Landlord Estoppel Agreement: What Is It?
A landlord estoppel agreement ("LE") is a document signed by a landlord or lessor (lessor is the party leasing its real property to a lessee or tenant) in which the landlord certifies the details of its lease with a tenant and acknowledges a number of different facts related to the lessee’s tenancy or lease. Depending on the transaction, a tenant estoppel agreement ("TEA") may be used instead of an LE. A TEA is similar in that a tenant can certify facts contained in their lease with a landlord to a third party who may have an interest in the real property such as a lender or purchaser.
The primary purpose of a landlord estoppel is to provide assurances and security to a lender or purchaser that the tenant actually occupies the real property and that its lease is in full force and effect, that all rents have been paid, and that the real property is not subject to any default or unfilled obligations which would allow the landlord to terminate the lease. For some landlords, a TEA may be used instead of a LE when an estoppel is requested by a tenant. The TEA affords the landlord the opportunity to certify the same information that would be normally contained in a LE. These agreements involve the same concepts and are generally utilized for the same purposes. However, more commonly it is the landlord that uses a LE to provide assurances about its commercial real estate to a prospective purchaser or lender. As a result, this article will focus on landlord estoppel agreements. Most commonly, a landlord estoppel will be used in a sale of real property. These documents are generally at the behest of the purchaser whose agreement to purchase the property will likely contain covenants of the landlord or lessee to deliver estoppels. Historically, estoppels are often found in the context of condominium or other mixed-use development properties where it is desirable to confirm facts related to the leases, lessees and even the operational aspects of the property before proceeding with a closing. Accordingly, a landlord estoppel is typically used when the property is underwritten by a lender , investor or purchaser to confirm and qualify certain aspects of the property and determine the proper legal, economic and financial condition of the real property. In other transactions -for example, where lenders or purchasers may not desire to pay for an estoppel or receive the same level of specificity- this diligence is handled through other means such as survey and/or property inspection. Drafting these documents, first, requires knowledge of what the individual transaction requires so you can tailor the estoppel to fit the needs and concerns of the parties. In some instances, a form estoppel may be used; otherwise, a custom estoppel may be drafted to fit the unique situation of the property. Almost always, a landlord estoppel must include the following information: A landlord estoppel will sometimes include additional detail related to the property and the tenant’s use of the property. For example, it will often list exceptions to the tenant’s rights of use. Both a TEA and an LE should be signed by the tenant notwithstanding that it is the landlord who typically requests the document. A TEA/LE should contain the following features: When reviewing or preparing an estoppel agreement, it is important to keep in mind that a landlord estoppel is a limited form of a subordination, non-disturbance and attornment agreement (an "SNDA"). The key concerns addressed when facing a foreclosure of commercial real estate property should also be kept in mind. While lease assignments are typically protected from future modification unless otherwise agreed, the lender is based upon the value of the real property, not the strength of the tenant’s use. Furthermore, commercially reasonable caveats are suggested. The treatment of estoppels can have a substantial impact on the value of the real property. Careful consideration should be made with each lease, and they should be considered in conjunction with all other conveyance and encumbrance documents such as deeds, financing agreements, easements, and declarations of condominium or other reservations.
The Importance of Estoppel Agreements for Tenants and Landlords
Estoppels provide significant protection for a tenant because they assist the tenant in preserving its rights both in and to the lease. Tenants have nothing without the lease and the tenant’s good standing under the lease. The estoppel acts as a confirmation of the status of the tenant and the lease. Once signed, the landlord cannot represent the status of the lease and/or the rights of the tenant differently than in the estoppel, otherwise the landlord will be bound by the statements in the estoppel. This assists a tenant from being harmed by inaccurate and/or false representations of the landlord. It also prevents the landlord from later falsely asserting that a default existed as of a certain date or with respect to a particular event in default. It gives a tenant certainty that it has complied with all obligations and is not in default and landlords cannot undermine that certainty.
