Don't Let Tenant Estoppel Certificate Delay Jeopardize Your Sale or Loan
Here’s how to motivate tenants to sign estoppel certificates promptly.
Delivering timely estoppel certificates to a buyer or lender is often essential for the transaction to go through. So, tenants who drag their feet on signing an estoppel certificate can end up costing you the sale or loan you desperately need. If like so many standard leases do, your lease limits your remedies in this situation to seeking eviction, you may not have enough time to satisfy the buyer or lender. That’s why you need to anticipate and take action to ensure that tenants aren’t in a position to block sales and loans involving your property.
The solution attorneys recommend is adding provisions to your lease that will motivate tenants to promptly sign estoppel certificates and give you swift and meaningful remedies if they don’t. Here’s a look at the leasing strategy, along with sample lease language you can use to implement it.
Why Estoppel Certificates Are So Important
The estoppel certificate is a legal document in which tenants certify as to their current rent, the lease term, legal claims they may have against the landlord, and other key information about their lease and current relationship with the landlord. It’s common practice for a prospective lender or buyer that’s contemplating a transaction with the owner or landlord of a commercial property to insist on getting an estoppel certificate from each of the building’s current tenants. Reviewing estoppel certificates is an essential part of the buyer’s/lender’s due diligence process. And if landlords can’t deliver the needed certificates on time, the buyer/lender might deem the transaction too risky and walk away from the deal.
That’s why most leases include a clause requiring tenants to sign an estoppel certificate upon the landlord’s request. Specifically, the tenant must certify that, to the best of its knowledge, the information listed in the certificate is true and correct.
The Challenge of Getting Tenants to Sign Promptly
Even with a lease clause, getting tenants to sign and return estoppel certificates quickly can be problematic. Tenants may find the document intimidating, especially since providing a false certification exposes them to risk of liability. So, tenants may want time without feeling like they’re being rushed into signing. For one thing, the information on the estoppel certificate may not be 100 percent correct. In that case, the tenant will have to modify the certificate accordingly before signing.
Example: A dry cleaning tenant that uses Perchloroethylene (PERC), a solvent shown to cause cancer, that’s presented with an estoppel certificate stating that there are no hazardous materials in the leased space might have to modify the certificate to say: “To Tenant’s best knowledge, there are no hazardous materials in the Premises, except Perchloroethylene [and any other hazardous materials the tenant has brought into the space].”
Tenants may also refuse to sign an estoppel certificate for various reasons such as out of fear that doing so will lock them in and legally bar them from suing over some problem that belies the certification that they discover later on.
Tenants may also seek to take advantage of the situation. Recognizing that they’ve got you over the barrel, they may withhold their signature unless and until you grant them some kind of concession in return, like a rent cut, forgiveness of a missed payment, or agreement to make an improvement that you previously refused.
Watch Out for “Dirty” Estoppel Certificates
Getting a tenant to sign promptly may not be the only estoppel certificate problem you confront. There’s also the risk that a tenant will seize upon the estoppel certification as an opportunity to air its grievances against you in writing. Thus, instead of signing the estoppel certificate you relayed from the buyer or lender for them to sign, they send you a “dirty” estoppel certificate that they’ve modified to set out a laundry list of problems and defects with the lease and/or space.
Of course, the tenant doesn’t really expect you to submit the dirty estoppel certificate to the prospective lender or buyer. What the tenant is hoping is that you’ll bend over backwards to fix the listed problems to get it to sign a “clean” estoppel certificate. And that strategy might pay off if the listed problems and defects are true. However, if the tenant’s list of problems and defects is false, you could threaten to take legal action against the tenant for falsifying statements on the estoppel certificate.
Problem: Standard Default Remedies May Not Work
Adding to the landlord’s difficulty is that normal lease default remedies aren’t suited to these situations. Failure to promptly sign and return an estoppel certificate upon request would constitute a default. Under standard leases, landlords must provide tenants notice of and time to cure a default. Only after the tenant fails to cure the default by the cure deadline may the landlord take action.
