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.
Estoppel certificates or letters (and we’ll describe them merely as “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 need 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).
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 be over cooperating 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 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, to hold up the stool. Basically, the golden rule is a good one to apply.
It’s now time for some substantive “law.” None of what follows is a substitute for actual legal advice. It is only general information to provide background to all readers.
What is the legal effect of 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 previous taken position. In the case of an “estoppel certificate,” the previously taken positions would be the statements in the certificate itself.
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 the 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.
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.
It isn’t to anyone’s advantage to have the lease provide merely that estoppels must be delivered to the requesting party within a given time period. A lease should describe what will or must be in the certificate. Here are sample clauses. These are not offered as exemplars to be used blindly, but only to show how such lease provisions might be written.
Tenant, without charge therefor, at any time and from time to time (but no more than twice in a calendar year), within 15 days after request therefor by Landlord or Lender, will execute, acknowledge, and deliver to Landlord a written estoppel certificate, in reasonable form, certifying to Landlord’s designated mortgagee, other lender or any prospective purchaser of the Property, as of the date of such estoppel certificate, but only to the extent true: (i) that Tenant is in possession of the Premises and has unconditionally accepted the same; (ii) that this Lease is unmodified and in full force and effect (or if there has been any modification, that the same is in full force and effect as modified and setting forth such modifications); (iii) whether Tenant is aware of any then existing set-offs or defenses against the enforcement of any right or remedy of Landlord (and, if so, specifying the same in detail); (iv) that Rent is paid currently without any offset or defense thereto (or, if not, specifying the nature of any offset or defense in detail); (v) the dates, if any, to which any Rent has been paid in advance; (vi) whether Tenant is aware of an existing claim it holds of Landlord’s default under this Lease and if so, specifying the same in detail; (vii) that Tenant has no knowledge of any event having occurred that authorizes the termination of this Lease by Tenant (or if Tenant has such knowledge, specifying the same in detail); and (viii) any other matters relating to the status of this Lease that Landlord reasonably may request be confirmed, provided that such facts are accurate and ascertainable. Only persons and entities to which such written estoppel certificates are directly addressed will be entitled to rely upon them.
Landlord, without charge therefor, at any time and from time to time (but no more than twice in a calendar year), within 15 days after request therefor by Tenant or any leasehold lender, subtenant, prospective subtenant, assignee or prospective assignee, will execute, acknowledge, and deliver to Tenant a written estoppel certificate, in reasonable form, certifying to Tenant’s designated leasehold mortgagee, assignee, prospective assignee, subtenant or prospective subtenant or any other person designated by Tenant, as of the date of such estoppel certificate, but only to the extent true: (i) that Landlord owns or is the sole ground tenant of the Property (stating which is the case); (ii) that this Lease is unmodified and in full force and effect (or if there has been any modification, that the same is in full force and effect as modified and setting forth such modifications); (iii) that Rent is paid currently (or, if not, specifying the amount and nature of any deficiency); (iv) the dates, if any, to which any Rent has been paid in advance; (v) whether Landlord is aware of an existing claim of Tenant’s default under this Lease and if so, specifying the same in detail; (vi) that Landlord has no knowledge of any event having occurred that authorizes the termination of this Lease by Tenant (or if Landlord has such knowledge, specifying the same in detail); and (vii) any other matters relating to the status of this Lease that Tenant reasonably may request be confirmed, provided that such facts are accurate and ascertainable. Only persons and entities to which such written estoppel certificates are directly addressed will be entitled to rely upon them.
There is no single formulation for an “estoppel certificate” provision in a lease. Many prefer that a lease include a form of estoppel as an exhibit. That makes good sense, though it is rarely seen. Organizations with a lot of leases should consider developing a standard, fair form of estoppel and try to have that attached to every lease. If successful, the lease file should contain a “red-lined” comparison copy of the actual lease exhibit to the standard company form. Reference to that comparison copy will guard against the person completing the estoppel “assuming” she or he already knows what information is being called for based on familiarity with the organization’s own form.
Without doubt, accepting the obligation to furnish an estoppel is a burden and the benefit to the certificate giver isn’t immediately apparent. Basically, it is part of the deal. It is just the cost of doing business. Reciprocity of the obligation may seem like “the benefit,” but it has to be conceded that most tenants will never need or request one. On the other hand, very few lease obligations seem to have an immediate benefit. Paying rent is such an example. It would be nice not to be required to pay rent, but that (too) is part of the deal. So, don’t gripe about the work it takes.
If no other point has yet been brought home, keep this one in mind. The statements in an estoppel will be treated as true even if they weren’t. So, it is important for there to be no light between what an estoppel statement says and the actual facts. For that and other good reasons, the task of preparing an estoppel should not be kicked around the office or given to the last name added to the payroll. The recipient of the certificate deserves a quality response. The giver, with a few clicks of the keyboard, is binding itself to its words. Just as with other important tasks, experience matters.
Before any reader notices, we confess that today’s posting closely matches the beginning of a book chapter of ours in a just published book, Masterguide to Lease Administration, compiled by loyal Ruminations subscriber and colleague, Peter Morris. It is available from Amazon.com, where the Kindle version can be seen by clicking: HERE. A print version is also available through Amazon.com. Our chapter is considerably longer than today’s excerpt and, even if we pick up another snippet from that chapter, there is a lot more we won’t reproduce and, of course, there is a lot of even better material in the book than what we contributed.