Negotiate New and Standard Terms in Estoppel Certificate Clause

If you’re working with a prospective lender, buyer, or investor for your office building or shopping center, the last thing you want is a surprise tenant issue that can hold up or even kill the deal. Any party preparing to spend money will want to know that it won’t be blindsided later with tenant claims that it’ll be responsible for resolving. For example, a tenant could assert that you’ve defaulted on the lease for any number of reasons, such as failing to pay it for tenant improvements you agreed to or not making necessary repairs to its space. That’s where an estoppel certificate comes into play: The tenant must commit in writing the position it takes as to the status of its lease—that is, whether or not you and the tenant are performing your lease obligations adequately.

Although it's a common provision in leases, don’t make the mistake of using standard form language for your estoppel certificate clause. Changes in the economy and the need for increased flexibility on the part of owners and tenants make it crucial to tailor your estoppel certificate provisions so you end up with a clause that helps, not hurts, your interests.

Don’t Underestimate Clause’s Power

“Estoppel certificates are still a dynamic area where hotly contested issues are negotiated,” says real estate attorney Marc Leonard Ripp. And they matter in more than just lender- or buyer-driven situations. Ripp notes that new business partners or existing partners who are putting an infusion of cash into a project might want to see estoppel certificates from tenants. If the building is being converted to a cooperative or condominium there may also be a need for an estoppel certificate.

“The specific reason behind the need for an estoppel certificate might change, but the purpose is always to get an accurate understanding of what the lease says from the tenant’s point of view, as opposed to the owner’s,” Ripp emphasizes. He describes the estoppel certificate as a snapshot of the lease up until that date. The value of an estoppel certificate is that once the tenant submits a signed statement representing that everything is running smoothly with its tenancy, it can’t make contrary statements later that would compromise the owner’s deal. Once the tenant signs off on these representations, it’s estopped, or barred, from making a claim that’s inconsistent with the certificate.

An estoppel certificate carries serious weight. “Even though the estoppel certificate isn’t a contract that is executed by the owner and tenant, it’s contractually binding on the tenant,” Ripp explains. In other words, your tenant can’t represent that you have been upholding your end of the bargain, and change its story later in a way that would be detrimental to you.

Make Standard Items Work in Your Favor 

Although there are new and important issues for owners to consider when negotiating and drafting estoppel certificate provisions, don’t focus on them to the exclusion of standard terms that need to be tailored to your situation.

There are certain standard types of items in most estoppel certificates, but there’s always room for negotiation, says Ripp. Make the following items work in your favor:

Preparation costs. A typical clause will start off by obligating the tenant to pay for any expenses stemming from the tenant’s review of the estoppel certificate. A tenant’s attorney might raise the point that you should pay for costs associated with the certificate, like the tenant’s attorney’s fees for reviewing the document, but don’t agree to a reimbursement or credit, says Ripp. Instead, take the position that providing the estoppel certificate is just one of your tenant’s obligations and, therefore, shouldn’t be compensated.

Frequency. Most provisions will say that the owner can request an estoppel certificate “at any time and from time to time.” Part of the negotiation will be agreeing on when and how often you can ask the tenant, who might be afraid that frequent requests will make it impracticable for the tenant to comply. But Ripp doesn’t recommend putting a limit on the number of requests. “Tenants don’t want the requests to become a nuisance,” he says. “You can assuage their fears by specifying that certificates will be requested only for ‘legitimate, bona fide good faith business purposes,’” Ripp suggests.

Compliance period. Sometimes time is of the essence in a deal, and owners want to get estoppel certificates as soon as they can. Your tenant may argue to get a longer time period than you suggest. “There is a dance back and forth about within how many days the tenant must submit the estoppel certificate, but your urgency will depend on the size of the tenant,” says Ripp. It’s very important for you to get a larger or more valuable tenant’s certificate quickly because a third party will want to know that the business that is the major source of revenue for the property is satisfied; the need to have it delivered by a small tenant is less pressing.

Remedies. What happens if a tenant doesn’t provide its estoppel certificate? If you are savvy when negotiating ahead of time, there are ways of making certain that deadlines are met and certificates are delivered. “You could state that failure to provide the estoppel certificate is a breach, and the owner can pursue rights for eviction. But that’s not really what the owner wants; the owner would be swatting a fly with a sledgehammer,” says Ripp. He recommends building into the estoppel clause remedies that are less draconian than eviction and lease termination. After all, you simply want the signed certificate—not litigation.

• Liquidated damages. Liquidated damages are one option. During negotiations, set a dollar amount that’s due for each day the certificate is late.

Model Lease Language

If Tenant fails to execute and deliver an estoppel certificate within [insert number, 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, (and in addition to all other remedies available to Landlord) Tenant agrees to pay to Landlord as liquidated damages therefor  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 number, e.g., 20]-day period.

• Automatic approval. Another approach to compel responses is to state that if it doesn’t arrive on time, then the certificate is “deemed approved and adopted” in the form that the owner initially prepared it, Ripp recommends.

