Breaking Down Estoppel Certificates: Why They Matter in Real Estate Sales

In real estate transactions, creating peace of mind for potential buyers and protecting everyone who might be impacted by the sale of a property is crucial. Numerous measures are taken to cover those bases. Those can include unbiased property inspections, title reports, creating detailed purchase agreements, providing proof of funds letters, defining contingencies, and implementing contingency periods, to name a few. Full disclosure, transparency, and comprehensive documentation are essential.

In some cases, estoppel certificates are also required. Like other documents, they are important tools in protecting the best interests of everyone involved in real estate transactions. Estoppel certificates provide clarity and security, but they need to be completely accurate to properly serve their purposes. Below provides some valuable information on estoppel certificates which can prove helpful in your current or next real estate transaction. Whether you’re buying or selling a property, working with a real estate attorney in Texas will help you ensure these documents, as well as others included in the transaction process, are in order.

What Is an Estoppel Certificate, and What Is Its Purpose?

First, let’s take a basic look at what, exactly, an estoppel certificate is. In short, it’s a legal document used in commercial real estate transactions, such as those involving office buildings, retail spaces, warehouses, and apartment buildings and complexes. In some situations, these documents are required for the sale of single-family homes. That may be the case when selling a house that’s an occupied rental property or part of a homeowners’ association. Estoppel certificates cover the details of tenants’ lease agreements.

Property owners have estoppel certificates created to eventually forward to potential buyers. Though they can technically create them on their own, having an attorney do this for them is recommended. It helps to ensure no crucial details are left out and that the document is in full compliance with the law.

Once an estoppel certificate is drawn up, it’s sent to the property owner’s tenants for confirmation of its accuracy. Upon receiving the document, tenants should read it carefully. If they find inaccuracies or omissions regarding their lease agreements and other factors, they are encouraged to point them out. They can do so by making notes directly on the certificate, creating an addendum, or requesting that a new document be drawn up that includes the information they want to add.

After confirming that the estoppel certificate is correct, tenants sign it and return it to the property owner. From there, the owner sends it to the potential buyer. Its purpose is to provide a clear understanding of the revenue the property generates, tenants’ rights, and other essential information.

What Information Is Included in an Estoppel Certificate?

Estoppel certificates contain an array of pertinent details about tenants’ lease agreements. They may vary by property type, lease arrangements, local laws and regulations, and other factors. In general, though, they include the following information:

• Lease Start and End Dates
• Rent Amounts
• Utilities Included in Rent Amounts Versus Those That Are Tenants’ Responsibilities
• Security Deposits
• Modifications Made to the Original Lease
• Pet Policies
• Maintenance Responsibilities
• Unresolved Maintenance Issues
• End Lease Conditions
• Eviction Policies
• Tenant Disputes
• Special Payment Arrangements
• Parking Assignments
• Unpaid Balances
• Legal Claims
• Landlord Defaults

Those are some of the details you might find in an estoppel certificate. In some cases, lease arrangements vary by tenant. If so, a different estoppel certificate will be needed for each tenant with each document containing information that’s specific to the tenant in question. Overall, the purpose of these documents is to help prospective buyers understand exactly what obligations and benefits they’ll be inheriting if they purchase a property.

What Do Estoppel Certificates Verify?

In light of the information they contain, estoppel certificates verify an array of significant points. They confirm that the current owner of a property doesn’t have any outstanding legal or financial obligations. They also give potential buyers peace of mind that such problems and responsibilities won’t fall on their shoulders if they purchase the property.

Estoppel certificates likewise verify several points for tenants. They guarantee that the rent amounts, rights, responsibilities, lease durations, and other factors covered in the document are correct. They also verify that tenants are up to date on their rent payments and that they have no open disputes with the landlord or vice versa.

Why Are Estoppel Certificates Important in Real Estate Transactions?

Other than helping prospective buyers know what they are purchasing and verifying information for tenants, estoppel certificates are important in real estate transactions for several reasons.

