June 19, 2018
Tenant Estoppel Certificate: How it Works & FAQ
What’s the official definition of a tenant estoppel certificate? It’s a “signed statement by a party (such as a tenant or mortgagee) 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. A party’s delivery of this statement estops that party from later claiming a different state of facts.’’ (Source: Black’s Law Dictionary, 572, 7th Ed., 1999)
So, that’s all well and good, but why or where would a landlord ever use a tenant estoppel certificate?
Let’s say you owned a five-storey building with mixed use retail and residential with total area of 35,000 square feet. And, let’s say most of the main retail-level was occupied by a well-known high-end coffeehouse and this anchor tenant had locked into a lease of X amount per square foot for 10 years. That coffeehouse is a very stable and reliable part of your NOI.
If you wanted to refinance the building for more favourable terms, you might need to show a tenant estoppel certificate. This is essentially a binding legal document signed by the tenant that verifies the relationship between the landlord and the tenant to a third party, like a bank or a buyer.
Tenant Estoppel FAQ
Why does a landlord need one if they have a lease?
A tenant estoppel certificate is often part of the due diligence process, especially when the landlord is selling or refinancing a building. It is an independent verification of the rent roll, and in essence it is a promise of the future revenue stream to the potential buyer or lender.
What does a tenant estoppel certificate include?
The tenant estoppel certificate covers a range of facts pertaining to the terms of the lease This can include when the lease began, its renewal date, the date that the lease expires and if there are any renewal rights. It will also confirm how much rent is paid and when, whether there was any initial deposit, and what happens if the lease goes into default. Of course, all contact information is also included.
Why does the lender want a tenant estoppel?
A lender or buyer wants to guarantee the income stream from the commercial property. While market value is important, it can be the unassuming estoppel that can make or break multi-million dollar deals.
How else can estoppels be used?
Estoppels act as written proof, and trump any verbal promises. They are sometimes used in court to show that a tenant agreed to certain terms, such as paying a percentage of management fees, even if the lease fails to include this clause.
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