Thursday, March 31, 2011

Getting an Estoppel Signed

Buyers in a transaction involving the purchase of a leased property will usually require the tenant to complete an estoppel certificate. By completing this form, the tenant has an opportunity to confirm the terms of the lease, verify that the landlord is in compliance with those terms and/or provide any other information relating to their relationship with the landlord. It is important for a buyer to have a solid understanding of the tenant's perspective of their relationship with the landlord; after all it is a relationship that the buyer will inherit. Because of its importance, the estoppel certificate is usually a condition of closing a sale transaction. Most leases have language that requires tenants to complete and execute an estoppel certificate within a certain time period, say 10 days. 

Despite its importance and the requirements of the lease, it is not uncommon for tenants to make completing the estoppel a low priority. This can lead to a delay in closing the sale transaction. Depending on the language of the lease, the landlord has a few remedies against the tenant. First, he can pursue a breach action against the tenant. This option is probably not practical considering the time required and the fact that most buyers do not want to inherit a lease that is in breach. Secondly, many leases have language which allows landlords to provide an estoppel on behalf of the tenant if the tenant refuses to provide it. That being said, most buyers prefer to have an estoppel provided by the tenant themselves. Perhaps the most effective option is a monetary penalty. Try adding language to your leases that allows for charging an amount equal to one month’s rent. This could be the most effective way to motivate a tenant to complete an estoppel certificate.

One last word on estoppels. It's not unsual for a buyer or lender to add language to an estoppel that essentially amends/modifies the lease rather than just confirm its terms. Tenants are under no obliation to execute such an estoppel.

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