While this timetable might work for most defaults, it’s not likely to be effective for dealing with a tenant’s failure to promptly sign an estoppel certificate, especially where time is of the essence to the prospective buyer or lender. Thus, by the time the cure period expires, it might be too late for the landlord to rescue the sale or loan deal. And if the buyer or lender has already pulled out, evicting the tenant for not signing the estoppel certificate on time will yield the landlord little more than a vacant space to fill.
Bottom Line: You need a different kind of remedy to get tenants to sign and return estoppel certificates promptly.
Solution: Get Right to Accelerate Signing Defaults
A Chicago attorney who’s been down this path many times recommends accelerating the tenant’s lease default. In other words, shorten the time you must wait before taking legal action against a tenant for an estoppel certificate signature default. The attorney also lays out a negotiating strategy to follow, depending on how much leverage you have:
Hardball: No default notice or cure period for estoppel certificate violations. In the lease estoppel certificate clause, insert language that expressly states that the normal requirement that you provide the tenant a default notice and cure period doesn’t apply if the tenant doesn't sign the estoppel certificate by a set deadline after receiving your request. In that situation, the tenant's failure to give you an estoppel certificate becomes an immediate lease default entitling you to take action without providing notice of default or time to cure.
Compromise: No default notice or cure period but two requests to sign certificate. If tenants balk at your first proposal and you must compromise, insist on the default notice and cure period carve-out but let the tenant have two chances. In other words, agree to give a tenant who doesn’t meet the request to sign the estoppel certificate on the stated date a second request. Say that you won’t initiate legal action unless and until the tenant fails to comply with the second request. Don’t be surprised or put off if the tenant requires that the second request contain bold lettering on the outside to flag the importance of the request and the consequences of the tenant’s failing to respond within a set deadline.
Implementation strategy: If you must agree to a two-request arrangement, decide how many days in total you’re willing to wait for the signed estoppel certificate. Then split that number between the first and second requests. For example, if you’re willing to wait a total of 20 days for the tenant to give you the signed certificate, give the tenant only 10 days after each request.
Model Lease Language
If Tenant fails to execute and deliver an estoppel certificate within [insert #, e.g., 10] days after Tenant's receipt of a written request therefor from Landlord, and if such failure shall continue for [insert #, e.g., 10] days after Tenant's receipt of a second (reminder) written request therefor from Landlord which includes the following legend in capital letters: “IMPORTANT NOTICE—FAILURE TO RESPOND WITHIN [insert #, e.g., 10] DAYS SHALL CONSTITUTE A LEASE DEFAULT,” then such failure shall constitute an Event of Default triggering Landlord’s remedies under the Lease.
Practical Pointer: Send any estoppel certificate request to the tenant by certified mail, return receipt requested. That way, you can prove that the tenant got the request and didn’t respond in time.
Get Additional Remedy If Tenants Still Won’t Sign
Accelerating the tenant’s lease default is typically enough to pressure a tenant into signing the estoppel certificate on time. But it’s a good idea to have some additional remedies just in case it doesn’t work. Three possibilities (in order of preference):
Alternative 1. Landlord power of attorney to sign for tenant. Specify that if the tenant doesn’t sign the estoppel certificate, you have the power of attorney to sign on the tenant’s behalf as its “attorney-in-fact.” Many buyers and lenders prefer this alternative, attorneys say, because it gives them a signed estoppel certificate. However, larger and sophisticated tenants may not agree to give you power of attorney, citing lack of authority to do so under their company bylaws.
Model Lease Language
If Tenant fails to execute and deliver an estoppel certificate within [insert #, e.g., 20] days after Tenant’s receipt of a [insert as needed: second] written request therefor from Landlord, Tenant irrevocably appoints Landlord as its attorney-in-fact, in Tenant’s name, to execute such instrument.
Alternative 2. Tenant deemed to accept estoppel certificate terms. Another potential remedy is to get the tenant to agree that if it doesn’t sign the estoppel certificate within the stated deadline, it will be deemed to have accepted the certificate’s basic terms. These basic terms typically include statements that:
- The lease is in full force and effect;
- The rent hasn't been paid for more than one month in advance;
- You’re not in default; and
- The tenant has no claims against you.
While likely less attractive to lenders and buyers, the deemed-to-accept approach should be easier to sell to tenants than the power of attorney alternative.
