What Tenants Need to Know About Estoppel Certificates

Willis Tower sells for $1.3 Billion.  Such eye-popping sales headlines are fairly common today. With low interest rates and rising rental rates, we’re seeing record volume of office building sales in Chicago and many markets nationally.  As part of the sale of an office building as well as refinancing, tenants will receive a document known as an “Estoppel Certificate” from their landlord as is commonly required in most office leases.  Below is a brief explanation of “Estoppel Certificates” and what tenants should consider when negotiating their lease and what to look for when reviewing one.

What is it?  A tenant Estoppel Certificate is a legally binding document where a tenant represents to another party (i.e., prospective purchaser or lender) certain facts regarding the lease.  Its purpose is two-fold: (1) providing a snapshot of the status of the lease at a particular time; and (2) precluding the tenant (i.e., estopping) from maintaining any claims inconsistent with such representations.  As part of the due diligence process, one can certainly understand why a prospective buyer or lender would want to obtain such representations.

By what authority?  The landlord has authority to request an Estoppel through the lease, which will typically specify the timeframe for the tenant to execute as well as the scope of the representation.  Those representations are typically as to: (1) lease dates – commencement, renewal, expiration; (2) the amount of rent paid and payable; (3) the existence of any defaults; (4) addresses of the parties; (5) security deposits or letters of credit; and (6) existence of any sublease or assignment.  Many leases will further state that if the tenant does not object to or execute the draft Estoppel within the required timeframe, that the tenant is deemed to have accepted the representations in that draft Estoppel or landlord is appointed as agent for tenant and allowed to sign the Estoppel on tenant’s behalf.

Leasing Tips in Negotiating Estoppel Provision: In negotiating the Estoppel provision of an office lease, the tenant should consider: (1) allowing adequate time to review the document and use a “business day” period to avoid getting tripped-up on holidays and weekends; (2) providing that tenant may make comments to the draft document; (3) deleting language that would deem the draft submitted approved if tenant does not timely reply; (4) deleting language appointing landlord as agent (attorney-in-fact) to sign the estoppels on tenant’s behalf if tenant does not timely reply; (5) pre-negotiating the estoppel by attaching its form as an exhibit to the lease; and (6) turning the tables, by adding that tenant may request an Estoppel of the landlord and/or Lender.

Estoppel Certificate Checklist:  Be careful what you sign!  The Estoppel Certificate has the effect of changing the terms of your lease if it is not correctly documented.  Having reviewed estoppel certificates for clients over the past 20 years, I cannot recall many that were 100% accurate.  One of the reasons for the errors is that the preparation of estoppel certificates is typically delegated to a back-office function.  When you receive the draft Estoppel Certificate, here’s what you should consider:

  1. Watch the clock – according to the lease, how much time do you have for review?  Did you receive the estoppel in accordance with the notice provision in the lease?  What happens if you do not respond on a timely basis?
  2. Review the lease (including all amendments) including the estoppel provision and verify that the names and addresses of all parties as well as all documentation is included in the definition of “Lease”.  It is not uncommon for there to be a missing document which could be problematic if there is a foreclosure.
  3. Talk with people at the location of this office to confirm facts and determine if there has been any issues that may have arisen to a default.  For example, has the landlord not fixed the defective HVAC as it is required under the lease?
  4. Preserve tenant’s rights and options under the lease.  Be sure that the Estoppel reflects any options of tenant to renew, expand or early termination.  Where a tenant has negotiated a self-help right with rent set-off remedies, be sure that it is not negated in the Estoppel.
  5. Qualify any statement requesting tenant’s representation as to any ongoing obligation or default with “to the best of tenant’s knowledge”.  This is particularly important for tenants with multiple facilities and/or facilities they have inherited through an acquisition.
  6. As to rents paid and payable, check with tenant’s accounting department and review the latest rent invoices.
  7. Be sure the Estoppel does not negate tenant’s right to audit and/or challenge future Operating Expense and Tax reconciliations.
  8. Limit the scope of the Estoppel to the facts of the lease and its representation to the requesting third party.  Do not allow the landlord to expand the tenant’s obligations or lessen its rights. For any gray areas, consider adding qualifying language such “as required under the Lease….”

Keep in mind that the purpose of the Estoppel is to simply record the facts associated with the tenant’s lease, it’s typically not the forum to renegotiate lease terms.  In fostering a good landlord-tenant relationship, a prompt, factually accurate response to the Estoppel will be much appreciated by the landlord, who is typically under a major time crunch and attempting to secure such Estoppel from multiple tenants in a building, among other issues.  By the same token, be careful what you sign.

 

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