Jul, 12

What Is a Tenant Estoppel Certificate and When Is It Used in Commercial Real Estate?

What Is a Tenant Estoppel Certificate and When Is It Used in Commercial Real Estate

Tenant estoppel certificates often come up during the due diligence stage of acquiring commercial real estate. However, it may be a term you have not come across before, especially if you are new to the real estate game. 

It is an important term to understand for both sellers and purchasers. In this blog post, we will cover everything you need to know about tenant estoppel certificates. What they are, what their purpose is, and when to use them. By the time you have finished reading this post, you will be an expert and able to approach tenant estoppel certificates with confidence.  

tenant estoppel certificate denver commercial real estate

What is a Tenant Estoppel Certificate?

Tenant estoppel certificates come up often in commercial real estate, so it’s important to understand what they are.

The literal dictionary definition of estoppel is:

“The principle which precludes a person from asserting something contrary to what is implied by a previous action or statement of that person or by a previous pertinent judicial determination.”

In simple terms, what this means, is estoppel stops a person from taking a position that is contrary to something they have already stated or agreed to. 

When signed by your tenant, a tenant estoppel certificate verified the terms and condition of the tenancy. 

Commercial real estate leases will often require the tenant to provide a tenant estoppel certificate upon request. This is a key part of both the due diligence process and also the underwriting of a real estate loan. 

With the recent passage of the American Rescue Plan, small businesses can potentially look to invest their stimulus by expanding into other commercial spaces. As we may start to see a rise in the interest in both purchasing and leasing of commercial spaces by small business in the coming months, it is important for business owners to have a clear understanding of what a tenant estoppel certificate is so they mitigate risks as they look to lease or purchase properties.

Note: Remember that the terms “tenant estoppel,” “estoppel certificate,” and “estoppel letter,” are often used interchangeably. 

What is Included in an Estoppel Certificate?

The requirement of a tenant estoppel certificate can vary. However, you can expect it to include some of or all of the following:

  • Lease start date
  • The date on which the rent is expected to be paid
  • Value of the rent
  • Amount of security deposit
  • Expenses or maintenance the landlord or tenant is responsible
  • Whether or not the landlord or tenant is in default
  • If either party is in default, then what the specification of these defaults are

what is a tenant estoppel certificate

The Purpose of an Estoppel Certificate and When to Use it 

Tenant estoppel letters prevent tenants from going back on their word. Therefore, they have several purposes. 

The most common need for a tenant estoppel certificate is in a situation when a landlord is selling or mortgaging property. The prospective buyer or lender may then request the estoppel certificate from the tenant to confirm the status of the current lease. 

Another situation in which a tenant estoppel certificate might be needed is when a landlord is asked to present it during a corporate transaction. For example, if a business is being sold and currently leases the property in which it operates. The buyer of said business will want to see the tenant estoppel certificate to confirm that the tenant has been complying with its lease before they commit to purchasing the tenants business. 

If a purchaser requests a tenant estoppel certificate from you, you will typically be given a set time frame in which to respond. If you are requesting it, you will often need to give a set time in which the seller can respond. 

Once the estoppel certificate is in the purchaser’s hands it will be reviewed for any red flags, which may make the purchaser stop the purchase. 

As a buyer, reviewing the estoppel certificate is an essential part of the due diligence process. It will limit your risk in your commercial real estate transaction. 

As a seller, the certificate is equally important. It will help demonstrate to buyers that there is less risk in the purchase of your commercial property and show you or your tenants have upheld the conditions of your lease.  

Do You Need an Estoppel Certificate or Letter in Your Commercial Real Estate Contract? 

From reading the above, you probably came to the conclusion that having a tenant estoppel certificate is a good idea – whether you are a seller or purchaser.

However, is it legally required? The short answer is no. But, the long answer is a little more complicated. 

