Remedies for Failure by a Commercial Tenant to Sign Estoppel Certificate


Remedies for Failure by a Commercial Tenant to Sign Estoppel Certificate

What are a landlord’s remedies when a commercial tenant refuses to sign a tenant estoppel certificate or estoppel letter as required by the lease?

Please note that, while this article accurately describes applicable law on the subject covered at the time of its writing, the law continues to develop with the passage of time. Accordingly, before relying upon this article, care should be taken to verify that the law described herein has not changed.

What Is a Tenant Estoppel Certificate?

By definition, an estoppel certificate is a “[a] signed statement by a party (such as a tenant or mortgagee) certifying for another’s benefit that certain facts are correct, such 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 state of facts.” Black’s Law Dictionary (9th ed. 2009). In other words, an estoppel certificate is a statement by a party having an interest in property that describes that interest so that other parties contemplating taking an interest in the same property will be informed about the nature of that interest.

“Estoppel” is the legal term for preventing a person from asserting a claim inconsistent with a position he previously maintained. Consequently, the purpose of an estoppel statement is twofold: (1) to give the prospective purchaser or lender information about the lease and the leased premises and (2) to give assurance to the purchaser or lender that the lessee at a later date will not make claims that are inconsistent with the statements contained in the estoppel. Alvin L. Arnold & Jeanne O’Neill, Real Estate Leasing Practice Manual, § 35.1 (West 2005); see e.g., Plaza Freeway Ltd. P’ship v. First Mtn. Bank, 81 Cal. App. 4th 616, 628, 96 Cal. Rptr. 2d 865, 873 (Cal. Ct. App. 2000) (“[E]stoppel certificates are almost always used in commercial real estate transactions. They inform lenders and buyers of commercial property of the tenant’s understanding of the lease agreement. Lenders and buyers rely upon the certificates in finalizing loans and purchases.”); Miner v. Tustin Ave. Investors LLC, 116 Cal. App. 4th 264, 273, 10 Cal. Rptr. 3d 178, 183 (Cal. Ct. App. 2004) (“By providing independent verification of the presence or absence of any side deals, estoppel certificates prevent unwelcome post-transaction surprises that might adversely affect the building’s income stream . . . .”); In re Aslan, 909 F.2d 367, 369 (9th Cir. 1990) (“A certificate of estoppel is a tenant’s warranty as to the terms of a lease, and thus would enable [the purchaser of the property] to estimate the cost of ousting or keeping a tenant. Aside from being a source of information, however, the certificate of estoppel would be of considerable value to [the purchaser] in the event of litigation with a tenant, since a tenant cannot contradict the certificate’s contents, having once warranted them as true”).

When a landlord decides to sell a piece of commercial rental property, he or she will request that tenants complete and sign a tenant estoppel certificate. See, e.g., Freshman v. Attaboy Mfrs. Representatives, Inc., 1993 Ohio App. LEXIS 630, *12, 1993 WL 20061, *4 (Ohio Ct. App. 1993) (“Estoppel certificates are useful devices to preserve and enhance the marketability of commercial property.”); Miner, 116 Cal. App. 4th at 273, 10 Cal. Rptr. 3d at 183 (“Estoppel certificates are equally critical to landlords because they affect their ability to sell commercial real property and to secure financing.”). Typically, the prospective buyer or lender will require the landlord to obtain such certificates from its tenants and present them to the buyer or lender for use in its due diligence review of the property. Lenders and buyers need tenant estoppel certificates in order to best understand the economics of the lease and to determine any potential exposures they may face as owners of the property.

An estoppel certificate requests information about numerous facts, including: (1) the amount of rent payable under the lease; (2) the commencement and duration of the lease; (3) the date through which rent has been paid; (4) whether there is any prepaid rent in excess of one month; (5) the names of the tenants; (6) whether the lease is in full force and effect and has not been assigned, modified, supplemented, or amended; (7) the current monthly rent; (8) whether there are options to renew the lease; (9) whether there are any defaults; (10) whether there are any existing claims, defenses, or offsets which the tenant has against the enforcement of the lease; (11) whether the tenant has sold, pledged, subleased, or otherwise transferred any portion of its leasehold interest; (12) whether there are any agreements with respect to payment of utilities, e.g. water and gas; (13) whether any security deposit has been deposited with the landlord; (14) whether all conditions under the lease to be performed by the landlord have been satisfied; and (15) whether any required contributions by the landlord to the tenant on account of the tenant’s improvements have been received by the tenant. In short, the estoppel agreement outlines the nature of the relationship between the landlord and tenant.

Is a Tenant Obligated to Complete an Estoppel Certificate?

