What is an estoppel? Let’s begin with the definition of a tenant estoppel. In the commercial real estate world, these are common. It is a certificate or a letter that may be required during the due diligence phase or the underwriting process.
The dictionary definition of estoppel is as follows:
“A legal bar to alleging or denying a fact because of one’s own previous actions or words to the contrary”
In other words, 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. In many commercial leases, a tenant estoppel certificate or letter is required to be provided upon request.
The terms “tenant estoppel,” “estoppel letter,” and “estoppel certificate” are often used interchangeably.
Situations Where an Estoppel Letter is Useful
Since estoppels prohibit a tenant from going back on their word, it essentially provides proof or a promise of cash flow. In addition, it also provides third-party verification. The tenant is confirming the landlord is not confusing or changing any information to put themselves in a better position. 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. Or it can be provided to lenders during the underwriting process. It provides a level of confidence for the investor or lender. After all, their primary concern in the decision-making process is whether or not your property is likely to have good cash flow. An estoppel letter can help them to feel secure in their decision.
Sometimes, estoppel letters are also used in court cases, though this is a less common circumstance.
What It Contains
If you require that your tenants send you an estoppel letter upon request, you must also lay out the items that must be included in the 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.
- Finally, a verification that the lease is unmodified. OR, it’s a statement of all modifications made to the lease.
While requirements can vary, these are among the most common points.
Do You Need an Estoppel Certificate or 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. It will put you in a better position when making real estate contracts or property arrangements of any kind. By reducing the ability of any party to confuse or alter information, estoppels can help set you up for success!
Keep track of everything you need to know about your leases with STRATAFOLIO, including estoppel letters and much more. In fact, many of our customers retain these as reference documents right in STRATAFOLIO for easy reference. Ask us about a free demo today!