Your lease will determine whether or not a tenant estoppel certificate is necessary. Commercial leases can vary greatly, however, in general, you will probably encounter one of these two situations on your commercial lease:

  • A Provision to Complete and Return a Certificate Upon the Landlords Request

Standard commercial leases will often include a provision that requires the tenant to complete and return an estoppel certificate on request, within a certain time frame. This provision will detail everything that the tenant is expected to provide. In this case, you are legally required to provide it upon request

  • The Absence of a Lease Provision

Your lease may not include a provision that requires the tenant to sign an estoppel certificate. In this case, it is better not to do so. If you are a tenant and sign an estoppel certificate where the lease does not ask for one, you may end up binding yourself to a legal document that contains incorrect information.

If you are a commercial real estate owner, and you intend to bring on investors, it would be a good idea to include a provision about a tenant estoppel certificate within your lease. 

This provision will put you in a better position to make new real estate contracts in the future or change the arrangements of your commercial property.  

Is a Tenant Obligated to Complete an Estoppel Certificate?

Let’s imagine that your landlord has requested that you provide them with a tenant estoppel certificate. Are you legally obliged to do so? 

If your lease includes a provision stating that you need to provide the certificate on request, then yes. 

Failure to deliver the certificate upon the deadline can result in varying consequences. For example: 

  • Your landlord may complete it for you as your attorney-in-fact.
  • Your failure to provide the certificate will be deemed an admission that everything included in the requested certificate is true. 
  • You may be liable for any cost the landlord incurs as a result of your failure to provide the certificate. 

If your lease does not have a provision that states you are required to provide an estoppel certificate on request, then you are not required to do so. However there may be a few occasions where it is in your best interest to do so.

For example, if your rent has been lowered, or your landlord has promised to do some maintenance on your property, signing the tenant estoppel certificate can ensure that your new landlord is aware of these changes, and helps you avoid later disputes. 

denver commercial real estate estoppel certificate

Types of Properties Where You Should Use a Tenant Estoppel Certificate

There are several areas of real estate where having a tenant estoppel certificate is a must. Viewing the certificate before agreeing to purchase in both commercial and multifamily real estate can help you avoid costly problems with your new property.

Commercial Real Estate

Commercial real estate leases can often involve high stakes. Rent payments are significantly larger than with residential or multifamily real estate. In addition, commercial real estate leases can need periodic adjustments to the base rent. 

The numerous variables present in commercial real estate leases such as who is responsible for certain expenditures make having a tenant estoppel certificate a must. If a tenant does not understand what their responsibilities are in their lease, purchasers can encounter some shocks down the road. 

Multifamily Real Estate

Multifamily real estate is another sector where having a tenant estoppel certificate can be a great help to buyers and landlords. Multifamily properties are often rented by several tenants. This makes leases more complicated and longer, meaning tenants have more to understand. 

As a buyer, you might encounter some expensive surprises if disputes arise after your purchase between you and the tenants. For example, tenants may dispute how much was being held for a security deposit or what repairs to the property are your responsibility. 

When you purchase a multifamily property you need to be clear about what you are walking into. There are times when a great investment can turn into a nightmare because tenancy terms are not clearly explained and you end up being liable for more expense than you originally thought. 

To Sum Up 

If you are purchasing a commercial or multifamily property, a tenant estoppel certificate is likely to come up during the due diligence check. 

Understanding what a tenant estoppel certificate is and the benefits it brings you as a buyer will help you mitigate risk in your purchase. You can move through your purchase knowing that there will be no nasty or expensive surprises from your tenants further down the line. There will not be disputes, because your tenant estoppel certificate will include all the responsibilities of both the landlord and tenant within the lease.

Having this certificate saves you a headache in the future and lets you more accurately calculate costs. From the certificate, you will be aware of all the expenses you will be expected to pay along with the agreed rent price for the property. 

Look out for any red flags and use your estoppel certificate to help guide you during the due diligence process so you can go ahead with your purchase, with peace of mind. 

Looking to make a commercial real estate purchase in Colorado? U-Collective is an expert team of local real estate brokers who can help guide you. We have specialists in everything from hospitality to multifamily properties. Whatever type of property you are looking for, our team can help find it for you, and guide you through the research and purchasing process. Ready to grow your business and purchase a new piece of commercial real estate? Get in touch with our team today.