Estoppel Certificates and Their Importance to Commercial Real Estate Transactions
[NOTE: this post originally appeared on The Vanilla Shell on September 13, 2010]
The old saying in real estate that it’s “location, location, location” is not necessarily the last word when it comes to commercial real estate transactions. Whether it be a buyer or a lender, the key to a successful commercial transaction is oftentimes the income stream the property generates, particularly from its tenant or tenants. Thus, a commercial tenant has a more significant role vis-à-vis third parties with whom the landlord wishes to do business than in the residential leasing context.
Commercial leases typically address the tenant’s role in commercial transactions with a paragraph such as this:
Within ten (10) days after written notice from Landlord, Tenant shall provide an estoppel certificate to Landlord and such other party as is directed by Landlord certifying: (a) that this Lease is in full force and effect and that it has not been assigned, modified, supplemented or amended in any way (or identifying any assignment, modification, supplement or amendment); (b) the date of commencement and expiration of the Term of applicable Renewal Term; (c) that there are no defenses or offsets thereto (or stating those claimed by Tenant); (d) the amount of Base Rent or Additional Rent that has been paid in advance and the amount of security that has been deposited with the Landlord; (e) the date to which Base Rent or Additional Rent have been paid under this Lease; (f) that any Tenant improvements have been completed in accordance with the requirements of the Lease; and (g) such other information as is reasonably requested by Landlord. Tenant hereby irrevocably appoints Landlord as its attorney in fact to execute such a certificate in the event the Tenant shall fail to do so within ten (10) days of the Landlord’s notice.
Estoppel certificates are an essential component to any commercial real estate closing, be it a sale or a loan. Prospective buyers and lenders want assurances that nothing looms on the horizon to interrupt the income stream which they are buying or lending on, as the case may be. With a paragraph such as the one above, a commercial landlord has a means of inducing its tenant to provide such assurances (assuming of course, that none of the issues referenced in the certificate do, in fact, exist).
If I were a tenant signing a lease, I would absolutely not agree to the last sentence in the estoppel certificate provision quoted above. The fact that the landlord has the right to execute a legally binding document without your review and consent after only 10 days, is frankly scary.