Estoppel Letters – Can’t We All Get Along?

About 9 months ago, we wrote about some practical aspects of dealing with estoppel letters. Readers can see that blog posting by clicking: HERE. [We did so more substantively in 2011 and that can be seen by clicking: HERE.] Today, in fulfillment of a promise made 9 months ago, we have more to say about requesting and furnishing those letters.

We start with where we left off. 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 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 shall 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.

Often, a requested estoppel form will recite: “Certifying party represents, warrants, and covenants that ….” These three terms do not have the same meaning. None of the “other” two words are there just to emphasize the third. We may always recite, “Larry, Moe, and Curly,” as if they were co-joined triplets, but they aren’t. The same is true for “represents, warrants, and covenants.”

To “covenant” is to agree or promise. Instead of saying, “I covenant to do such and such,” you could (should) say, “I agree to do such and such.”

To “warrant” is to guaranty, essentially to agree to make good if something turns out not to be as stated.

To “represent,” is to state that something is true and that the receiving party has the right to rely on the truth of what was said.

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.”

Well, we’re at about 2500 words and that seems like enough for today’s posting. So, next week, we’ll continue, beginning with a sentence that will begin with: “One way to appreciate the difference between making a representation and giving a warranty is to understand … .”

[Today’s posting is eerily similar to part of our Chapter 19 in Masterguide to Lease Administration (available as an EBook) available for Greenstead Media, Mill Bay, BC, Canada.]