For Buyers

As noted, estoppel certificates give buyers peace of mind and protection by essentially showing them what they may be getting into when they purchase a commercial property. They can help prospects decide if a property is worth their investment and protect them if they decide to go through with the transaction. They may also protect buyers against any claims tenants have made against the current owner.

For Lenders

Additionally, lenders usually require estoppel certificates before providing loans for commercial properties. These documents give lenders a clear picture of a property’s profitability and reassurance that it’s a stable source of revenue. That, in turn, protects their investments and minimizes their risks. Prospective buyers may not be able to get funding to purchase a property without an estoppel certificate.

For Sellers

Furthermore, estoppel certificates give sellers a certain level of protection. Since tenants confirm the terms of their lease agreements in these documents, they can prevent future disputes and claims against sellers. That safeguards them against liabilities with tenants and buyers. Providing estoppel certificates for potential buyers and lenders can also improve the chances of a property selling.

For Tenants

Finally, estoppel certificates can give tenants added protection when the properties they are living or working in change hands. These documents ensure tenants’ rights are upheld and that their lease terms aren’t changed without their knowledge and consent. They can also help tenants get complaints, maintenance issues, and other problems resolved.

Potential Liability Issues With Estoppel Certificates

Though estoppel certificates are designed to protect everyone involved in the sale of a commercial property, they can also cause problems in some cases. If a property, tenants’ lease terms, or owners’ obligations are misrepresented, certain liability issues may arise. In those instances, they may negatively affect owners, buyers, and tenants rather than giving them added security.

Problems for Tenants

Several liability issues can come into play for tenants. When they sign an estoppel certificate, they are affirming that all the details included therein are correct. That means they are legally bound to abide by them.

For example, say the rent amount listed on the document is higher than what a tenant actually pays or some of their rights have been left out, or their responsibilities versus those of the owner or maintenance team have been misrepresented. In either scenario, if a tenant signs the document anyway, they may be held to the terms in the estoppel certificate rather than those in their actual lease. Having signed the document containing inaccurate information could render them unable to reverse their claims later on as well.

Issues for Buyers

Now, let’s look at the potential risks and liabilities for buyers. Buyers generally take for granted that the information provided in an estoppel certificate is complete and correct. If certain details are incorrect or left out, they may find themselves with more responsibilities and problems than they bargained for when they agreed to purchase the property in question. Though the buyer may be able to resolve those problems via legal disputes, that can be a lengthy and costly process.

Incorrect rent amounts and other details about a property’s revenue can also cause serious financial problems for buyers. If a property’s income, operating expenses, and other financial details are misrepresented in an estoppel certificate, that could certainly cause hardships for the buyer. Since the buyer based their purchasing decision, at least in part, on the information in the estoppel certificate, their cash flow and debts may not balance out the way they planned.

Issues for Sellers

Misinformation in an estoppel certificate can have negative implications for sellers as well. It can affect property values, which may cause sellers to get less than they expect from the sale of commercial properties. As is the case for buyers, it can lead to time-consuming and expensive legal disputes. If tenants refuse to sign estoppel certificates, they can cause delays or complications in the sales process.

Beyond those problems, estoppel certificates can bring to light issues tenants have with their landlords. That, in turn, may cause them to push the envelope, so to speak. They may decide to press those issues or refuse to sign their estoppel certificates until their demands are met. That, too, can bring about legal complications and potentially lead prospects to opt out of a purchase.

Fostering Effective Property Sales With Estoppel Certificates

In a nutshell, estoppel certificates are essential documents in commercial real estate transactions, and in some cases, residential transactions. They can provide several benefits for buyers, sellers, and tenants alike, but they can also create problems and liabilities. It’s important to be sure all information contained in these documents is complete and accurate. Having experienced legal counsel on your side can ensure those documents work for you rather than against you. Working with a real estate attorney protects the best interests of everyone involved in the sale of a property.

Disclaimer:

Ruelas Andino Law, PLLC makes no claims as to the accuracy of the information contained within the external links in this blog article nor does it endorse any of the businesses contained in the links. Information contained in this blog is for informational purposes only and may not be construed as legal advice.