Protect Against Risks of Signing Estoppel Certificate for Tenant
It's common for owners to require tenants to sign an estoppel certificate. But don't be surprised if a tenant that wants to assign its lease or get financing demands that you sign an estoppel certificate and give it to a prospective assignee or lender. Many prospective assignees and lenders won't go ahead with the deal unless they get assurances in an estoppel certificate signed by the owner that the tenant's lease is still effective and that the tenant is in good standing.
But signing an estoppel certificate can be risky. If you sign the tenant's or its lender's form of estoppel certificate, you may be certifying that the tenant has complied with all of its lease obligations—when in fact it hasn't. Or you may be certifying the accuracy of more information than is necessary. Either way, you could end up getting burned. For example, you could unintentionally give up a valuable lease right.
New Jersey attorney Marc L. Ripp suggests that you add certain protections to your lease that can help you if the tenant wants you to sign an estoppel certificate. And instead of signing the tenant's or its lender's form, Ripp advises that you give the tenant your form of estoppel certificate so that you can better limit its contents. There's a Model Lease Clause on p. 2 that includes the recommended protections. There's also a Model Form on p. 3 that you can adapt and use for your estoppel certificate.
Five Protections for Your Lease
Make sure that your lease, like our Model Lease Clause, includes these five protections:
* Require Tenant to Meet Three Conditions
Require the tenant to meet three conditions before you'll give it a signed estoppel certificate, says Ripp. They are:
No lease violation. Say that you'll give the tenant an estoppel certificate only if hasn't ever violated the lease, says Ripp [Clause, par. a(i)]. If the tenant argues that this is too harsh, consider requiring only that the tenant must not currently be in violation of the lease, he says.
Processing fee paid. Make the tenant pay you a fee for giving it an estoppel certificate, says Ripp [Clause, par. a(ii)]. This fee should be fair and reasonable, he says. But make sure it's high enough to cover your time and costs for drafting the estoppel certificate, he adds.
Notice received. Require the tenant to send you a formal, written notice that it wants the estoppel certificate, says Ripp [Clause, par. a(iii)]. Don't agree to accept an oral notice, especially if the lease sets a delivery deadline for the estoppel certificate, he warns. It's very easy to lose track of an oral notice.
* You Prepare Estoppel Certificate
Say in the lease that you'll prepare the estoppel certificate, says Ripp [Clause, par. a]. This way, the tenant can't force you to sign its form, he explains.
* Certificate's Content Must Be Satisfactory to You
Say in the lease that the form and content of the estoppel certificate must be satisfactory to you, in your sole and absolute discretion, says Ripp [Clause, par. a]. Then you can control what the estoppel certificate says, he explains. And you can keep out unwanted and unnecessary language that the tenant or its lender might ask you to include.
This protection is vital, Ripp says. When the tenant notifies you that it needs an estoppel certificate, it's likely to ask you to broaden the content of your form. For example, it may want you to include a representation—that is, your assurance—in the estoppel certificate that there are no environmental problems in the space. But since that's something you may not know about without a thorough (and expensive) investigation, you can refuse to add that representation on the basis that it's not satisfactory to you, he says.
* Give Yourself Enough Time to Prepare Certificate
Give yourself enough time to prepare the estoppel certificate properly, says Ripp. He suggests getting 30 days [Clause, par. a]. If you don't have a reasonable time in the lease, a tenant might try to bully you into giving the estoppel certificate to it too quickly, he says. Ripp has seen some tenants demand delivery of an estoppel certificate in as little as three days. If they don't get it by then, they demand free rent or other cash penalties, he says.
Practical Pointer: Some tenants might want protection against your failure to sign an estoppel certificate by the deadline. It may demand the right to prepare a certificate that you're “deemed” to have approved, warns Ripp. Don't give in to this demand.
* Limit Number of Certificates Given Per Year
Limit the number of times per year the tenant can ask you to sign an estoppel certificate, says Ripp. He recommends that you hold a tenant to no more than two or three estoppel certificates per year [Clause, par. b]. It's not worth the hassle for you to do more.
Five Protections for Estoppel Certificate
When preparing your form of estoppel certificate, make sure that, like our Model Form, it includes these five protections, says Ripp:
* Limit Information You Certify as True
Certify to as little information as possible in the estoppel certificate, says Ripp. The more you include, the more there is that could turn out to be inaccurate and be held against you. The certificate should cover only basic information, such as:
Lease in effect and its term. Say whether the lease is in full force and effect, says Ripp. Also, list the commencement and expiration dates of the current lease, he adds [Form., par. 1(a)].
Entire agreement. Say whether the lease is the “entire written agreement” between you and the tenant regarding the space, says Ripp. If there have been any amendments to the lease or other written agreements, say so, advises Ripp. If not, say that there haven't been any [Form, par. 1(b)].
Minimum rent. List the tenant's current annual minimum rent, says Ripp. And indicate through which date the rent has been paid, he adds [Form, par. 1(c)].
Security deposit. Give the cur- rent amount of the tenant's security deposit you're holding, says Ripp [Form, par. 1(d)].
* Don't Say There Are No Lease Violations
Instead of saying that there are no outstanding lease violations—say only whether you've notified the tenant of any lease violations that haven't been cured—that is, fixed—says Ripp. This language protects you, he says, because there may be outstanding lease violations that you don't know about, he explains [Form, par. 1(e)].
* Keep Your Right to Take Action Against Tenant
State your right to go after the tenant for any lease violation that you didn't know about when you signed the estoppel certificate, says Ripp. Otherwise, if you discover such a lease violation after you sign the estoppel certificate, the tenant may argue that you waived your right to take any action against it, he explains [Form, par. 2].
* Limit Certificate to Your ‘Actual’ Knowledge
Say that the information you're certifying in the estoppel certificate is based on your “actual” knowledge—without having to conduct an investigation, says Ripp. You don't want to spend time and money investigating whether the tenant has complied with its lease obligations, he says. The tenant could use your investigation results against you if they later turn out to be faulty, he warns [Form, par. 3].
* Limit Your Liability
Say in the estoppel certificate that you aren't liable for damages to someone who read the estoppel certificate and may have gotten hurt by relying on what you said in it, says Ripp [Form, par. 4]. Ideally, this would protect you if, for example, your estoppel certificate says that there are no lease amendments, but the assignee later discovers that there's a lease amendment barring the type of use it wants to carry on in the space.
Is this limitation enough to stop the assignee from suing you? It probably won't be effective against an assignee that hasn't agreed to it in writing, but it's better to include it than not, says Ripp.
CLLI Source
Marc L. Ripp, Esq.: General Counsel, The Gale Company, 100 Campus Dr., Ste. 200, Florham Park, NJ 07932; (973) 301-9500; mripp@thegalecompany.com.