Tenant Estoppel Certificates: Understanding Their Role in Real Estate Transactions

Introduction

Tenant estoppel certificates play a critical role in real estate transactions. Whether you are a purchaser, lender or tenant, you have likely encountered these documents. This bulletin highlights four essential aspects of estoppel certificates: their purpose, how the form is established, their role at closing and the extent to which their contents may be relied upon.

Purpose of the Estoppel Certificate

At their core, estoppel certificates provide purchasers and lenders with direct confirmation from tenants regarding the status of the lease. They typically confirm whether the lease is in good standing, the amount of rent payable, any unresolved landlord defaults, outstanding improvement allowances and other material lease details.

In essence, tenants are being asked to confirm the landlord’s representations as they relate to the lease. This gives purchasers and lenders greater confidence that lease terms are consistently understood and communicated by both landlord and tenant. Aligning expectations before closing is critical, as transaction parties generally seek to proceed on the basis of a shared understanding of the property’s leasing arrangements.

The term estoppel reflects the principle that a party may, in certain circumstances, be prevented from later contradicting a prior statement. Once a tenant signs an estoppel certificate, they are generally expected to stand by the statements it contains. This allows third parties who do not deal directly with the tenant to rely on the tenant’s confirmation of key facts, such as rent, lease term and the existence of defaults. That said, such reliance on estoppel certificates is not absolute. Where an estoppel conflicts with the lease or contains errors, its effect may be limited — a point addressed further below.

Establishing the Estoppel Form

In most transactions, the estoppel certificate form is settled early, often as a schedule to the purchase agreement or loan commitment. Careful review of the form before it is circulated to tenants is important, as the certificate should address key business considerations, including rent amounts, lease term, renewal rights, outstanding claims, defaults and disputes.

Although many leases require tenants to provide estoppel certificates upon request, the standard form referenced in the lease is often less detailed than what purchasers or lenders typically require. As a result, tenants, particularly large national or international tenants, may resist detailed forms and instead return their own versions. These may exclude certain confirmations or include qualifying language such as “to the best of our knowledge.” In some cases, the form returned may differ materially from what was originally provided. Nevertheless, provided the certificate addresses the principal lease terms and does not raise substantive issues, such responses may be considered “clean” and sufficient to satisfy closing conditions.

The Role of Estoppels at Closing

The importance of estoppel certificates becomes most apparent at closing. Many purchase and financing agreements make delivery of clean estoppels a condition to closing. Purchasers and lenders may seek estoppels from all tenants; however, where a property has multiple tenants, this requirement is sometimes limited in practice to major tenants or those occupying a significant portion of the property.

Estoppels are typically required to be dated within 30 days of closing, which can leave limited time to obtain, review and resolve any issues raised. If a concern is flagged by a tenant, it may be addressed by the landlord or require further discussion among the transaction parties. For this reason, beginning the process early by finalizing the form, identifying sensitive leases and giving tenants advance notice is often prudent.

The Effect of Estoppel Certificates

Although estoppel certificates are intended to provide a measure of finality, the extent to which they are relied upon depends on the surrounding circumstances. Courts may consider, among other things, whether the tenant understood the nature of the document, whether the tenant intended it to be relied upon, and whether reliance by the purchaser or lender was reasonable. Courts may also assess the sophistication of the parties, the clarity of the lease provisions, and whether the third party could or should have independently verified the information contained in the estoppel.

In some cases, courts have been prepared to give significant weight to estoppel certificates. For example, where a lender relies on a tenant’s written confirmation that no landlord defaults exist and subsequently suffers a loss, a court may uphold the estoppel depending on the circumstances. In other situations, particularly where the estoppel appears inconsistent with clear lease provisions or omits material information, courts may approach reliance more cautiously, especially where the third party had access to the lease and the opportunity to verify the information independently.

It is also worth emphasizing that estoppel certificates do not amend the lease or create new legal obligations. They are not contracts, but unilateral confirmations of fact. Their strength lies in consistency. Where the estoppel aligns with the lease, it reinforces reliability. Where there is a mismatch, it raises questions. Any such discrepancy should be identified and resolved before closing, whether it arises from oversight, ambiguity or informal side agreements that are not reflected in the lease.

Conclusion

Tenant estoppel certificates are an important tool in real estate due diligence. While they are not a substitute for reviewing leases, rent rolls and conducting independent verification, they offer a valuable snapshot of the lease as seen by the tenant. Used effectively, estoppel certificates help uncover risks, align expectations, and provide an added layer of assurance for purchasers and lenders as they move toward closing.

For more information, please contact the author or any other member of our Commercial Real Estate group.