ESTOPPEL IN COMMERCIAL REAL ESTATE: What Investors Need To Know Before Acquisition.
As a commercial real estate investor who wants to buy a piece of commercial rental property, let’s start with an explanation of what tenant estoppel is. These are common in the commercial real estate market. It’s a letter or certificate that may be requested as part of the due diligence procedure. Tenant estoppel often comes up during the due diligence phase before acquisition.
Detailed meaning of tenant estoppel, its importance in commercial property acquisition, and what the certificate should entail will be the focus of this article. While, if a tenant is obligated to sign an estoppel certificate will be considered in another edition.
What is tenant estoppel? An estoppel certificate according to Black’s Law Dictionary is defined as a “signed statement by a party (such as tenant or mortgagee) certifying for another’s benefit that certain facts are correct, as that a lease exists, that there are no defaults, and that rent is paid to a certain date. A party’s delivery of this statement estops that party from later claiming a different state of facts”. The word “estop” simply means to prohibit. Hence, tenant estoppel thus is a certificate that prohibits tenants from taking a position different from what is stated in their certificate.
A certificate of estoppel is a tenant’s assurance of a lease term and conditions, and it would allow the property’s buyer to estimate the cost of evicting or keeping a tenant. Apart from being a source of information, the certificate of estoppel, on the other hand, would be extremely valuable to the purchaser in the event of a dispute with a tenant, because the tenant cannot refute the contents of the certificate after having previously certified them as true.
IMPORTANCE OF ESTOPPEL IN COMMERCIAL PROPERTY ACQUISITION
The legal phrase for barring someone from advancing a claim that contradicts a previous stance is “estoppel.” As a result, an estoppel statement serves two purposes:
(1) To provide information regarding the lease and the leased premises to a prospective buyer, and
(2) To assure the buyer or lender that the lessee will not make claims at a later period.
In commercial real estate transactions, the prospective buyer will typically require the landlord to obtain estoppel certificates from its tenants and make them available for due diligence investigation of the property. Buyers require tenant estoppel certificates to fully understand the economics of the lease and to identify any potential exposures they may face as property owners. This may be required when applying for commercial real estate financing or a loan. The tenant, landlord, or other parties can proceed without further issues if they are aware of the status, conditions, and terms of a lease or other contract.
CONTENT OF TENANT ESTOPPEL CERTIFICATE
While the exact items required in a tenant estoppel letter or certificate will vary, the following are some of the most common points covered in a typical tenant estoppel letter or certificate:
- The names of the tenants, commencement, and duration of their lease;
- Rent payable under the lease, the date to which rent has been paid, and if there are options to renew;
- If or not the tenant’s leasehold interest or part has been subleased, sold, or otherwise transferred;
- Verification that the lease has not been modified, amended, and in full force and effect;
- Whether there are any defaults either by the landlord or the tenant;
- Whether the tenant has received any required payments from the landlord based on the tenant’s renovations or improvement if any;
- Verification of any agreements concerning utilities and statutory property taxes and rates such as water, electricity, and Land Use Charge;
- If the tenant has any existing claims, defences, or offsets that could prevent the lease from being enforced.
Therefore, in summary, the tenant estoppel agreement establishes the nature of the landlord-tenant relationship. With BROKERFIELD REAL ESTATE SERVICES, you can keep track of all you need to know about your leases, estoppel letters, and commercial real estate transactions.
–ESV OYEDOKUN EUNICE, ANIVS, RSV