the conscious awareness of the undersigned officer of Tenant that is signing this Certificate(the “Signing Officer”). References to Tenant’s actual knowledge will not mean implied, imputed or constructive knowledge and will not require the Signing Officer or any other officer, director, shareholder, employee or agent of Tenant to undertake any investigation whatsoever.”

    • I like your drafting and wordsmith language regarding tenant’s “Actual Knowledge”. I use similar language in most of my commercial agreements where an officer is providing a certification in a business transaction. Thank you for sharing this wording – it is very very good!

Leave a Reply