A standard commercial lease will include a provision requiring the tenant to complete and return an estoppel certificate upon the landlord’s request, usually within a relatively short period of time. The operative provision will usually read something like: “The tenant, upon 15 days written notice, must deliver to the landlord an estoppel certificate stating . . . .” The lease will detail what the tenant is expected to provide.

Some leases provide that if the tenant does not complete the requested estoppel certificate and return it by a certain deadline, the landlord may complete it as the tenant’s attorney-in-fact. Other leases say that the tenant’s failure to timely return the estoppel certificate is deemed to be an admission that everything set out in the requested estoppel certificate is true. Still others pronounce that if the tenant fails to deliver the requested estoppel certificate in a timely manner, the tenant must pay a monetary penalty or will be liable for all damages incurred by the landlord as a result of the failure to timely return the estoppel certificate.

As a matter of contract law, a tenant must sign an estoppel agreement when the lease contains a provision requiring the tenant to do so. This requirement can be enforced just like any other contractual provision, and the remedies, as outlined infra, are similar. See Riggs v. Murdock, 10 Ariz. App. 248, 252, 458 P.2d 115, 119 (Ct. App. 1969) (“[T]he relationship of landlord and tenant is governed by principles of property law as well as contract law.”).

In the absence of such a lease provision, however, a tenant is not required to complete and sign an estoppel agreement. In fact, signing the certificate will likely be to the tenant’s detriment. By signing the certificate, a tenant is confirming that the information contained therein is true, but the information, whether intentionally or erroneously, may actually be inaccurate and binding upon the tenant. Plaza Freeway, 81 Cal. App. 4th at 628, 96 Cal. Rptr. 2d at 873. If the tenant signs and returns an estoppel certificate that contains inaccurate lease information, the owner, lender, or buyer will be entitled to rely on the lease terms as set forth in the estoppel certificate, effectively altering the tenant’s rights. See e.g., Gen. Elec. Capital Corp. v. Domino’s Pizza, 1994 U.S. Dist. LEXIS 7277, *12–14, 1994 WL 256776, *4–5 (S.D.N.Y. 1994) (holding that a tenant was obligated to obtain, even though the lease did not require, written consent before it could terminate its lease because it signed an estoppel certificate requiring it to do so); SRM Card Shop, Inc. v. 1740 Broadway Assocs., L.P., 2 A.D.3d 136, 140, 769 N.Y.S.2d 483, 487 (N.Y. App. Div. 2003) (holding that a commercial tenant was not entitled to a rent reduction when its claim for such reduction was expressly contradicted by an estoppel document signed by its corporate parent); Va. Highland Assocs. v. Allen, 174 Ga. App. 706, 709–10, 330 S.E.2d 892, 896 (Ga. Ct. App. 1985) (holding that public policy, good faith, equity, and justice required that a tenant estoppel certificate executed by tenants estopped them from raising novation defense); Yee v. Weiss, 110 Nev. 657, 662, 877 P.2d 510, 513 (Nev. 1994) (holding that even though a commercial tenant did not read an estoppel certificate, which stated that conditions of lease to be performed by landlord had been satisfied, he was bound by its terms after he signed it); Spiegel v. Stanley Nelson, Inc., 458 So. 2d 1175, 1176–77 (Fla. Dist. Ct. App. 1984) (holding that a tenant was prohibited from later claiming defaults that existed at the time the tenant signed an estoppel letter because the letter did not include existing defaults).

Possible Remedies

Solutions Without Litigation

Often, when a wayward tenant refuses to sign an estoppel letter, there are basic solutions not requiring a lawsuit. For example, sometimes a tenant refuses to sign a certificate for the simple reason that he does not understand the statement’s purpose. In these cases, an explanation of the reason for the statement may sometimes conquer the tenant’s concerns.

In other cases, a tenant’s sole objection may be with the landlord’s form of the estoppel letter, preferring to use its own form. This will most likely be the case with large retail or business chains that have prepared their own documents and do not wish to use others. Here, the landlord should determine if any significant difference exists between the forms and ask the prospective purchaser if he will accept the tenant’s form. If this is unacceptable, the landlord should determine if the lease requires that its form be used, and if not, the parties will need to negotiate.

In still other cases, the tenant may refuse to sign an estoppel letter because it has a legitimate dispute with the landlord. In these cases, it will be best for the landlord to negotiate a resolution of the dispute, because a landlord should be reluctant to submit estoppel letters that set allege defaults or failures by the landlord to perform its obligations. Moreover, if the landlord brings a breach of lease claim against the rebuffing tenant, it may find itself liable for its own breach. In an Alabama case, a landlord sued a tenant for not completing and returning an estoppel certificate as required by the lease. Johnstown Mobile Ctrs. v. Williams, 1997 U.S. Dist. LEXIS 6550, 14 (S.D. Ala. Mar. 10, 1997). The court reasoned the tenant did not breach the lease because at the time of the request, the landlord himself was in breach of the contract. Id. at 15. Thus, because the estoppel certificate included a provision stating that the “Lease is valid and subsisting and in full force and effect,” the tenant rightfully refused to sign the lease. Id. Ultimately, the court held the landlord liable for nearly $30,000 for its breach. Id. at 16.

