Estoppel certificates are often treated as routine and are often blithely signed by commercial and residential tenants upon request by landlords. On closer examination, however, such certificates may present risks to the unwary tenant and landlord.
What is an Estoppel Certificate?
An estoppel certificate is a legally binding document whereby a tenant represents or promises certain things regarding its lease or rental agreement to be true. The topics normally recited in an estoppel certificate relate to the tenant’s relationship with the landlord and the status, as of the date of the certificate, regarding certain terms of the lease. Common topics addressed in an estoppel certificate include:
- Dates: When the lease started, when it was last renewed and its expiration date;
- Rent: The amount of the monthly rent the tenant pays and what may be due over the term of the lease;
- Defaults: Whether either party is in default under the terms of the lease;
- Contact information: The parties’ addresses, phone numbers and email information;
- Deposits: Whether any deposits have been made by the tenant and if interest is being collected, how the deposit can be used etc.;
- Renewals or Extensions: Whether such provisions are included in the lease and if so , the terms and the notification periods; and
- Full Force and Effect: Verification that the lease is unmodified and in full force and effect and if the lease has been modified, then the estoppel certificate will normally include a statement verifying what modifications have been made.
On a more fundamental basis, Black’s Law Dictionary defines “estoppel certificate” as “[a] signed statement by a party, such as a tenant or a mortgagee, certifying for the benefit of another party that a certain statement of facts is correct as of the date of the statement, such as that a lease exists, that there are no defaults and that rent is paid to a certain date. Delivery of the statement by the tenant prevents (estops) the tenant from later claiming a different state of facts.” (Black’s Law Dict. (6th ed. 1990) p. 551, col. 2) “An estoppel certificate binds the signatory to the statements made and estops that party from claiming to the contrary at a later time.” (Cal. Practice Guide: Real Property Transactions (The Rutter Group 1999) P 7.292, p. 7-73 (rev. # 1 1997).)
When is an Estoppel Certificate Required to be Signed by a Tenant?
Execution and delivery of an estoppel certificate is generally controlled by a specific term in the lease itself. Such a provision typically provides:
Tenant agrees, from time to time, within 10 days after request of Landlord, to execute and deliver to Landlord, or Landlord’s designee, any estoppel certificate requested by Landlord, stating that this Lease is in full force and effect, the date to which rent has been paid, that Landlord is not in default hereunder (or specifying in detail the nature of Landlord’s default), the termination date of this Lease and such other matters pertaining to this Lease as may be requested by Landlord.
The contents of an estoppel certificate which a tenant is contractually bound to sign is usually no more detailed than what the lease term regarding the obligation requires. Often, a landlord will request that topics be included in the certificate that exceed the requirements under the lease. Should such a request be made, counsel for a tenant might want to consider limiting the statements in the certificate only to what is required, or qualifying the accuracy of the extra terms, if the potential exists for changed circumstances down the line.
Purpose of an Estoppel Certificate
The purpose of an estoppel certificate is usually twofold: (1) to give a prospective purchaser or lender accurate information about the lease and the leased premises and (2) to give assurance to the purchaser that the tenant at a later date will not make claims that are inconsistent with the statements contained in the estoppel certificate. It is the latter purpose which can cause problems if not carefully addressed.
How an Inaccurate Estoppel Certificate Can Create Future Problems
In the case of Plaza Freeway v. First Mt. Bank, the defendant occupied a commercial building under a twenty-five-year-lease that was ambiguous as to its commencement and termination dates. (Plaza Freeway v. First Mt. Bank, (2000) 81 Cal. App. 4th at 619).) In connection with a sale of the building the landlord requested that the tenant sign an estoppel certificate setting forth the lease’s commencement and termination dates. Defendant tenant understood that it had an option to extend the lease term which required the tenant to notify the landlord twelve months prior to expiration of the lease in order to effectively exercise the option. When the tenant attempted to exercise the option to extend the term, years after the acquisition of the building by the new landlord, the landlord claimed that the notice was untimely and past the notification deadline based on the representations regarding the term of the lease that the tenant had made in the estoppel certificate executed at the time the landlord purchased the building. The tenant disagreed and remained in possession of the property. The landlord sought eviction.
