Estoppel Certificates in Commercial Real Estate

If you own investment commercial real estate you may already be familiar with estoppel certificates. Why do most banks and lenders require them before they finance your investment property?

An estoppel certificate is a certification from a landlord and a tenant which outlines certain facts that exist between the two parties with respect to the terms and conditions of the lease that the lender can rely upon. Lenders are looking to verify from both parties specific information such as the amount of rent being paid, lease terms and duration, any predetermined lease extensions, amount of security deposits and terms of such deposits, expenses that each party is responsible for, and that there are no existing defaults or oral representations under the lease by either party. The estoppel certificate offers protection for the lender and brings all parties together to verify all aspects of the current lease arrangement.

The lenders primary concern is the repayment of their loan. Because the repayment source for a loan secured by commercial real estate is typically from the rents it receives, an estoppel is generally required from all tenants regardless of whether they are paying month-to-month or have a lease for an extended term. The estoppel verifies the lease terms but also offers protection and keeps the borrower honest.

Most lenders will have their own estoppel certificates that they will require the borrower and their tenants to complete. While it will not change the existing lease terms, it usually will include specific language that may create new terms between the tenant(s) and the lender under certain circumstances such as a foreclosure. The lender may have different clauses in the estoppel depending on the property type and current lease agreement.

Most estoppel certificates will include subordination language, non-disturbance language, and attornment language. Subordination language assures the lender that their mortgage has priority over a lease. This is very important especially if the borrower is occupying space in the subject property. When the borrower(s) will occupy some of the space in their building, many lenders will require the borrower(s) to draft and execute a lease between themselves and their business occupying the space. This will allow the lender to be able to enforce the lease if they need to take back the building. Non-disturbance language assures the tenant that the lender or subsequent owner through foreclosure will not disturb the tenant's possession as long as the tenant is performing in accordance with their lease. Attornment language is included to ensure that the tenant will recognize the lender as the new landlord if the borrower(s) default on their loan. This protects the lender so that in the case of a foreclosure, the tenants do not vacate the premise and leave the lender with a vacant property.

As a borrower, familiarize yourself with an estoppel certificate so that you clearly understand what it is and which clauses are included in your estoppel. Your understanding of this will also help you when you need to explain to your tenants why they have to sign the estoppel certificate and how it protects them

Posted by Chad Pitt
Sr. Vice President
Commercial Alternative
Phone (714) 594-3426
Fax (866) 724-8171
cpitt@commalt.com
http://www.commalt.com
http://www.commaltblog.com

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Estoppel Certificates

Estoppel, to the non-initiated, sounds more like the newest toy in the Pentagon's vast array of secret weaponry and armaments, something that belongs more to Area 51 than the real estate world, or perhaps the latest scandal to permeate Capitol Hill. "CIA's Probe Leak: The New Martin Lochheed F-22 Supersonic Estoppel!", one might envision reading one day in the front page of USA Today. But readers of my Articles know better ...

In Real Estate, an "Estoppel Certificate" is a document signed by the Seller, under oath, confirming the representations made by the Seller in the Contract of Purchase and Sale. The reasons for the Buyer to request an Estoppel Certificate are twofold. First, to confirm the Seller's representations as stated above and, secondly, to bar and prevent the Seller from later on asserting a fact, that is inconsistent with the terms of the Contract.

For instance, when purchasing a rental property - whether a house or an apartment building - an investor might want to insert the following two conditions precedent ('subject to' clauses). The first might read:

"Subject to the Buyer by ( insert date ) reviewing and approving the Residential Tenancy Agreement(s) presently in effect and covering the property herein bought and sold. Seller warrants that the term(s) of the tenancy is/are for a period of ( insert length of tenancy ), the monthly rent(s) is/are ( insert amount ) and that the last rental increase was on ( insert date )".

What happens if, by the time all the subjects are removed (and the property is virtually sold) and the time the investor completes the transaction, the tenant is run over by a bus and dies? In some instances the market value of the subject property may be altered, as in the case of an investor purchasing a professional building. This is where an Estoppel Certificate fits in.

The second clause might read:

"Subject to the Buyer, after all the other subjects herein are removed but in no event before two weeks (or any other time) prior to completion and no later than one week (or any other time) prior to completion, receiving, perusing and approving an Estoppel Certificate ratified by Seller covering the existence and confirming the validity at law of the subject matter and terms of the tenancies herein. Failure by the Seller to provide such Estoppel Certificate in the aforesaid time-frame will render this Contract null and void, and all deposit monies until then paid by Buyer will be refunded to Buyer forthwith with interest accrued thereon, if any there be".

The reason for Estoppel Certificates to exist in Real Estate is to be found in the equitable Doctrine Of The Promissory Estoppel. Under this doctrine, one party is barred and prevented from withdrawing a promise made to another party, if the latter has relied on that promise and acted upon it. All the more so, since contracts in real estate are made 'under seal' (deeds) and, as such, the rule of evidence arising from the special status of a deed is that the parties are expected to take greater care to verify the contents of the agreement and their validity at law, before consummating it.

The American Law Institute goes one step further by discerning between equitable and promissory estoppel in its Restatements of Contracts as follows:

"Equitable estoppel is distinct from promissory estoppel. Promissory estoppel involves a clear and definite promise, while equitable estoppel involves only representations and inducements. The representations at issue in promissory estoppel go to future intent, while equitable estoppel involves statement of past or present fact. It is also said that equitable estoppel lies in tort, while promissory estoppel lies in contract. The major distinction between equitable estoppel and promissory estoppel is that the former is available only as a defense, while promissory estoppel can be used as the basis of a cause of action for damages. The American Law Institute's website can be found at http://www.ali.org.

All the foregoing simply goes to prove, once again, that the discipline of real estate wheeling and dealing is littered with rubbish all the way - until such time as a contract is entered into and ratified by the parties, at which time Real Estate suddenly becomes all too deadly serious.

Luigi Frascati

Luigi Frascati is a Real Estate Agent based in Vancouver, British Columbia. He holds a Bachelor Degree in Economics and maintains a weblog entitled the Real Estate Chronicle at http://wwwrealestatechronicle.blogspot.com where you can find the full collection of his articles. Luigi is associated with the Sutton Group, the largest real estate organization in Canada, and is based with Sutton-Centre Realty in Burnaby, BC.

Luigi is very proud to be an EzineArticles Platinum Expert Author. Your rating at the footer of this Article is very much appreciated. Thank you.

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