Representations; Warranties; Covenants; Weasel Words And Estoppel Certificates. Huh?

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Last week, we left off with: This trilogy (“represent” – “warrant” – “covenant”) is thrown about so casually that it isn’t possible to generalize as to what the cumulative effect might be. Try replacing the word “covenant” with the word “agree” and then reread the statement being requested as part of the estoppel. To “covenant” does not mean to “acknowledge.” It means to “agree” in the sense of to “promise.”

Now, as promised, we will elaborate. [That should come as no surprise to long-time readers of Ruminations.]

One way to appreciate the difference between making a representation and giving a warranty is to understand the consequence of each statement. In the case of a representation, the “relying” party may act as if the representation (statement) was true, but only if that relying party either did not know it was untrue at the time it was given or if the relying party couldn’t have easily known it was untrue. That’s what “reliance” is all about. In addition, in appropriate circumstances, though unlikely in an estoppel, if a material representation is untrue at the time given, the recipient of that representation may suspend its contractual obligations or even terminate an agreement with the representing party. For example, in the normal transaction, if a car seller represents that the car runs, and it doesn’t, the buyer can terminate any agreement to buy that car because whether a car runs is material. Of course, if the buyer really knew that the car didn’t run, it could not rely on the representation.

In contrast to a “representation,” the falseness of which would allow a party to terminate an agreement or to claim damages if the recipient of the representation actually relied on it, the effect of someone “warranting” the truth of a statement is that the warranting party will have the opportunity to “make good” by fixing what was wrong. So, if our car seller warrants that the car runs, but didn’t represent that the car runs, the seller will have the right to fix the car, thereby, in most cases, precluding the seller from terminating the purchase contract and even from claiming most kinds, if not all kinds, of damages.

To put that in real estate leasing terms, if a landlord represents that the HVAC works and it doesn’t, its prospective tenant might have the right to terminate a lease before it begins (assuming the HVAC was material, such as for a data center, and that the representation wasn’t in the form: “the HVAC will be in good working order on the Delivery Date”). It’s more complicated than that, but the tenant would have greater rights than if the landlord had only warranted that the HVAC works. In the case of such a warranty, the tenant would have to accept delivery (if the lease were otherwise silent), even if the HVAC did not work, and the landlord would have the opportunity and obligation to put the HVAC in working order.

The distinctions between and among “represent,” “warrant,” and “covenant” are important because those terms almost always appear in an estoppel. Sometimes, the certificate will ask the respondent to “state.” That’s the functional equivalent of making a representation.

Representations, and possibly warranties, have a rightful place in an estoppel. Covenants do not. Either a party has already agreed to do something or to refrain from doing something or it hasn’t. An estoppel is not the place to accept new obligations. Does that mean that the word “covenants” or words of similar import should be struck out on “principle”? Probably not. In most cases, using those words is harmless because, in the context presented, there is nothing actually being agreed-to by the certifying party. In other cases, all they serve to do is republish an existing promise or agreement. So, if it is valuable to maintain a harmonious relationship with the requesting party (or to keep the relationship from going further downhill), and it is harmless to say that a party “covenants,” it is best to “let it go.”

Warranting something that one has already obligated to warrant, such as where a tenant is already responsible to keep the HVAC in good, operating condition, is also harmless. If a tenant, in an estoppel, warrants that the HVAC is in good, operating, and the lease already places that obligation on the tenant, it doesn’t add to the tenant’s burdens. So, as with use of “covenant,” the term “warrants” should only be stricken if it adds an obligation not already in existence.

Representations, however, are the heart and soul, the engine so to speak, of an estoppel. Even though the “breach” of a representation has the consequences already described, representations really serve two practical purposes. The first is what has already been discussed, to bind the “representer” to its word even if the facts were different. The other is as a due diligence or investigatory tool on the part of the requesting party. For example, if a tenant represents that its landlord in not in default of any obligations under the lease but for the landlord’s failure to repair a roof leak, the tenant will be out of luck later claiming otherwise. That’s true about the “no default” portion of the example. But, what about the part of the representation that said that the roof leaks?

The roof may or may not require repairs and if repairs are required, the landlord may or may not be the one obligated to make them. If the tenant reasonably believes that its landlord is in default of its obligations under the lease to repair the roof, then it is appropriate to say so in the tenant’s estoppel. The tenant can’t knowingly lie and it can’t be recklessly indifferent as to the truth of the matter, but it can state what it reasonably believes. Does this mean that the tenant will be liable to the party relying on the certificate if the roof doesn’t need repairs? No, the recipient “asked” the question about the landlord’s possible defaults as part of its property investigation and is now alerted of a “possible” roof leak.

