Estoppels can feel confusing to handle, but they are a crucial aspect of commercial real estate. This document is essential for confirming the terms of a lease for owners, tenants, and third parties like investors and lenders. As an owner or property manager, it is important to understand how and when to use this important form, the information it should contain, and the ways that it can provide certainty and support for your lease agreements. Let’s dive into the details:
What is an Estoppel?
Let’s begin with the definition of a tenant estoppel. In the commercial real estate world, these are a common part of leasing, lending, and investing processes. It is a certificate or a letter often required during the due diligence phase or during underwriting.
An estoppel is a legal document that details important information related to a lease for a third party. It acts as a verification of what each party has agreed to, preventing miscommunications and false claims about the lease terms. Essentially, an estoppel prohibits someone from taking a position that is contrary to what they have previously stated.
When it comes to commercial real estate, the tenant estoppel is a document signed by a tenant that verifies the terms, conditions, and status of the lease they have signed off on. Many commercial leases require that tenants provide an estoppel certificate or letter upon request. They may face fines or other consequences for failing to do so.
The terms “tenant estoppel,” “estoppel letter,” and “estoppel certificate” are often used interchangeably.
Benefits of Estoppel Letters
Since estoppels prohibit a tenant from going back on their word, it essentially provides proof or a promise of cash flow. In addition, it offers third-party verification. The tenant confirms that the landlord is not confusing or changing any information for their own benefit. The tenant also states that they understand and commit to the terms of the lease. It holds each party to the truth.
The letter or certificate can then be shown to investors during the due diligence phase of an acquisition. It can also be provided to lenders during the underwriting process.
An estoppel provides a level of confidence for commercial real estate investors and lenders. Their primary concern in the decision-making process is whether or not your property is likely to have good cash flow. They also want to make sure the owner does not hurt the property’s profits by defaulting on lease terms. Having a written letter or certificate of confirmation can help investors and lenders feel secure in their decision.
Sometimes, estoppel letters are also used in court cases, though this is a less common circumstance.
What Does a Complete Letter Contain?
If you require that your tenants send you an estoppel letter upon request, you must also lay out the necessary items for the tenant to include in that letter. In most cases, the letter or certificate contains the following:
- The start date of the lease
- The date to which rent has been paid
- A verification there are no defaults. Or a statement of the defaults made by the landlord or tenant.
- Relevant tenant rights (lease extension, early termination, etc.)
- Verification that the lease is unmodified. OR, it’s a statement of all modifications made to the lease.
By getting all information upfront, you eliminate future disputes.
It is important to note that these are just some of the most common points included in commercial estoppel letters. Exact details can vary greatly depending on the exact details of the lease and the businesses involved.
Should You Use an Estoppel Letter in Your Contract?
Are you a commercial real estate owner who plans to bring on investors or lenders? If so, it would serve you well to put a provision in each lease that requires your tenants to provide an estoppel letter upon request. Keeping this requirement reduces the ability of any party to confuse or alter information when making property arrangements or real estate contracts. Estoppels help build trust and transparency between tenants, owners, and investors, and therefore help set you up for success.
If either owners or tenants have concerns about the contents of an estoppel, it’s smart to consult a commercial real estate lawyer. The purpose of the document is to provide everyone involved with clear, honest confirmation of lease terms. Therefore, getting professional assistance when needed helps prevent disputes and ensure everyone fully understands the agreement.
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