- Don't overlook stuff in the back of commercial lease | Expert column
- February 26, 2018 | Author: John E. Pearson
- Law Firm: Willcox & Savage, P.C. - Norfolk Office
The average commercial lease can be daunting to review. Often containing numerous pages, your eyes may begin to glaze over after key provisions like rent and operating expenses are dealt with in the front of the lease.
It can be difficult to surmise what all of the boilerplate language in the back of the lease means, and why any of it is necessary.
Here is a portion of a sample tenant estoppel certificate provision commonly found in commercial leases:
Tenant shall at any time upon not less than 20 days prior written notice from landlord, execute and deliver to landlord a statement in writing certifying the lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification), the amount of any security deposit, and the date to which the rent and other charges are paid in advance; and acknowledging there are not, to tenant’s knowledge, any uncured defaults on the part of landlord hereunder, or specifying such defaults if any are claimed.
When a potential purchaser or lender whose loan is secured by commercial property performs its due diligence, a key piece of information is the income stream generated by leases currently in effect, as well as the terms of such leases.
A purchaser or lender will also want to know if there are any defaults, or any other types of disputes. Therefore, the purchaser or lender typically requires the landlord to obtain estoppel certificates that outline the key terms of the lease and the nature of any defaults and/or disputes.
The purchaser or lender usually wants to see language in the estoppel certificate stating the tenant acknowledges the information in the certificate may be relied upon by the purchaser or lender. In anticipation of the need for estoppel certificates in the event of a sale or loan transaction, most commercial leases contain a section requiring the tenant to sign such a certificate upon the landlord’s request.
FOR BOTH PARTIES
Estoppel certificates legally bar the tenant from disputing any facts set forth. Once the potential buyer or lender has the estoppel certificates in hand, there is a greater level of comfort the terms in the corresponding lease are, in fact, the terms the landlord and tenant are performing under.
All of this may seem innocuous enough during lease negotiations, but when a tenant is faced with signing an estoppel certificate during the term of the lease, tenants are often and understandably reluctant to do so. Remember, since the tenant is barred from disputing facts in the estoppel certificate at a later date, the tenant may have trouble making a future claim against its landlord.
For instance, if the landlord was in default under the lease at the time the estoppel certificate was signed and it states no such landlord default exists, the tenant may be out of luck.
Further, since an estoppel certificate often states the contents may be relied upon by a third party, a tenant faces potential liability from a purchaser or lender if any statements are false. On the other hand, it is usually critical for the landlord to receive these tenant-executed estoppel certificates in order for the landlord’s sale or loan transaction to close.
How can a savvy tenant or landlord protect themselves when negotiating the estoppel certificate provision in a commercial lease?
GUARD AGAINST SURPRISE
For the tenant, it may be helpful to include an estoppel certificate as an exhibit to the lease so there is no surprise when the time comes for a tenant to sign one. More importantly, the tenant should require language be added stating the tenant certifies “to the best of tenant’s knowledge” the contents of the estoppel certificate are true.
This may allow the tenant to make a reasonable claim the contents of the estoppel certificate were not accurate and/or to avoid potential future liability.
On the other side, language in the lease should allow the landlord to sign an estoppel certificate on the tenant’s behalf in the event the tenant does not sign the certificate within a certain period of time.
Further, a landlord will typically expressly state failure to comply with the estoppel certificate obligation constitutes a default.
Estoppel certificate provisions should not be overlooked. When a landlord tries to sell or finance commercial property, these certificates are often a critical piece in closing the deal.
If a tenant does not sign the estoppel certificate and the landlord has no reasonable remedy to force the tenant’s hand, an advantageous deal for the landlord may be thwarted.
On the other hand, a tenant should guard against being barred from claiming an unknown landlord default and/or potential future liability.