When listing “issues” in an estoppel being provided to a lender, it isn’t fair to include trivial items that are “always” worked out in the normal course of business. Lenders don’t understand that there are often “undone” items awaiting attention. Converting an estoppel that a landlord or a tenant, as the case may be, needs for a loan into a sledgehammer won’t be helpful going forward. It might get the $200 worth of ceiling tiles replaced a little quicker, but at the cost of poisoning a long-term relationship. If, however, an estoppel is for a prospective buyer, assignee or subtenant, and the issue can’t be worked out directly between the certificate giver and the certificate recipient, list the issue.

Something needs to be said about “weasel words.” They are necessary. What are they? For now, here’s a single example: “Certifying party represents that to its knowledge, without any duty of investigation, such and such is true.”

There are some items that the certifying party should stand behind without qualification (unless there is a real reason for doubt, in which case the doubt should be set forth in the certificate). For example, a landlord or tenant, as the case may be, should represent whether the rent is paid through a given date and not use any weasel words when giving such a representation. If, however, a tenant knows that it owes a tax reimbursement to the landlord, but the amount is in dispute, it should state that fact. If it holds the view that its rent is paid by virtue of a credit owed to it, it should state that fact. In those cases, it isn’t appropriate to merely say: “Tenant is unaware that any rent is now due and owing to Landlord.”

Similarly, a tenant or landlord should be obligated to know if it has “received” any notice from a governmental authority. Who else would know without polling every possible such authority? This is information in the hands of the responding landlord or tenant and not readily available elsewhere. On the other hand, it is inappropriate for a tenant or landlord, as the case may be, to be asked to represent that it is not in violation of any laws. That example invites an exposition on “weasel words,” a concept dropped in above. “Weasel words” isn’t a term used in the “law.” The phrase’s meaning is intuitive. Weasel words are words that qualify a statement. They aren’t like crossing one’s fingers behind one’s back where they can’t be seen. They are placed right up front. They are words of “qualification” and are commonly seen.

Perhaps tagging words of qualification as weasel words is a bit unfair, and not only to the weasel. In the example above dealing with whether a party is in compliance with all laws, certain qualifications are appropriate. First, there are too many “laws.” It is unreasonable to expect, let alone believe, that the certifying party even knows of every applicable law or whether it is in compliance. Such a representation, if it needs to be given, would appropriately be limited to “material” laws or all laws other than those, the violation of which would not have a material, adverse effect. It isn’t unreasonable to expect that a party should know about laws that directly impact its business or whether it is in compliance with those important laws.

The “qualifier” of materiality goes to the laws themselves, but what about knowing if one is in compliance or not? In the end, that’s a legal conclusion and estoppels are not legal opinion letters. They are about “facts.” So, is it reasonable for the certifying party to know all of the relevant facts? Obviously, if a tenant or landlord knows of a violation of law, it shouldn’t hide that knowledge. Otherwise, no. Words of qualification are to protect a party from being trapped by the “unknown,” not to avoid telling the truth. Therefore, when giving an estoppel, known facts should be disclosed in the form of, “except as follows:” and then listing the exceptions. When a tenant wants to report a default by its landlord, such as a default in being reimbursed, it isn’t appropriate to say merely, “Landlord is in default of its obligations under the Lease.” That’s not what was being asked no matter how the question was posed. The proper representation, before we proceed to write that it isn’t, is: “Landlord is not default of its obligations under the Lease except that it has failed to reimburse Tenant in the amount of $35,000 on account of the Tenant Allowance.”

The example last given is a stepping off point for some other common weasel words. Can a tenant (or for that matter, a landlord) be sure that its counterparty to the lease really isn’t in default? No, it can’t. The best that can be said is that is doesn’t know otherwise unless it really, really “should” know otherwise. For example, the burden to determine if the rent has been paid to date is slight. Therefore, the certifying party should assume that burden. Similarly, a tenant should know if it has sublet the leased space, and should give the appropriate representation without reservation. Similarly, it should know if it has any right to extend the term of the lease or to buy the property beyond what is in the lease itself. There is no place for any “qualifying” modifier to such representations. On the other hand, the burden to investigate the violation or non-violation of every obligation that the other party may have in a lease can be overwhelming. For that reason, it would be legitimate to tell it like it is: “Here is what we actually know or are aware of.”

Some of the examples above deal with “what the lease says.” But, a lease should speak for itself. So, it is probably inappropriate for the requested estoppel to ask the certificate giver “what is in the lease,” though many do just that. When faced with a request for a representation as to what the rent schedule looks like or whether there are any renewal rights, it would be appropriate to attach the lease and make the representation refer to the lease. Of course, it is proper to make an unqualified representation as to whether the lease has been modified because a party to a lease “should” know that and an outsider relying on the estoppel would not.