Model Lease Language

Tenant’s failure to execute and deliver an estoppel certificate within [insert number, e.g.,20] days after Tenant’s receipt of Landlord’s written request(s) therefor shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord, that there are no uncured defaults in Landlord’s performance, not more than [insert number, e.g., 1] month’s rental has been paid in advance, and that all other statements required to be made in the estoppel certificate are conclusively made.

• Power of attorney. A corollary to the “deemed approved and accepted” approach is that the owner would have a power of attorney for estoppel certificates, Ripp notes. If the tenant doesn’t deliver by the due date, the owner would be empowered to execute the estoppel certificate on the tenant’s behalf using the power of attorney.

Model Lease Language

If Tenant fails to execute and deliver an estoppel certificate within [insert number, e.g.,20] days after Tenant’s receipt of a [insert as needed: second] written request therefor from Landlord, Tenant irrevocably appoints Landlord as Tenant’s attorney-in-fact, in Tenant’s name, to execute such instrument.

New Spin on Standard Clause

The basic terms in an estoppel certificate clause might not change, but several new terms have come into play, and the way in which owners and tenants negotiate and draft estoppel certificates has changed as a result.

Grant mutual clauses. “The soft economy has encouraged tenants to make the estoppel clause mutual, because they want an exit strategy if their need for space changes—and assignment and subletting is just that,” says Ripp. He notes that, very often, parties to which leases are being assigned, or prospective subtenants, want certificates from landlords. Ripp has been seeing more assignments and sublets due to the post-recession landscape of the economy. You should have the same concerns about providing certificates as your tenant does—namely, the time within which you must comply and the frequency with which you can be asked. If you agree to give your tenant estoppel certificates, make the terms as narrow as possible, like our Model Lease Clause: Put Limits on Tenant’s Right to Estoppel Certificate.

Avoid sample certificate forms. Your negotiation strategy should change according to the new landscape of commercial real estate; it’s key to protect your own flexibility. In the past, some owners would give tenants a sneak peek at the terms that could appear in a future certificate. Many tenants still want estoppel certificate forms attached to their leases. If the sample form is short (asking for two or three items such as a statement of the rent rate and that the lease is in good standing, is in full force and effect, and hasn’t been modified, changed, or altered) the tenant might argue later that it’s not required to complete a lengthier form.

The problem with attaching a certificate ahead of time is that the owner really doesn’t know what questions will be asked, because lenders and buyers have different forms, Ripp warns. “Information in an estoppel certificate usually comes from a third party, not the owner, so to attach a form that’s fixed and limits everyone involved is troublesome,” he adds.

Broaden language in clause. Negotiate the broadest possible owner-favorable language in your estoppel certificate clause. For example, specify the shortest possible time period in which the tenant must return the certificate, and the greatest frequency for your requests. Also include an open-ended description of what can go into an estoppel certificate. To do that, you can use language to the effect that the certificate may contain “any and all items that the Landlord may require,” Ripp recommends.

Require documentation. Not only should the tenant be required to sign and submit the certificate, it also should supply a photocopy of all the documents that support the statements made in the certificate, such as a copy of the lease and any amendments. “This is a safety net in case your staff has misplaced documents that only the tenant would have a copy of in its files,” says Ripp.

Don’t Panic Over ‘Dirty’ Certificates

Sometimes, a tenant will send back a so-called “dirty” estoppel certificate. That’s one in which the tenant notes that there is a breach by the owner or problems in the premises, Ripp explains. Some owners are concerned that a tenant will use your need for an estoppel certificate as an opportunity to hold you hostage, making false claims that it can use as leverage to force you to do something it wants, in exchange for a flawless certificate. But remember that it would be fraudulent for a tenant to manufacture false claims, and sophisticated tenants know that. However, the certificate should be complete, accurate, detailed, and truthful, so a tenant must actually raise any legitimate concerns. An estoppel certificate is a great opportunity to resolve problems.

To discourage tenants that don’t play fair and encourage legitimately dissatisfied tenants to make claims that can be resolved, require in your estoppel clause that the tenant provide reasonable detail and documentation to support the allegations. Remember that this has the same effect as an affidavit—that is, the tenant will risk perjuring itself if it’s not truthful.

If you’re faced with legitimate issues in a dirty certificate, you don’t have to panic and scramble to fix problems. The certificate is just a truthful statement of a set of facts, and the lender, buyer, partner, or investor won’t necessarily terminate the transaction just because a tenant complains about something like too few parking spaces or inadequate air conditioning on unusually hot days. “If the third party has asked for certificates from specific tenants and the owner has delivered them with the information asked for, the owner has met the requirement, even if a certificate contains blemishes,” Ripp points out. The requirement from a third party isn’t that problems be immediately fixed. If serious breaches are revealed, a buyer might back away, but that would still be based on what the contract of sale allows,” says Ripp. A dirty certificate won’t necessarily affect your business.

Insider Source

Marc Leonard Ripp, Esq.: Attorney at Law, Short Hills, NJ.