Tenant estoppel is an issue that often comes up in commercial real estate, especially in an acquisition’s due diligence phase or a loan’s underwriting. With that in mind, what exactly is it?
Tenant Estoppel | What It Is and How It Works
What Is a Tenant Estoppel?
Black’s Law Dictionary defines an estoppel certificate as “a signed statement by a party certifying for another’s benefit that certain facts are correct, as that a lease exists, that there are no defaults, and that rent is paid to a certain date.”
Furthermore, when a party delivers this statement, it prohibits that same party from claiming a different statement of facts later on.
In simpler terms, a tenant estoppel is a certified statement a tenant makes. It verifies the terms and conditions and the current status of their lease.
Commercial real estate leases often require tenants to furnish them an estoppel certificate or letter upon request. It is a vital step in the underwriting phase of most commercial real estate loans as well as in the due diligence phase of acquisitions.
A tenant estoppel serves as proof of cash flow. Ultimately, that cash flow is what lenders and potential investors are most concerned with.
Additionally, the word estoppel is from the root word “estop,” which means “to prohibit.” As such, it is a certificate that precludes or prohibits the tenant from making a contradictory statement in the future to the one stated in their certificate.
What Is In a Tenant Estoppel Letter or Certificate?
The actual items that tenant estoppel letters or certificates contain often vary. However, some of the most common contents include the following:
- The lease’s commencement date
- The date to which the tenant has paid rent
- That neither the landlord nor the tenant has any defaults
- Should there be defaults by either party, a specification of said defaults
- Verification that no one has modified the lease and that it remains in full force and effect
- If someone modified the lease, a statement that verifies the modifications made to it
Many leases include a clause that requires the tenant to furnish a tenant estoppel certificate or letter upon request. The details that need to be in the actual certificate or letter can vary but most often include the items mentioned above.
Tenant estoppel often comes up during the process of loan underwriting or the due diligence phase of acquisitions. It provides a third-party insight into the relationship a certain landlord has with his tenant.
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