The Harmless Estoppel
The "harmless" estoppel, it turns out, may not be so harmless after all
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An estoppel certificate is a legal document that most leases require tenants to sign upon demand by their landlord. Estoppels are commonly required in the event of a pending sale or refinance. Their purpose is to confirm key elements of the lease including the security deposit, the lease commencement and expiration dates, any pre-paid rent, future rent increases, and any options the tenant may have such as renewal, early termination, expansion, right of first refusal, right to purchase, etc. The estoppel certificate also outlines any outstanding Landlord obligations, such as remodeling or tenant finish and confirms that the landlord is not in default of its obligations under the lease.
Once a tenant signs an estoppel, it is estopped (or barred) from claiming facts contrary to those in the estoppel.
And therein lies the danger.
Almost every company that leases space is asked to sign an estoppel at one point or another. It's usually short (one or two pages) and a seemingly straight-forward document that just states the facts of the lease. Many tenants sign them without thinking twice, but be aware, estoppel certificates have actually been used against tenants to surreptitiously change the terms of the lease. For this reason, tenants should never sign this legal and binding document without a careful review by their real estate broker and/or legal counsel.
The California case known as Plaza Freeway Limited v. First Mountain Bank should serve as a warning to tenants not to take estoppels lightly. In this matter, the court held that the tenant was bound by the lease expiration date stated in the estoppel even though it was not accurate and was inconsistent with the actual termination date of the lease.
Tenants should be wary because estoppels can either accidentally or intentionally alter lease terms to benefit landlords, lenders, or buyers. Once signed, they can act as an amendment to a lease, and the terms of the estoppel can be held to supersede the original lease terms. Not so harmless, eh?
When an estoppel certificate is requested we advise the following for tenant protection:
Document Review
Bring in your broker or legal counsel for a consultation.
Review the estoppel clause in your lease and determine response deadlines, tenant compliance requirements, and consequences of non-compliance (usually results in an event of default or it appoints landlord as attorney-in-fact to execute the estoppel on tenant's behalf).
Carefully compare the terms in the estoppel certificate to the lease, any lease amendments, lease commencement certificates, etc. and correct any discrepancies.
Include any outstanding grievances in the estoppel certificate. Examples may include unfinished tenant finish work, HVAC issues, claims against landlord for failure to properly operate the building, landlord's failure to enforce building rules and regulations, etc.
Delete excess verbiage. Estoppel certificates used to be short and cover a few basic facts. Lately they have gotten excessively long. To the extent allowed by your lease, delete excess verbiage that goes beyond what the lease requires.
Be sure to include mention of all documents comprising your lease agreement. Estoppel certificates usually include a clause stating that the lease is the "entire agreement" between the parties. Expand that definition as needed to include amendments, lease commencement certificates, lease renewal notice letters and other formal correspondence and side letters that are relevant and should not be waived.
Limit the Scope of the Estoppel
Use the term "tenant's knowledge" when making statements about whether the landlord or tenant is in default or whether tenant has any claims against landlord. Avoid the term "best knowledge" and use "actual knowledge" and "without investigation."
Include a clause in the estoppel that states that "nothing in the estoppel shall amend the lease" and "in the event of a discrepancy between the two, the lease will control."
Rather than tenant "warranties, certifies, and represents" limit tenant declarations to "tenant states."
Date the certificate no later than (or earlier than) the date you deliver it to the landlord.
State that the estoppel beneficiary may not rely on any statement it knows to be false.
Request Landlord Reciprocity
If the landlord has the right to request an estoppel, why shouldn't the tenant have the same right? Lease expiration dates, renewal notice dates, and security deposit amounts are just as important to the tenant, to a prospective subtenant or to an assignee. Try to get reciprocal language included in the estoppel clause of your lease.
The landlord should be a party to and should sign any estoppel certificate requested of tenant.
If these guidelines are closely followed, then the estoppel certificate can indeed be harmless.
The Harmless Estoppel
By: Stephen B. Epling
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