Another appropriate form of response is as follows: “Except as expressly set forth in the Lease, Tenant has no options to renew or extend the term of the Lease, no right of first offer or right of first refusal to lease or occupy any other space within the Leased Premises, and no right to cancel or reduce the term of the Lease. Notwithstanding the foregoing, Tenant has a first right to lease adjoining space contiguous to the Leased Premises pursuant to Article XX of the Lease.”

If forced (or if it is convenient) to make statements as to what the lease “says,” then it is appropriate to add the following to an estoppel: “In the event of any difference between the provisions of this Certificate and those of the attached Lease, the provisions of the attached Lease will prevail.” Basically, as will be emphasized later, an estoppel should stick to its purpose, and not be a means of amending a lease.

The certificate giver will be, and should be, charged with knowing the contents of writings in the organization’s possession. That’s why all notices and other writings should be placed in the appropriate lease file. In the case of hands-on properties, the person preparing an estoppel should be aware of whatever the one or two people involved have heard. On the other hand, a multi-location tenant, by example, shouldn’t be considered as being “aware of” or “knowing” something that was said to a low-level store employee.

For those reasons, except in the most unique circumstances, a fair and accurate representation as to the default status of the other party would be: “We are not aware that the [other party to the lease] is currently in default of its obligations under the Lease and we have received no writing from anyone saying that the [other party to the lease] is currently in default of its obligations under the Lease.”

The most commonly seen qualifier, modifier or weasel words all include some form of: “To our knowledge.” Other formulations include the infamous, “To the best of our knowledge” or “To the best of our knowledge and belief.” If those formulations make the certificate giver feels better, go right ahead and offer them up. Basically, “To the best of our knowledge” only sounds stronger; the word “best” doesn’t add anything. Further, statements are always to the giver’s “belief” even if that belief is wrong. If the party didn’t “believe” what it was certifying, then it isn’t being honest, and it shouldn’t be making that particular certification. What matters is whether the certifying party has an obligation to “investigate” or merely to respond to the request for an estoppel letter based on what already is known by the organization at the time the estoppel letter is prepared. If no investigation is made, then as to those representations that properly are qualified by “knowledge,” it would be appropriate to say, “To our knowledge, without any duty of investigation….” Certainly, the certificate recipient would prefer seeing: “To the best of our knowledge after due inquiry and investigation …,” but unless the agreement that requires a party to deliver the estoppel also requires the certifying party to conduct an investigation, there is no duty to do so.

The conflict between having a duty to investigate and having no duty to investigate really applies to large organizations where information is decentralized and where there are many, many employees who might know “something.” While it would be inappropriate for a single store tenant whose business is run by one or two individuals to assert a “no duty to investigate” qualification, the same would not be true for a wide-spread chain of retail stores. A reasonable compromise for a large tenant or a large landlord would be to define knowledge as being limited to what is known by its lease administration department, its accounting department, and its field manager for the store or property. Of course, each organization would have a different list and specific questions might call for the knowledge of a particular individual or department, as might be the case for representations about construction matters.

Where the representation is of the “here is the response to your due diligence request” type as contrasted with the “you can treat this as the truth” type, all anyone should expect is a statement as to what is currently known. It doesn’t seem appropriate for anyone to think that the certificate giver should make a representation about something it doesn’t really (or fully) know about. Because one should know whether all tenant improvement monies have been received or whether any written notices have been received, it isn’t improper to expect an unqualified representation one way or the other. In contrast, it is almost impossible to be sure that: “No event has occurred, which with the giving of notice or the passage of time or both would constitute a default by Landlord under the Lease.”

For statements like that, all one should be obligated to “say” is what one actually knows. If one actually knows that such an event has occurred (or that there is presently an uncured default), it should be revealed. A certifying party should not be required to represent something of which it is unaware and can’t readily determine. Even though the recipient of a certificate is entitled to honest, non-quibbling representations, it isn’t entitled to a “guaranty” from the certifying party as to items that the certifying party really isn’t expected to fully know.

Qualifications aren’t an all or nothing proposition. For example, if factually correct, an estoppel could properly state: “We have received no written notice from any governmental or quasi-governmental entity concerning an uncured violation of law by us relating to the leased space and, without undertaking any duty of investigation, we are unaware of any uncured violations of law by us relating to the leased space.”

[Again, as was the case last week, today’s posting is eerily similar to part of our Chapter 19 in Masterguide to Lease Administration (available as an EBook) available from Greenstead Media, Mill Bay, BC, Canada.]

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