When entering into a real estate contract you may see an estoppel certificate or letter, especially when purchasing a multi-family building or other commercial property with tenants. It’s important to understand estoppel in real estate and what it means to landlords, tenants, and the due diligence process.
An Estoppel Establishes the Facts
Estoppel makes sure the facts surrounding the property are not confusing. Once all information is assembled and added to the estoppel certificate, the tenants and the landlord will sign the document to verify its accuracy. While estoppel certificates can vary depending on the situation — in real estate, they generally confirm the following information:
- Dates of existing leases
- Expirations of existing leases
- Lease terms
- Monthly rents
- Security deposits held
- Tenant names
- Parking provided
- Storage provided
- Any defaults
Not only are these facts important for the due diligence process, but they are also necessary for securing a commercial real estate loan.
An Estoppel Helps Investors Make Informed Decisions
Estoppel certificates help investors and lenders project the profitability of a property. Substantiated by the tenants, the estoppel confirms the future cash flow of a property, the length of lease terms, paid rents, unpaid rents, or claims against the landlord.
When signing the estoppel, tenants can clarify any disputes or verbal agreements. They can request for these facts to be added to the estoppel in writing so that the potential new owner is aware of them before purchasing the property. For instance, the landlord may have provided free parking, pets, or use of certain areas of the property.
Similarly, the buyer needs to know if any of the current tenants have ongoing legal claims against the landlord. If so, those claims would transfer over to the new owner. For this reason, it’s wise for the buyer to request tenant estoppels.
What an Estoppel Means to Tenants
When tenants sign estoppel, they are verifying the material terms within the lease. For this reason, tenants must compare what’s listed on the estoppel certificate to their original lease to make sure it is accurate. If the estoppel certificate contains incorrect or false information, the estoppel could override the tenant rights in the lease. By clarifying all previous agreements, estoppels also uphold tenant rights and prevent any future disputes with the new landlord.
What an Estoppel Means to Landlords
Since the value of the property is directly related to current leases and existing tenants, estoppels substantiate the value of a property. To that end, an estoppel certificate helps the landlord sell the building more quickly and for the best price possible.
Why Leases Aren’t Always Enough For Due Diligence
Buyers need to know about all prior agreements such as promises of free rent, laundry facilities, or parking – especially when they may have been discussed verbally. To illustrate, a tenant may say, “The landlord promised us two parking spaces instead of one.” — Only to find out there is now a shortage of parking spaces on the property. Disclosing all potential obligations helps avoid future misunderstandings.
To sum up, estoppel certificates may benefit everyone involved in commercial property — landlords, tenants, and buyers alike. For landlords, they help ensure a smooth sale for the maximum price. For buyers, estoppels are an important part of the due diligence process and fact-checking. For tenants, they clarify all lease terms and ensure all previous agreements are upheld.
If you are concerned about the property you are looking to buy or if you have issues with the property you put up for sale, it helps to talk to a reliable real estate lawyer. Call Moschetti Law at 888-664-1848 for legal advice.