Estoppel Certificates Explained

Estoppel Certificates Explained

An estoppel certificate is a device that is
used by landlords and by lenders in order to get some certainty as to what their situation
is on a property. The lease agreement also should provide for estoppel certificates.
It’s one of those terms that nobody understands what it is and people sign it and figure,
“Eh, it’s probably not important.” If you’re a landlord, it’s really important
that you include some provision for getting estoppel certificates from your tenants. And
that needs to be in your lease. Because as a landlord, there’s a couple of things that
you may want to do with that property. You may want to sell a property, you may want
to refinance the property, in either case, you are going to be introducing a new party
to that property and that party does not know what’s gone on in the premises before they
arrived. Let’s say that you own a strip mall shopping
center. You have several tenants in the shopping center and they’re paying the rent and it’s
a good investment property. Cash flows. But, for whatever reason, you want to sell it.
The buyer is going to come in and the thing that’s going to be attractive to them about
your shopping center is its profitability. The way it throws off cash. You’ve got all
these tenants that are doing great, paying their rents on time, the rents are nice and
high, and it’s really attractive. However, they’re just taking your word for
it. Because they know you, they don’t know those tenants, and they don’t know what’s
gone on between you and those tenants. They want some assurance that if they buy the shopping
center, that they’re not going to turn around and be faced with a giant lawsuit from the
restaurant that’s your anchor tenant in the premises, saying, “Hey, you breached this
agreement that we had years ago to put this really expensive, fancy fountain in the parking
lot and we were really counting on that because that was going to be a major draw. There was
going to be a lot of traffic that would come in as a result of that and we thought some
of those people might want to stop by and eat at our restaurant. You promised, you didn’t
do it, and now we’re suing you.” Well, that’s a huge problem for somebody that
just came in and bought the property because they didn’t know anything about that promise
to build a fountain and they have in fact, succeeded to the obligations of the previous
landlord. They now stand in that previous landlord’s shoes. They don’t want to be surprised
in that way. They want something from the tenants that says, “We don’t have any secret
claims that we’re going to assert against you.” The landlord can go to his tenants and say,
“Hey look, check out our lease. There on page 25 of the lease, that one section you didn’t
understand, you just signed it and didn’t get what it meant. It says that you have to
give me an estoppel certificate on demand.” The estoppel certificate says, “I’m the tenant
and basically, I don’t have any claims against you. Or if I do have any claims, here’s what
they are.” Getting that estoppel certificate allows the
landlord to sell the shopping center. He can take that to perspective buyers and say, “Here’s
my lease roles, this is how much money I’m making on this building, none of these people
have any claims against me, here’s their estoppel certificates, here’s all their lease agreements.
As you can see, everybody’s committed for a long period of time, this is a great piece
of property for you.” And it’s got a reliable landlord to sell the property. Without that,
the landlord may not be able to sell the property at all, or if they are able to sell the property,
there’s going to be some risk to the buyer that they’re not going to be able to mitigate
against. They’re not going to be able to get as much in terms of a purchase price for the
sale of that property. It’s tremendous advantage to the landlord to have a provision that allows
the landlord to receive an estoppel certificates from commercial tenants. The landlord may also want to refinance its
loan on the property. Perhaps the property was acquired at a time where interest rates
were very high, so the landlord is paying 7% interest on this property. But now the
landlord can refinance his property for 4 1/2 and that’s a huge difference to the landlord
in terms of their profitability in this investment. But the bank is not going to, just like the
buyer of the property, the bank doesn’t want to have its security on the property, the
shopping center, potentially subject to claims by disgruntled tenants who’ve got secret claims.
Estoppel certificates are very valuable for landlords that are interested in refinancing
their property or in selling their property.

6 thoughts on “Estoppel Certificates Explained

  1. Great explanation.  Thanks!

  2. Hello,
    Thank you so much for this video, I had a question, what happens if you get an estoppel certificate at closing and the tenants have not received it yet but they will in a few days (but I am the owner now). Is that ES effective although the previous owner was the only one to sign in?

  3. This does not apply just to landlord and or tenant situations.

  4. Excellent explanation

  5. Really really helpful! Thank you for this

  6. very well explained thank you

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