As a way to thwart these dilemmas before they arise, a landlord should include one of more of the following remedies in the lease for when a tenant fails to provide the estoppel statement within the designated time:
  • Failure of the tenant to provide the statement will be deemed an acknowledgement of the tenant of the accuracy of the representations in the statement proffered by the landlord (“silence is consent”).
  • Failure of the tenant to respond appoints the landlord as the tenant’s attorney-in-fact to execute the proffered estoppel statement.
  • A specified monetary penalty, such as one month’s rent.
Remedies Via Litigation

In the absence of such a provision, a tenant’s failure to complete an estoppel certificate as required by a lease will result in a breach of the lease agreement. The law provides a few remedies for such a breach.

First, a tenant’s breach of the lease agreement may allow the landlord to terminate the lease. See Restatement (Second) of Property, Landlord & Tenant § 13.1 (1977) (hereinafter “Landlord & Tenant”) (“[I]f the tenant fails to perform a valid promise contained in the lease . . . and as a consequence thereof, the landlord is deprived of a significant inducement to the making of the lease . . . the landlord may: (1) terminate the lease and recover damages . . . .”). However, termination is not altogether practical considering the time required and the fact that the potential buyer will not want to inherit a lease that is in breach. Moreover, this remedy has not been fully developed in Arizona as only “material breaches” justify foreclosure, whereas “trivial and immaterial breaches” do not. See, e.g., Found. Dev. Corp. v. Loehmann’s, Inc., 163 Ariz. 438, 443, 788 P.2d 1189, 1194 (1990) (en banc) (holding that a tenant’s delay in paying a common-area maintenance charge was immaterial and did not justify foreclosure despite the lease specifically stating that any breach would be cause for termination); Ponderosa Mfd. Homes, L.L.C. v. EZ Ventures, Inc., 2008 WL 4853604 (Ariz. Ct. App. Nov. 6, 2008) (holding that an assignment of a lease without the landlord’s consent was not a material breach and the lease could not be terminated by landlord despite the lease specifically stating that tenant assignments without the landlord’s approval would constitute a material breach). Whether a tenant’s refusal to sign an estoppel certificate when contractually obligated to do so is a “material” breach has not been decided by an Arizona court. Thus, termination is likely not a sensible solution.

Additionally, a second remedy could require litigation but does not require it. Under Arizona statutory law, “when a tenant violates any provision of the lease, the landlord . . . may reenter and take possession, or without formal demand or reentry, commence an action for recovery of possession of the premises.” Ariz. Rev. State. Ann. § 33-361(A) (West). Again, however, this remedy is not likely a sensible solution as the prospective buyer will not want to purchase a commercial building without tenants.

Finally, if the non-breaching party decides to continue the lease but sustains damages stemming from the breaching party’s refusal to sign the estoppel letter, e.g., loss of the prospective buyer or lender, the non-breaching party may have a claim for expectation, consequential, restitution, or liquidation damages. See, e.g., CR-RSC Tower I, LLC v. RSC Tower I, LLC, 202 Md. App. 307, 335, 32 A.3d 456, 473 (Md. Ct. Spec. App. 2011) (reasoning that a landlord’s refusal to provide estoppel certificates to a tenant as required by their contract was a breach of the contract and a substantial factor in the tenant’s failure to obtain project financing); Landlord & Tenant § 13.1(“[I]f the tenant fails to perform a valid promise contained in the lease . . . and as a consequence thereof, the landlord is deprived of a significant inducement to the making of the lease . . . the landlord may . . . continue the lease and obtain appropriate equitable and legal relief, including (a) recovery of damages, and (b) recovery of the reasonable cost of performing the tenant’s promise.”); Gettinger Assocs., LLC v. Abraham Kamber & Co. LLC, 2010 WL 2357817, 2010 N.Y. Misc. LEXIS 2289 (N.Y. Sup. Ct. May 28, 2010) (Trial Order) (“The third cause of action alleging that [tenants] were damaged by [landlord’s] failure to provide estoppel certificates will be sustained. [Tenants] have stated a legally viable claim . . . .”);cf. MBank Hous., Nat’l Ass’n v. Armco, Inc., 1 F.3d 1439, 1446–47, 1448–50 (5th Cir. 1993) (holding that despite a tenant failing to provide an estoppel certificate as required by contract, thus breaching the contract and tortuously interfering with a subsequent agreement, the jury’s award for expectancy and consequential damages was too speculative); see generally 311 S. Spring St. Co. v. Dep’t of Gen. Servs., 2008 Cal. App. Unpub. LEXIS 4408, 35–41 (Cal. App. 2d Dist. May 29, 2008) (upholding a $1.6 million jury verdict to the seller of a building against a California state agency for “lost future tenant improvements,” “lost future brokers’ commissions,” “excess interest costs,” and “loan extension costs” after the agency failed to provide an “unequivocal estoppel letter,” preventing the seller from refinancing its construction loan thereby causing the seller to incur interest charges and loss of tenants); Maingate Hotel Co. v. Zaby’s LP, 2004 Cal. App. Unpub. LEXIS 2494, 2004 WL 530810 (Cal. Ct. App. Mar. 18, 2004) (awarding developers $1,250,000 in lost profits after the defendant breached the contract by failing to provide an estoppel certificate as required by the contract).

