LEASE AGREEMENT REFERENCE GUIDE 1590: THE HUMBLE ESTOPPEL--MAKING THIRD PARTIES TO COMMERCIAL LEASES COMFORTABLE $49.95
Making Third Parties Comfortable
This LARG concerns itself with the estoppel certificate—a standard feature of the commercial lease. The first article looks at the initial raison d’être of the estoppel as a device to be relied by third party purchasers and lenders—and how estoppels have sometimes evolved into lease exhibits, reciprocal devices in favor of both parties, and even would-be lease amendments. The Lease Clause Critique contains three lease clauses pertaining to estoppels of various flavors, and two complete forms—one for the landlord’s buyer or lender, and one for the tenant’s assignee or subtenant.
Considering the Lowly Estoppel Certificate
What could possibly be controversial about an estoppel certificate? Those modest little creatures, usually one page in length, normally have one simple but critical mission to perform. They give the purchaser or lender of a leased property a snap shot of the lease or leases that create the property’s value. In addition, a purchaser or lender can rely on the statements made by the property’s tenants contained in the estoppel. The form confirms what the landlord has been telling the buyer or lender about the property, and eliminates uncertainties about the leases, thereby facilitating the sale or loan.
Pro-landlord estoppels have traditionally contained statements by the tenant confirming the lease’s commencement and expiration dates, the amount of rent payable, the presence of prepaid rent, and security deposit, and the existence of options to purchase, expand or renew in favor of the tenant. As a result, so long as the statements contained in the certificate were in fact correct, the tenant generally had no problem executing and delivering the document. Of course, that assumed the time fuse for the tenant to provide the certificate was reasonable—ten days were probably ok, three days was way too short.
New and Improved
Commercial tenants only started having problems with the language of estoppels when lenders began “enhancing” the forms with provisions that, from the standpoint of the tenant, were really de facto amendments to the lease. Such “enhancements” usually restricted remedies available to the tenant against the landlord contained in the body of the lease, or otherwise available to the tenant under applicable law. For example, some of the following sort of provisions would pop up from time to time in pro-lender estoppels:
Making It an Exhibit
Many commercial landlords, particularly those with shopping centers, began attaching the form of the estoppel they wanted as an exhibit to the lease. The lease clause concerning estoppels referred to the exhibit, and obligated the tenant to complete that form without modification, and submit it within the allotted time period. That approach made it incumbent upon the tenant to review the form of the estoppel with care when the lease was negotiated. In some cases that didn’t happen, and the tenant was sorry it didn’t pay attention to the seemingly “routine” form of the estoppel when the lease was signed.
Major tenants also began demanding that the landlord provide estoppels if the tenant was transferring all or part of its interest in the premises to a third party via an assignment or sublease. The form of such pro-tenant estoppels executed by the landlord was quite similar to that of traditional estoppels executed by the tenant for a sale or loan.
There were two principal reasons why reciprocal estoppel clauses were confined to major space users. First, they had the leverage to negotiate a mutual clause. Second, they often had broad rights to assign and sublease without the landlord’s consent. That meant that no consent to assign or sublease documentation would need be executed as part of a lease transfer by the tenant.
Such consents customarily contained certain “estoppel type statements” by the landlord (e.g., the length of the term, the amount of rent payable, security deposit status, etc.). Since no consent was needed when the tenant had the luxury to assign or sublease without the landlord‘s approval, the tenant wanted an estoppel signed by the landlord confirming the status of the lease at the outset of the assignment or sublease. The assignee or subtenant was really in the same position as a buyer of the landlord’s fee interest in the property. They were both third parties that wanted no surprises after the deal was done.