If you’re considering the purchase of a tenant-occupied commercial space, it’s important to understand the tenant estoppel certificate. This is simply a signed document from the tenant that confirms the core terms of the commercial lease. But its simplicity doesn’t reduce its importance. Yet, incomplete and unclear tenant estoppel certificates are a common problem that many investors face. And for those without a huge budget for attorney fees, it’s even more crucial to get things right the first time. Today, we’re looking at five points that your tenant estoppel certificate needs to clarify (but that far too often get overlooked).
(1.) Is the Lease Described in the Tenant Estoppel Certificate Current?
Leases in the commercial sector can run for a long time. During the life of a commercial lease, it’s common for tenants to submit signed amendments and letters. But are these making their way into the seller’s files? They should be. When collecting the tenant estoppel certificate from the seller, ensure that the tenant confirms that the specific lease document, along with any amendments, represents the current and total agreement. So, what if the tenant cites an amendment that’s news to you? Then it’s time to go back to the seller to make sure that everything is complete and in order before closing.
(2.) Is Rent Paid Up? Have Any Rental Concessions Been Granted?
A tenant estoppel certificate should also clearly confirm:
- Rental amount for the commercial lease
- Last date of rent payment
- Any rental abatements, discounts, or deferred payment agreements received by the tenant
Again, the seller should set any verbal agreements in writing, but this doesn’t always happen. In the event that the seller and the tenant have a discrepancy, it’s important to iron it out as soon as possible.
(3.) Are There Any Unresolved Disputes or Defaults?
A tenant estoppel certificate asks the tenant whether a landlord is in default of the commercial lease. However, many tenants struggle to understand this question, rushing through the certificate with vague answers or simply checking “no” and moving on. But “default” on this certificate could encompass anything from an unresolved maintenance request to a disagreement over common area charges. It’s crucial to determine whether the tenant fully understands the question, because outstanding issues won’t go away on their own.
(4.) When Does the Lease Expire and Has the Tenant Been Offered Renewal Options?
Verbal agreements can quickly muddle a tenant estoppel certificate, but they’re still commonplace in the commercial market. Therefore, it’s important to make sure that whatever the tenant and the seller have agreed upon is supported in writing. The tenant needs to confirm the expiration date of their lease along with any possible options for renewal, purchase, or lease extension. If any of those options have already been exercised or waived, this information also needs to be included.
(5.) How Much is the Security Deposit Really?
A security deposit may seem simple enough, but remember that the power of the tenant estoppel certificate is in its clarity and completeness. This means that if a deposit has been increased, reduced, or only partially applied, it needs to be clearly stated. Therefore, if the tenant’s figures aren’t matching the landlord’s, then a conversation needs to be had with the seller.
Your Key to Proper Due Diligence
Institutional buyers are insulated by legal teams that can review a tenant estoppel certificate before closing. But smaller investors need to be extra diligent when approaching this misunderstood document. Read (and re-read) the certificate, ask the right follow-up questions, and get a real estate attorney or experienced broker involved. It’s easy to dismiss the tenant estoppel certificate, but it’s often your key to successful due diligence.