In Plaza Freeway, where the exact termination date was unknown, the estoppel certificate served to set forth the key terms of the lease agreement, as understood by the tenant at the time of plaintiff/landlord’s purchase of the property. Notwithstanding the tenant’s estoppel certificate, the trial court concluded that the actual expiration date of the initial lease term was some eight months later than the date reflected in the estoppel certificate. The court of appeal reversed, finding that the estoppel certificate was a “written instrument’’ for evidentiary purposes under California law, and the tenant was estopped from contradicting the termination date it had represented in the estoppel certificate.
The Plaza Freeway Court concluded that “estoppel certificates are almost always used in commercial real estate transactions. They inform lenders and buyers of commercial property of the tenant’s understanding of the lease agreement. Lenders and buyers rely upon the certificates in finalizing loans and purchases. Thus, application of [California Evidence Code] Section 622 to estoppel certificates would promote certainty and reliability in commercial transactions. A contrary conclusion would defeat the purpose behind the widespread practice of using estoppel certificates.’’ (Plaza Freeway, 81 Cal.App.4th at 628, 629.) Therefore, in failing to exercise its option to renew the ground lease within the one-year time period before the termination date and in remaining on the premises after that date, defendant/tenant was guilty of unlawful detainer.
Under Plaza Freeway, statements made in an estoppel certificate, especially regarding terms or provisions of a complex lease which may be vague, become critical and can effectively trump the parties’ original understandings of those terms. In this regard, landlords need to be careful in reviewing the contents of certificates they receive from tenants to make sure that lease terms are not being manipulated in the exercise. Both parties to a lease therefore must take care to make sure that the information contained in the estoppel certificate is accurate and complete in order to protect their rights. A tenant should carefully review its lease, addendum, and any other contracts or agreements it has with the landlord prior to completing an estoppel certificate at the landlord’s request. If it appropriate to include reference to such agreements as part of representing the terms of the Lease, then those terms can be added to the certificate.
The issue becomes more salient where the parties have informally reached agreements which may not have been documented by amendment or modification; or where the parties may have actually litigated or arbitrated a lease term and have remained parties to the lease. In such circumstances, an opportunity arises in the context of the estoppel certificate for the tenant to clarify by its representations what it understands the terms to be. Here is where disagreements over an estoppel certificate can arise. The landlord may request a simple certificate stating the date of termination, that there are no defaults, and that the rent is current. The tenant may want to add provisions that it thinks are part of the lease terms as a result of informal agreements, an arbitration award on a prior dispute, or even based on custom and use of the leased premises. Creative counsel for the tenant might choose to address these additional lease terms directly in the certificate, submit it to the landlord, and should a dispute arise later argue that the certificate should be given legal effect under the holding in Plaza Freeway. On the other hand a landlord may object to addition of the additional matters, arguing that it is unnecessary and not responsive to the notion that the tenant must sign a certificate containing only the information called for by the provision of the lease regarding estoppel certificates.
An example recently encountered by the author’s firm involved how to reflect certain findings regarding the definition of the leased premises that had actually been arbitrated to a final award and ultimately entered as a judgment. When asked to submit an estoppel certificate in connection with the landlord’s sale of the property, the tenant included clarification from the arbitration award as to the definition of the leased premises; realizing that if he did not, and the new owner relied on the original lease terms alone, the tenant could conceivably lose the clarifying findings regarding the leased premises included in the arbitration award. In California even an unconfirmed arbitration award has “the same force and effect” as a contract between the parties and once an arbitration award is confirmed it becomes a judgment enforceable in the usual ways. (California Code of Civil Procedure §§ 1287.4 and 1287.6.) Thus where parties to a lease have litigated or arbitrated lease terms and the opportunity arises later to reflect terms in an estoppel certificate, consideration should be given to using the opportunity to address the changes.
Despite the routine use of these seemingly benign statements, estoppel certificates should be carefully considered by all parties to a lease when a request for submitting one comes the tenant’s way.