Estoppels also provide significant protection for a landlord because they protect the landlord from assertions by a tenant to the contrary, including that the tenant is not in default, that any rent payable under the lease is paid through the date of the estoppel, and that there are no outside agreements between the landlord and tenant modifying the terms of the lease, only those found in the lease itself. Once signed, and delivered, the landlord is bound by the statements contained in the estoppel to be true and correct assuming proper knowledge for purposes of being able to make the statements in the estoppel.
Implications of Estoppel Agreements on Property Transactions
In addition to acquisitions, refinancings and groundleases and over leases, the necessity of providing an estoppel for a sale of the mortgaged property, a syndication or other form of sale of property is increasingly common. Many institutional investors (including insurance company or pension fund lenders) will insist on an estoppel prior to releasing their first mortgages on properties in connection with a sale of property. Credit of the seller or purchaser may not be adequate protection for a lender to provide additional mortgage dollars in connection with the sale so another level of comfort is needed and the estoppel provides that comfort. An estoppel in connection with an acquisition of property may, depending on the credit of the purchaser, make it more likely that the buyer can get his loan from other lenders either directly or by financing an acquisition loan on a participation basis with the senior mortgages held by the institutional lender. Estoppels are also desirable to purchasers in connection with sales of groundleased land under improvements to investment grade single tenant properties. Many institutional investors will not acquire a sale leaseback interest in a property unless they have an estoppel from the ground tenant. In a refinancing of an existing mortgage secured by a ground leased asset, an estoppel may be required by the refinancing lender who is taking the second position behind the existing mortgage lender. The existing mortgage lenders may require an estoppel in connection with a refinance or may have an acceptable term for the subordination of the new loan to the existing loan as a matter of course.
Essential Elements of a Landlord Estoppel Agreement
Typically, the principal components of these forms are: (1) the identity of the tenant; (2) the term of the lease; (3) the base rent under the lease; (4) the current fixed charges and percentage rent due; (5) any existing defaults by the tenant; and, (6) the tenant’s right to make alterations to the property. In addition, a form of estoppel agreement may require an attornment by the tenant to the lender. The required attornment clause will provide the lender the right to enforce the lease against the tenant as if the lender were the landlord, upon taking ownership of the real estate. The lease terms of the form of estoppel become binding upon the lender once it takes title to the property. The lender is also provided with a waiver of the tenant’s right of offset under the lease, and/or a waiver of the tenant’s rights to defenses against the enforcement of the lease, which may be used by the lender to defeat any present obligations of the tenant to the landlord.
The landlord’s representations under the form are usually a summary of the more significant terms of lease between the landlord and tenant. Lender’s estoppel forms will, however, typically require additional information from the borrower including, but not limited to: (1) current tenant rental payment history; (2) tenant default history; (3) disclosure of any pending or potential litigation between the landlord and tenant; (4) a current property operating budget; (5) an aging summary of tenant accounts receivable; and, (6) information concerning any proposed changes in ownership of the property which may impact the lender’s security.
Circumstances Where an Estoppel Agreement Is Necessary
Common scenarios that require an estoppel agreement include the following:
- (1) The sale of the Property. Both buyers and sellers are cautious about purchase agreements and want to know where they stand in the event of a dispute. Opinion letters are not always enough for comfort. Lenders (the buyer’s lender) want to know what deals the tenant has made. A landlord’s estoppel agreement provides the lender with a picture of the lease relationship. In addition, a buyer wants the ability to assume the seller’s lease and avoid liability for any acts or omissions of the seller or others occurring before the closing.
- (2) A proposed change in the ownership. A proposed change in the ownership of the leased property may trigger an event of default as defined in the lease itself. A review of the specific language is recommended.
- (3) An equity investment. An equity investor wants to know where it stands before taking the situation over.
- (4) A potential bankruptcy. If a tenant is seriously thinking about bankruptcy , a Creditor/Landlord should look closely at its lease terms and language, covenant and usage rights for any potential valuation and exposure issues with selling the lease or allowing a bankruptcy sale.
- (5) A proposed lease financing transaction. Landlords want to ensure their leases are valid, enforceable and properly assigned. Tenants on the other hand want to ensure they will have continued use of their improvements. Refinancing may require modification to the leases. For example, a tenant may have reduced charges or rent due on a variable term lease. Also, a tenant may need to agree to fix or after appraisal adjustments. These changes however change the picture of the lease to the lender. A landlord’s estoppel agreement provides a picture of the lease relationship and provides the lender with an understanding of the tenant’s obligations for approval.
