By Kylie Bergmann.
Requests for estoppel certificates can arise in many contexts during the course of a commercial real estate transaction. The most common scenario occurs when a landlord is selling or mortgaging its property and the prospective purchaser or lender desires confirmation from the tenant of the status of the existing lease.
As part of its due diligence process, a lender or a prospective purchaser who intends to take an assignment of the lease will ask the tenant to certify certain items, such as:
- The rental amount;
- The term;
- The amount of the security deposit; and
- Whether the landlord is currently in default.
Typically, the lease will provide a time frame for the tenant to respond to such a request so the prospective purchaser or lender can evaluate the transaction. If the estoppel certificate discloses any red flags, the prospective purchaser can address them. For example, this can be done by asking for a credit from the seller/landlord at closing for any items the seller/landlord owes to the tenant or is responsible for curing, or the purchaser can terminate the transaction.
Estoppel certificates can also be given by a landlord in the event a tenant wants to sublease its premises so the proposed sublessee understands the status of the underlying lease before signing a sublease.
A landlord may also provide an estoppel certificate during a corporate transaction. If the seller is a business that leases the property where it operates, the prospective purchaser of the business will want confirmation that the seller/tenant has been complying with the terms of the lease before it steps into the shoes of the seller/tenant.
A prospective purchaser of property may request an estoppel certificate if the property is encumbered by an operating document, such as a reciprocal easement agreement or declaration governing maintenance at the property. A prospective purchaser should ask the party responsible for collecting the payments due under the operating document, such as an association, to certify the current property owner has been making all the required payments so the prospective purchaser is not saddled with past-due payments when it closes on the property.
Although less common, estoppel certificates can also be used when a purchaser assigns its interest in a real estate purchase agreement to a third party. The proposed assignee may want confirmation that the purchase agreement is in effect and the existing purchaser is not in default under the terms of the purchase agreement.
Estoppel certificates can be useful in a variety of situations and are vital during the due diligence process to limit a party’s risk in a commercial real estate transaction.
Interested in learning more about the effectiveness of estoppel certificates and how they can help ensure a smooth commercial real estate transaction? Contact Kylie Bergmann today.
