Estoppel Certificates

What this clause does

When your landlord sells the building or places a new loan, the buyer or lender wants proof that the lease says what the landlord claims it says. The estoppel certificate is how they get it. You confirm which documents make up the lease, the current rent, the expiration date, any options, the security deposit, any prepaid rent, and whether you know of any landlord default or claim.

The word estoppel is the point. A statement you sign can prevent you from later asserting something different against the party that relied on it. If you certify there are no landlord defaults, you may lose the ability to raise a roof leak claim or an unpaid improvement allowance against the new owner.

What a certificate typically covers

A typical request asks you to confirm the lease and every amendment, the commencement and expiration dates, the current monthly base rent and the date through which it is paid, your share of operating expenses, the security deposit, any remaining options or rights of first refusal, any unpaid allowances or landlord work still owed, and whether you or the landlord are in default. Lenders sometimes add questions about hazardous materials, bankruptcy and subleases.

Before answering, pull the actual documents. Memory is not a reliable source for a statement a buyer or lender will rely on for years.

Why it matters in industrial deals

Industrial buildings trade and refinance often, and investors price them on the leases. The remaining term, the rent increases and the options are what a buyer is paying for, which is why buyers and lenders insist on current, signed confirmation from each tenant.

That puts your response on the critical path of someone else's closing. Most leases treat failure to return a certificate on time as a default. Some go further and say that if you do not respond, the landlord's version of the facts is treated as accurate. Either outcome can cost you.

A certificate can also work in your favor. One that lists what the landlord still owes you, such as a roof repair or an allowance reimbursement, puts the buyer on notice and makes it harder for the new owner to claim it never knew.

Where it goes wrong

Speed is the first trap. Requests often arrive with a short turnaround, and the person who receives it at your company may not know the lease history. Assign one owner for lease administration, keep a lease abstract with key dates, dollars and open issues, and route every estoppel request to that person.

The form is the second trap. Buyers and lenders often send their own forms, and some go well beyond confirming facts. Watch for statements that amend the lease, waive your audit or offset rights, confirm you accepted improvements you are still disputing, or declare that you have no claims of any kind. Your job is to confirm facts, not to grant new rights.

Do not let the certificate describe the premises or the rent differently than the lease, even slightly. A small mismatch in square footage or a rent step can become the new owner's starting point.

The third trap is staying quiet about open issues. If there is a disputed operating expense reconciliation, an unfinished punch list, an unpaid allowance or a pending repair request, say so on the certificate. Stating it plainly preserves the claim.

How to negotiate it

At lease signing, negotiate a workable response period, commonly ten business days or more, a limit on how often the landlord can ask, and a requirement that the certificate follow a form attached to the lease or stick to factual statements. Where you can, qualify statements about defaults with the words to your knowledge.

Consider asking for the same courtesy in return: a landlord confirmation of lease facts when you need one, for example when you are selling your business, financing equipment or subleasing.

Have a real estate attorney review the estoppel clause before you sign the lease, and have someone who knows your lease history compare each certificate against the actual documents before it goes back.