Legal Ramifications and Considerations
Each party to the agreement should consider the following legal implications of entering into a landlord estoppel agreement: If the lease has not been recorded, the lessee and lessor have not changed its terms or the rights thereunder, the lease agreement is not affected by the landlord estoppel agreement.
A landlord estoppel agreement is not an assignment of any right or the transfer of any obligation of the tenant. The tenant is bound thereby, only if he signs it. If the change in the person entitled to receive rental or in the person by whom the rental is payable is, because of a default of the landlord, provided for in a written agreement, such change does not include any of the tenancies created by the lease agreement being ceded by the tenant.
Preparing and Reviewing an Estoppel Agreement
There are a few important steps to take when drafting and reviewing an estoppel agreement. Consider including the following information:
• Identity of parties – Name the primary and secondary landlord and tenant automatically authorize the tenant to provide consent to the conveyance transaction on the form.
• Description of the property – Include a legal description and a street address of the property to distinguish it from all other properties and leases.
• Current terms and status of lease or occupancy agreement – Identify the name of the tenant, when rent is due, terms of payment, amount of rent and frequency of payment (i.e., monthly, annually), any current arrearage, total amount due at date the estoppel is signed (i.e., through 30 days beyond the date of the signature), renewal provisions, security deposit, rights of first refusal, options to purchase, easements granted, collateral agreements, relocation agreements or voidable contracts.
• Identify other lease or occupancy agreements – Identify rights of tenants under any other agreements that are not addressed in the primary lease that may give a right of first refusal, option to purchase, easements or other effect on value or use of improvements.
• Condemnation – Identify whether the primary lease is subject to any condemnation proceedings.
• Build-out – Identify the builder, contractor or developer of improvements who may have a lien on the property for any construction costs.
To ensure accuracy and compliance with applicable real estate laws and for the protection of the signer, particular care should be taken in regard to the preparation and review of these documents.
Remember, a landlord estoppel agreement is a contractual agreement between the two parties. While there is no state law or official statute to specifically cover this document, it may become relevant if the deal should fall through. An accurate and compliant agreement with a singular focus on the interests of tenants can mitigate the pending fallout should the deal turn sour.
Questions and Answers about Landlord Estoppel Agreements
How does a landlord estoppel agreement work?
In its simplest terms, an estoppel is a bar that prevents someone from qualifying or asserting something contrary to an existing fact or state of affairs. Landlord estoppel agreements function as contracts between landlords and tenants, though the specifics of the arrangement can depend on the existing lease and desires of each party.
What happens if a landlord fails to sign an estoppel agreement?
The consequences of failing to actually sign the estoppel statement depend on the situation. For example, if the landlord doesn’t sign the statement, the tenant might have a case for damages. On the flip side, the sale could fall through if it is contingent upon acquiring these statements.
What details should be included in a landlord estoppel agreement?
The contents of each landlord estoppel agreement will, of course, vary between different agreements. However, a few details are standard across many agreements: It’s a good idea to discuss any concerns with the other party and make requests before the agreement is signed.
What if the landlord or tenant refuses to sign a landlord estoppel agreement?
If you’re a tenant , you have two primary options if the landlord refuses to sign an estoppel agreement: A landlord has a responsibility to live up to the terms of a lease, which includes signing a landlord estoppel agreement upon written request if the lease is contingent on it. If a landlord doesn’t sign an estoppel agreement, it could open the door for an injured party to claim compensatory damages.
What is the requirement for a landlord estoppel agreement to be upheld in court?
If it is in writing, a landlord estoppel agreement is generally a valid contract. As such, unless there is another law that prevents enforcement of the contract (such as the Statute of Frauds), a court will consider them enforceable. However, if a party fails to live up to the terms of the contract, the other party may be able to pursue financial damages against the negligent party. The specifics depend on the existing lease and circumstances surrounding the contract.