A tenant estoppel certificate is often associated with the due diligence phase of prospecting a purchase of the tenant-occupied property. Estoppel certificates are common practice in commercial transactions but are often an unfortunate oversight in tenant-occupied residential purchases. So, what exactly is a tenant estoppel certificate and how does it work?
What is a tenant estoppel certificate?
A tenant estoppel certificate is a signed statement by the tenant(s) certifying for another’s a benefit (in this case, the buyer) that certain facts are correct. Facts such as the existence of the lease, certain terms and conditions and current status of the lease. The tenant is then estopped, or prohibited, from later claiming a different state of facts.
What items are typically found in a tenant estoppel certificate?
- That a lease exists and is in full force and effect;
- That there are no defaults under the terms of the lease by either the landlord or tenant;
- The amount of each security deposit made, if any;
- That the tenant has no claims, defenses or offsets against payment of rent or enforcement of the lease by the landlord; and
- The amount of any rental payments made in advance, if any.
Good leases will have a provision requiring the tenant to provide to the landlord a tenant estoppel certificate upon request, but the details of what is included in the tenant estoppel certificate vary. Click here for an article I guest wrote on essential lease terms. The list above is a good starting point but is not meant to be an exclusive list.
Why is it important?
As stated above, having a tenant estoppel certificate is an important step in the due diligence process for a prospective buyer of tenant-occupied real estate. The certificate helps minimize the buyer’s risk and provides the buyer with more certainty and reliability in estimating the cash flow of the property. A tenant estoppel certificate will prevent the unwanted situation of purchasing a tenant-occupied property only to subsequently have the tenant claim they prepaid rent, were given permission to have pets, paid a larger security deposit then what is referenced in the lease, or any number of other claims unknown to the purchaser. The documents can also serve as early warning signs of a potential tenant dispute or default that could interfere with the projected revenue stream.
Tenant Estoppel Certificates – The Bottom Line
Tenant estoppel certificates provide prospective buyers assurance as to certain facts of the landlord-tenant relationship, the enforceability of the lease and if there are potential claims a tenant has against the landlord. The problem this author frequently encounters is that the majority of residential purchase agreements do not require or even contemplate a tenant estoppel certificate. Therefore, if you are buying tenant-occupied real estate, it is best practice to consult a qualified real estate attorney in the state where the property is located to help you modify or write your purchase agreement to require a tenant estoppel certificate and take advantage of a simple, but powerful tool.