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An Estoppel, in Real Estate, is a letter to certify someone’s understanding of an underlying promise, contract or agreement. Typically it’s occurring at the time of a transaction and used to ensure that everyone agrees on the basics of what was previously agreed upon. There are a few things that you will need before getting your Estoppel signed.
Tenant’s Estoppel Certificate?
This is one of those concepts that is best explained through an example, so allow us to explain:
Say an owner of a commercial building went to the bank to get a cash out refinance on the property. He explains he just signed 5 new tenants that increased the profitability of the building by $50,000 per year. The bank naturally does some due diligence on the property. They want to know that the owner can afford their new Loan payment. So they ask the owner to provide the Rent Roll, T12 and the underlying leases on the building.
Buyer Checklist for Estoppels
Well, either by mistake or maybe intentionally, the owner of that building fails to inform the bank that there’s a tenant who’s filing a lawsuit against the owner due to not honoring their contract. You see, the owner and an older tenant signed an addendum 3 years ago giving that tenant the right of first refusal to lease all the other spaces at $1/sqft when they become available. That’s 50% cheaper than they’re being leased for right now.
So now the bank just funded a property owner based on a false premise of leases that are eventually going to get called back in the court of law.
What is a Tenant’s Estoppel Certificate?
Back to Estoppels, which would have prevented that situation. Estoppels are meant to prevent that tenant AND bank from being unjustly wronged by the inconsistencies of the owner’s words or actions. It’s a protective measure for everyone to ensure that there is an agreement on everything and everyone is clear and without confusion as it relates to the terms.
How long does it take to Close on a Property with Tenant's?
As per the example, if the bank had gotten their Estoppels signed as they’re supposed to, then the tenant would have made the bank aware of that Right of First Refusal Addendum the tenant got signed 3 years back. Resultantly, the bank would have required that matter to be addressed before wiring all that money over to the owner.
Should I sign a Tenant Estoppel Certificate?
When The Residential Buyer buys homes with inherited tenants, we almost ALWAYS require Estoppels to be signed because of these protections that it provides to both ourselves AND to the tenant. If the tenant has an option to purchase the property, we need to see that document, we need to be aware so we don’t run into lawsuits. If there was a lease modification at some point, we want to see proof of that as well. At the end of the day, it won’t be just us that is protected by the Estoppel; the two people that are protected with these Estoppels are the Tenant and the lender (or buyer). If you’re the tenant, it is BRUTALLY important for your own sake that you read that Estoppel and get it signed once you can confirm its accuracy.
What happens if I refuse to sign the estoppel certificate?
So what if the tenant refuses to sign? Well we’ve run into situations where the tenant believed that them not signing the Estoppel gave them some leverage or something. A reason to start re-negotiating their lease terms or perhaps just get something in return for their signature; this is not the case. If you’re the tenant and you receive a Tenant Estoppel Certificate, then remember that this is how you protect yourself:
- Review this thing! If you see something inaccurate then point it out. But whether you need to get it corrected or it’s already good to go, you need to sign it! If you don’t, then your interests could be misrepresented and skewed.
In fact, if you refuse to sign an Estoppel or even try to correct it, then a judge is just going to discredit your case. Additionally, in most cases, you can actually be financially penalized for failing to sign it.
Remember that the Estoppel isn’t to protect the owner, it’s there to protect the tenant and the buyer. So read it over closely. If necessary, request changes. But either way, work with the other parties to get it signed so your interests are protected.