Why the need for an estoppel certificate?
Simply put, the estoppel certificate is an instrument of assurance. The assurance is that what a landlord says about his lessees is true. When a landlord puts his commercial building on the market for sale, part of the due diligence a buyer will require involves obtaining estoppel certificates from each and every tenant of the landlord for his particular building. While this is rarely done in residential real estate, getting a tenant estoppel form properly filled out and signed is imperative in commercial real estate..
Traditionally, a standard commercial lease will include the right of the investment property owner to obtain this signed landlord waiver from his tenants. These fully executed documents, known in estoppel real estate parlance as estoppel certificates, provide a potential buyer of the seller’s property with honest data about the leases they have in place with the current landlord.
The landlord waiver form is then used as part of the overall due diligence by the buyer. And many times, their lender will want to review these estoppel certificates prior to extending a mortgage to the buyer. They help the lender feel comfortable about the rental amounts and terms that are in place with the seller’s building. Usually, the lender’s underwriting department will perform the review of the documents to ensure accuracy before a loan will be granted. Unlike residential real estate, commercial property rental leases are usually for much longer periods of time. However, like in residential investment property sales, these lease assignments are critical to the new owner when a building is sold.
Provisions of the estoppel letter
The estoppel certificate (also known as the estoppel letter) is traditionally filled out upon the request of the landlord. In effect, the tenant certifies that their current rental agreement and its provisions are honest and truthful. Items usually found as part of the estoppel certificate include the veracity of the lease, when it began and when it ends, what security deposits are being held by the landlord, whether the tenant has assigned the lease to another party at the time of the estoppel letter, and whether the tenant has pre-paid any rent over and above his existing monthly rent.
The main purpose of the estoppel certificate is to protect the seller of the building. It basically places the onus on each tenant that their existing lease is correct. This makes the leases fully verifiable for purposes of the new owner, as well as their lender. Most estoppel forms create an out for a tenant’s liability here – many times they will say that the tenant is certifying the lease “to the best of tenant’s knowledge.” You can check out such verbiage by looking at the California Association of Realtors commercial lease agreement as just one example (http://www.car.org/legal/standard-forms/) . The tenant estoppel form is an important landlord waiver when it comes time to place his commercial investment property on the market for sale. Ultimately, it makes a sale much easier for the seller.
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