As a landlord, understanding estoppel certificates is crucial for transparent property transactions. Estoppel certificates validate lease details, protecting against disputes during ownership changes. Learn why you should require them, their benefits, risks, and what they include. Discover which properties need them and tenants’ roles. Be aware of associated risks and costs.
If you’re a landlord, there’s a pivotal element that often remains in the background but plays a significant role in property transactions that you should know about: Estoppel certificates. These certificates are a linchpin in ensuring smooth and transparent dealings between landlords, tenants, and buyers. Acting as a vital safeguard, estoppel certificates validate critical lease details, ensuring that the terms agreed upon between tenants and landlords are accurately documented.
If you’re curious to know more, in this blog, we’ll unravel why you should consider requiring an estoppel certificate, its benefits, risks, and everything else you need to know about it to make an informed decision.
The Basics
An estoppel certificate, ensures that tenants commit to honoring their existing lease terms if you ever want to sell your property or pursue refinancing it. It requires tenants to provide specific information about the current status of their lease agreement. Once the tenant signs the certificate and it’s validated, it protects you against any potential disputes or contradictory claims regarding the lease terms that may arise, especially when there’s a change in ownership. An estoppel certificate also gives potential buyers a good idea of the leases they will be inheriting.
You may also hear an estoppel certificate referred to as an estoppel letter, a tenant rental information declaration, a rental information questionnaire, an estoppel agreement, or just as an estoppel.
5 Good Reasons To Require An Estoppel Certificate
If you’re on the fence about whether or not you should require an estoppel certificate, here’s 5 good reasons why it makes sense.
1. Legal Protection
Acquiring and maintaining estoppel certificates ensures that the terms outlined in the lease agreements remain transparent, verifiable, and legally binding for both parties involved.
2. Smoother Real Estate Transactions
Estoppel certificates streamline the due diligence process for potential buyers, lenders, or investors evaluating a property by offering comprehensive insights into tenant-landlord agreements. By ensuring that all parties involved have a consistent understanding of the lease terms, estoppel certificates facilitate a more efficient and informed decision-making process.
3. Tenants’ Financial Stability
For lenders and investors evaluating a property’s financial viability, estoppel certificates offer a snapshot of the tenants’ financial capacity and their consistent payment history. With insights from tenants’ financial reliability, it’s easier for lenders and investors to assess the property’s income potential and associated risks.
4. Up-To-Date Lease Information
Estoppel certificates offer an accurate and current overview of the lease terms. For example, any changes made to the original agreement during tenancy, such as rent adjustments or additional clauses, are documented within it.
5. Transparency and Accountability
By requiring tenants to sign these certificates, you can hold them accountable for adhering to the terms stipulated in their lease agreements, fostering transparency and accountability in the landlord-tenant relationship.
What’s Included In An Estoppel Certificate?
Standard certificates typically include:
- Lease start date and termination date
- Tenant’s full legal name and contact information
- Details of the security deposit including amounts and interest rates
- Rent payment status
- Any tenant-landlord litigations or disputes
- Any modifications to the original lease agreement
- Subleasing details
- Statement of defaults made by either the landlord or tenant
Learn more: Tips for Buying a Property With Existing Tenants
Which Property Types Require An Estoppel Certificate?
The three different property types that require and estoppel certificate include:
Multi-Family Properties
As the name implies, multi-family properties have ‘multiple’ tenants, and therefore also have ‘multiple’ leases. Even though a multi-family property may not have as many tenants as a commercial property, an estoppel certificate gives new owners a complete snapshot of what they can expect. Multi-family properties including apartment complexes and condominium buildings require estoppel certificates to verify lease details such as terms, rent amounts, security deposits, and outstanding balances for each tenant.
Residential Real Estate
Estoppel certificates aren’t as common for residential real estate as they are for multi-family or commercial properties. However, single-family homes, townhouses, and similar dwellings, especially those under homeowners’ associations (HOAs) or specific covenants, conditions, and restrictions, may need estoppel certificates to validate compliance with HOA regulations, outstanding dues, assessments, and property-related litigations. If a new owner isn’t adequately prepared to deal with these issues, it could pose a huge dilemma and significantly impact the property’s ownership transfer and ongoing management.
Commercial Properties
Commercial leases are more complicated than residential or multi-family home leases and understandably so, because the rent payments are usually much more costly. Commercial real estate leases also typically contain regular adjustments to the rent and rent abatements. Therefore, offices, retail stores, warehouses, and industrial facilities often necessitate estoppel certificates to authenticate commercial leases.
These certificates verify lease specifics like rental rates, concessions, maintenance obligations, outstanding balances, and any ongoing legal disputes between tenants and landlords, providing insights for potential buyers and lenders regarding financial standings and associated risks during property acquisition.
Tenants’ Role In Estoppel Certificates
Whether or not a tenant is obligated to complete an estoppel certificate depends on their lease agreement. If the provisions in their lease mandate that they are required to, then they must legally do so within the timeframe requested. Refusing to sign it when legally obligated to can potentially result in fines, fees, and even eviction.
However, if there is no mention of it in their lease contract they can decide to forego it without facing legal consequences. In fact, a tenant might be better off if they don’t sign it, especially if the information isn’t accurate. The certificate is considered to be legally binding, as a result, tenants could face risks related to limiting their legal rights inadvertently. However, if concessions or verbal addendums were made to the lease agreement, tenants could have those provisions protected if included in the Estoppel.
How To Account For Off-Lease Arrangements
Although formal lease agreements include fundamental tenancy terms, it’s not uncommon for landlords and tenants to make additional verbal agreements. Any informal agreements however, such as agreeing to let the tenant sublet, have a pet, or other special privileges, must be documented in the estoppel certificate, especially if they aren’t outlined in the lease.
Risks Associated With Estoppel Certificates
Signing an estoppel agreement involves certain risks that can impact both landlords and tenants.
Lack of Clarity
In some cases, tenants might be pressured to sign an estoppel certificate without fully understanding the implications or without sufficient time to review the lease terms thoroughly. Unfortunately, this lack of clarity can result in unintended consequences or misunderstandings.
Liability Concerns
As a landlord, there is a risk of assuming liabilities or responsibilities not originally agreed upon in the lease if an incomplete or inaccurate estoppel certificate is presented during a property transaction.
Future Disputes
If there are any disagreements between the information provided in the estoppel certificate and the actual terms of the lease, it could potentially lead to disputes or complications during property transactions or between landlords and tenants.
How Much Does An Estoppel Certificate Cost?
The cost of obtaining an estoppel certificate can vary depending on the complexity of the property, the number of tenants involved, and the local regulations. Generally, the fee for an estoppel certificate can range from $100 to $500 or more. In some cases, this cost could be negotiable or included within the overall transaction or lease transfer expenses.
Either way, it’s essential to review the terms of the lease agreement or consult with property management companies, real estate attorneys, or agents to determine the specific costs associated with obtaining an estoppel certificate for a particular property. Factors such as the urgency of the request, the number of tenants involved, and any complexities in the lease terms might influence the final cost.
Final Thoughts
Deciding whether or not to require an estoppel certificate in a real estate transaction depends on various factors. When evaluating whether you should or shouldn’t, it’s crucial to weigh the benefits against the complexity and cost associated with obtaining it.
For larger or commercial properties, especially those with multiple tenants or complex lease agreements, using estoppel certificates is often prudent to protect all parties’ interests and ensure transactional transparency. If you’re still unsure about how to proceed, it’s wise to consult legal counsel or real estate professionals who can provide additional guidance to help you make the right decision.