Model Lease Language
Tenant’s failure to execute and deliver an estoppel certificate within [insert #, e.g., 20] days after Tenant’s receipt of Landlord's written request(s) therefor shall be conclusive upon Tenant: i. that this Lease is in full force and effect, without modification except as may be represented by Landlord; ii. that there are no uncured defaults in Landlord’s performance; iii. that not more than [insert #, e.g., 1] month’s rental has been paid in advance; and iv. that all other statements required to be made in the estoppel certificate are conclusively made.
Practical Pointer: Consider attaching a copy of the standard estoppel certificate you require tenants to sign to your lease as an exhibit. State in the lease that the estoppel certificate the tenant must sign will be “substantially” like the exhibit in case you change your standard estoppel certificate in the future. In case of a later dispute, attaching the certificate as an exhibit will make it easier to prove that the tenant understood what would be in an estoppel certificate you signed as its attorney-in-fact or would be deemed to have accepted.
Alternative 3. Tenant pays liquidated damages for not signing. The third alternative is to get your tenant to agree to pay as liquidated damages a preset dollar amount for each day past the deadline that it doesn’t return the signed estoppel certificate to you. Liquidated damages should be the third choice on your list. For one thing, it doesn’t yield a substitute that may satisfy a buyer or lender. In addition, courts won’t enforce a liquidated damages clause if they think the amount is a penalty. So, you need to set the liquidated damages as high as possible so that it serves as a true deterrent but not so high that it might be deemed a penalty. This is where you’ll need to speak to an experienced attorney. In addition, deadbeat tenants who cannot or will not pay are unlikely to be fazed by a liquidated damages clause.
Model Lease Language
If Tenant fails to execute and deliver an estoppel certificate within [insert #, e.g., 20] days after Tenant’s receipt of Landlord’s written request(s) therefor, then such failure shall constitute a material default by Tenant under this Lease, and in such event, Tenant agrees to pay to Landlord as liquidated damages therefor (and in addition to all other remedies available to Landlord) an amount equal to $[insert amount] per day for each day that Tenant fails to so deliver such certificate to Landlord after the expiration of such [insert #, e.g., 20]-day period.
Practical Pointer: A savvy tenant will want to keep the damages amount low. It may also demand that the liquidated damages be your only remedy if it defaults so that you can’t get any other damages or evict the tenant. The Chicago attorney sees no problem with negotiating this point because your real purpose is to have a way to scare the tenant into signing the estoppel certificate.
Getting Buyers & Lenders to Accept Substitutes
Getting the right to sign a certificate of estoppel as the tenant’s attorney-in-fact or stating that a tenant that doesn’t deliver a signed certificate on time is “deemed” to have accepted the document’s basic terms is all well and good as long as the proposed buyer or lender is willing to accept this solution. Unfortunately, there’s no guarantee that it will. Attorneys say that buyers and lenders generally make a case-by-case decision based on the circumstances of the transaction and their particular internal policies.
The chances of persuading a buyer or lender to accept an alternative solution are greater if the missing estoppel certificate relates only to a small or minor tenant. But with an anchor or major tenant, a lender or buyer is unlikely to accept anything other than an estoppel certificate that the tenant actually signs. Lenders tend to be more adamant than buyers on the issue, but there’s always the chance that they’ll soften their stance as the closing date nears, especially if they deem the proposed purchase or loan to be highly favorable.
For example, an Ohio attorney says that one of his landlord clients was able to persuade a lender to accept the “deemed to accept” language as a substitute for a tenant’s signed estoppel certificate. The lender also insisted on additional statements that the tenant’s lease was in effect with no defaults, which the landlord was more than willing to provide. You may also be able to satisfy lenders by promising to use diligent efforts to get the tenant to sign and deliver the estoppel certificate after the loan is funded.
Practical Pointer: Consider asking your prospective lender or buyer about its willingness to agree in advance to go forward with the loan or sale even if you can’t provide estoppel certificates from all of your tenants. For example, a lender or buyer may be satisfied with certificates from only 75 percent of the tenants, provided that those tenants include the anchor or major tenants. Just make sure that the lender spells out the compromise in its commitment letter to you and in other loan documents and that buyer does likewise in the sale contract.