Say that you’re the owner of a 100,000 square foot retail center. You decide that you want to refinance the property. As you shop around for financing, you show your lender copies of the rent roll that notes that the supermarket, as the anchor tenant, is paying $20 per square foot NNN with another 7 years remaining on its lease. In this strip center, the supermarket represents 65% of total NOI. If the supermarket were to leave the center, it could affect the owner’s ability to make debt payments. Consequently, the lender really needs to know that the lease is still in effect, so they ask you to have the supermarket (and other tenants) to complete a tenant estoppel certificate.
The tenant estoppel certificate will ask the tenant to confirm the rent and expenses currently being paid, and to verify that there are no past due or prepaid amounts that may not be listed in the lease agreement. Moreover, the tenant estoppel certificate will include a statement that the landlord has met all of their obligations and is not in default of the lease.
For similar reasons, a tenant estoppel certificate is also common when selling commercial real estate. The prospective buyer will want to know that the facts you’ve stated about existing leases are accurate. This gives the tenants an opportunity to address any side agreements, disputes, or unresolved issues with the existing owner. The tenant estoppel certificate is considered a legal document, and it therefore prevents tenants from presenting the new landlord with a contradictory set of facts.
Tenant Estoppel Certificates: Frequently Asked Questions
What is the Meaning of Estoppel?
According to Black’s Law Dictionary, by definition, an estoppel certificate is:
“A signed statement by a party certifying for another’s benefit that certain facts are correct, as that a lease exists, that there are no defaults, and that rent is paid to a certain date. A party’s delivery of this statement estops that party from later claiming a different set of facts.”
Estoppel is a tricky concept. The most common use of a tenant estoppel certificate is in the commercial real estate realm. In general terms, a tenant estoppel certificate is a form that owners or banks will use to confirm a tenant’s acknowledgement of certain lease details.
Are Tenant Estoppel Certificates Used in Residential Real Estate?
Now, we promised to talk about how a tenant estoppel certificate might be used in residential real estate. Quite honestly, they aren’t used very often. Usually, the lease agreement covers just about anything the prospective buyer needs to know and can easily be backed up with a copy of the rent roll and bank deposits.
A tenant estoppel certificate is also uncommon in residential real estate because the stakes are much lower. In commercial real estate, vacancies can cost much more and last much longer. Losing a grocery store as your anchor tenant is much different than having someone move out of your in-law unit. There are many more people looking for apartments than grocery stores looking for retail space, so residential landlords can usually absorb potential blows better than owners of large commercial spaces.
That said, just because tenant estoppel certificates aren’t commonly used in residential real estate doesn’t mean they shouldn’t be used more often. Here are a few examples of when a tenant estoppel certificate could make (or would have made!) a lot of sense.
Residential Tenant Estoppel Certificate Example #1
Arthur recently sold his 10-unit apartment building and, per both his lease agreements and his insurance policy, tenants were not allowed to have pets of any kind. After Arthur sells the property to John, John sees two dogs playing in the backyard. When John approaches the tenants and reminds them that they cannot have pets on the premises, they tell him that Arthur has always allowed pets. Had John realized that Arthur was running a pet-friendly building, he would have factored that into the purchase price. Properties occupied by pets sustain more wear and tear and typically cost more to insure. John could try to evict all tenants with pets, but this would be a costly endeavor for the sake of uprooting longterm residents who are otherwise great tenants. John now knows the folly in not asking for a tenant estoppel certificate prior to purchase.
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Residential Tenant Estoppel Certificate Example #2
Sally recently purchased a two-family home just outside of Boston. There was a family living in the first floor unit, and she planned to occupy the second floor unit, which was vacant at the time of closing. It came as a surprise to Sally a week after she moved into the property: the driveway she expected to park in was already occupied by three tandem-parked vehicles. She assumed that the tenants had parked here in error, perhaps taking advantage of their new, unsuspecting landlord.
Well, as it turns out, the previous owner had never indicated that the first floor tenants had previously negotiated sole use of the driveway (which functioned without issue at the time because the second floor tenants did not have a vehicle). When Sally tried to tell the tenants that this was not going to work—she and her husband both intended to park in the driveway—the first floor tenants threatened to withhold $150 in rent per month, per vehicle—the cost they’d pay for parking elsewhere. This was a terrible way to start off the landlord-tenant relationship, and a situation that could have been avoided entirely with a tenant estoppel certificate.
Residential Tenant Estoppel Certificate Example #3
Michael recently listed his 30-unit apartment building for sale. In the offering package, he noted that rents ranged from $900 to $1200 per month, which—at his suggested sale price—would provide compelling returns for prospective investors. In the meantime, he asked his property management company to start compiling documents. He asked the PM to furnish copies of all lease agreements, and asked the PM to start serving residents with a tenant estoppel certificate. When he started to receive the tenant estoppel certificates, he realized that he had actually understated rental rates. Unbeknownst to Michael, the PM had raised rents by $100 per unit, and the PM was then skimming the difference!
Residential Tenant Estoppel Certificate Example #4
Jim and Mary recently purchased a condo from another real estate investor. The condo had a great rental history, and it had been occupied by the same tenant for three years. For the first three months after closing on the condo, there were absolutely no issues. The tenants paid rent on time in accordance with the lease agreement. Then, neighbors started complaining about noise. When Jim and Mary went to investigate, they realized that the tenants were frequently throwing parties and had damaged the unit in the process. They got into a heated argument with the tenants, who then refused to pay rent for the next three months.
Eventually, Jim and Mary had no choice but to pursue eviction. The problem? When Jim and Mary went to serve the tenants with an eviction notice, they refused to sign, stating that those weren’t their names. As it turns out, the people listed on the lease had vacated the unit long ago. They had sublet the apartment (in violation of the lease) to a group of local students. The students could not be held liable for damages or unpaid rent since they were not parties to any lease agreement. Again, had Jim and Mary insisted upon a tenant estoppel certificate, they would have learned that the leases were not aligned with the information stated on the certificates.
What to Include in a Tenant Estoppel Certificate
Although the tenant estoppel certificate is not often used in residential real estate, there’s certainly a case to be made for doing so—particularly if you’re planning to purchase a new investment property. Here are some of the statements you may consider including in your tenant estoppel certificate:
- That the lease is in full force and effect
- That the lease is unmodified (either orally or in writing)
- The commencement and termination dates of the lease
- Whether there are any remaining options to extend the lease
- Whether the tenant does, or has the option to, lease/use other space in the building
- Whether there are any options to purchase the leased premises
- Whether either the landlord or tenant is in default under the lease
- The base rent or minimum rent payable under the lease
- That the tenant has made no agreements regarding free rent
- The amount of the security deposit posted with the landlord
- Whether any rent has been prepaid
- The date through which rent has been paid
- That the landlord has completed all improvements required to be made to the leased premises
- That the landlord has performed all maintenance obligations under the lease
- That the tenant is not in bankruptcy or party to any litigation regarding the premises
- That the tenant will not modify the lease without the new owner’s prior written consent
Tenant Estoppel Certificates: The Bottom Line
The tenant estoppel certificate is a tool that all investors should use as part of their due diligence process. A tenant estoppel certificate is a powerful way to cut to the chase and confirm the true facts about a deal—before you sign on the dotted line.Read more on Legal Considerations