For example, in Juleah Co., L.P. v. Greenpoint-Goldman Corp. a New York landlord breached a lease agreement by failing to issue an estoppel certificate in connection with the tenant’s application for refinancing. 49 A.D.3d 282, 283­, 853 N.Y.S.2d 313, 315 (N.Y. App. Div. 2008). The lease “unambiguously” provided that within 20 days of a request by the tenant, the landlord must furnish an estoppel certificate. Id. The court reasoned that despite the fact that the tenant requested certification of items not specifically identified in the lease, the landlord was not relieved of “its absolute obligation to issue an estoppel certificate.” Id. Moreover, despite the tenant’s failure to provide their request by registered mail as required by the lease, the “defendant’s receipt of the request and its failure to object promptly constituted a waiver of that defect.” Id. Accordingly, the court awarded the tenant “damages that were the natural and probable consequence of the breach,” which amounted to over $400,000. Id.

Seller’s Affidavit

One thing a prudent landlord should consider when a rogue tenant refuses to provide an estoppel letter in a timely manner is whether to include an amendment to the purchase agreement whereby the landlord agrees to provide a seller’s estoppel certificate (also called a “seller’s affidavit”) swearing to the same facts. A seller’s affidavit is virtually identical to a tenant estoppel letter but is signed by the landlord, not the tenant. While this option has its downfalls, e.g., self-interest, and may not fully appease a potential buyer or lender, it is an option for a landlord to consider when a tenant refuses to sign an estoppel letter.

It should be noted that if a tenant rightly refuses to sign an estoppel certificate, the landlord should be careful if he decides to execute a seller’s estoppel certificate. For instance, in Linden Partners v. Wilshire Linden Assocs., the landlord of a commercial real estate building planned to sell the building for a hefty sum, so he requested that the building’s tenants complete and sign estoppel certificates. 62 Cal. App. 4th 508, 512, 73 Cal. Rptr. 2d 708, 710 (Cal. Ct. App. 1998). One subtenant refused to sign, because it was not contractually obligated to do so, and its sublessor refused to sign as well. Id. at 513, 73 Cal. Rptr. 2d at 710. Thus, the landlord did not know the exact value of the subtenant’s rent. Id. Normally, one subtenant would not be that big of a deal in such a large commercial transaction, but after the buyer broached the idea that he wanted to “buy the subtenant out” to “rent the space at a higher price,” the precise rental value became imperative to the deal. Id. at 514, 73 Cal. Rptr. 2d at 711. Because the subtenant still refused to sign, the landlord provided the buyer with figures and calculations it believed were correct and signed a seller’s estoppel certificate to that effect. Id. Unfortunately, a few months after escrow closed and the sale was complete, the subtenant made his rental payment and the value was a mere 66% of the value the seller recorded in its estoppel certificate. Id. The buyer demanded the seller pay the difference, and the court agreed, holding the seller liable for over $130,000 in damages. Id. at 515, 73 Cal. Rptr. 2d at 711–12.

Conclusion

In summary, because a commercial tenant is not required to sign an estoppel certificate unless required by the lease, a property owner who expects to sell the property should include a provision in the lease requiring the tenant to sign an estoppel certificate upon request. Today, most commercial leases provide that if the tenant refuses to complete or delays in completing the estoppel certificate, the landlord has the right to complete the form as the tenant’s “attorney-in-fact” or that the tenant’s refusal means he acquiesces to the facts stated therein. While these provisions can help alleviate a few of the problems a landlord faces when a tenant refuses to sign an estoppel letter, they should be approached and executed with vigilance.
If you would like to discuss bringing a possible legal claim, we would be happy to speak with you. To arrange a consultation concerning your legal matter, please contact Robert Mitchell at rdm@tblaw.com or at (602) 452-2730.
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