E Is for Estoppel Certificate

With props to Rodney Dangerfield, some legal documents just don’t get no respect—or at least are not regarded with the importance deserved.

That innocuous looking two-page form that the landlord just sent to you, saying that in connection with a refinancing its lender has requested you sign an estoppel certificate certifying various facts about the lease and your tenancy, is a significant legal document, worthy of careful review by tenant and counsel and one that, if dealt with in a cavalier manner, can come back to bite you. Here we’re talking about monetary damages, inadvertent waiver of rights and adverse amendments to your lease.

Do I have your attention? O.K. This is supposed to be a glossary, right?

An estoppel certificate is a document, typically presented to and executed by a commercial tenant in which, in connection with the landlord’s refinancing or sale of the building, the tenant is asked to affirm and confirm basic facts about the lease and tenancy, covering items such as tenant’s name, description of the space rented, commencement and termination dates, whether any options have been granted (or are reserved), current rent and additional rent, prepaid rents and security deposit, status of landlord’s work, if any, and whether or not the landlord is in default of the lease obligations, such as repairs or payment of TI money, among other provisions. Taking the helicopter view, it specifies any existing claims, defenses or offsets that the tenant has against the landlord’s enforcement of the lease.

The typical EC, while not a contract, states that the third party may act in reliance on the matters certified. The tenant is then legally “stopped” (it’s the Old English “estop”), precluded as a matter of equity, from later claiming that the information provided was inaccurate, all to the detriment of the party (lender, purchaser) who has relied on that information. Webster defines “estoppel” as “the barring of a person, in a legal proceeding, from making allegations or denials which are contrary to … a previous statement.”

The EC is a means by which the prospective lender or purchaser can get direct testimony from a tenant as to the terms and status of the lease, of particular importance where the proposed transaction is based on a certain cash flow. It is an integral part of the due diligence process, and the presentation of ECs from certain larger tenants or a percentage of all tenants is typically a requirement of the loan documents or contract of sale. It is atypically a certification made to a stranger to the basic leasing transaction, a third party who will be relying on the content of the EC in making a significant business decision.

All modern commercial leases have a section covering ECs. There’s no inherent right to get an EC, so landlords are well advised to spell this out in the lease in appropriate detail. Also, that tenant will provide the EC upon request, and failure to comply within a certin number of days will constitute a default.

When we speak of third-party reliance, and the adverse legal consequences that can flow from mistaking the facts, the wise tenant does their homework and, when not certain, modifies their statements with “to the best of my knowledge” or “upon information and belief and without making independent investigation, I certify that …”

Also, clearly, the EC is not a “standard” form, so watch out for deadlines, and during the lease negotiation phase, try to increase the time period in which to respond and add a proviso that tenant’s rights and obligations will not be adversely affected.

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