What is Estoppel in Real Estate?
Negotiations and deals are made daily in the real estate industry. One of the key elements to making sure that everyone is on the same page and holding up their end of the bargain is the tenant estoppel. If you’re looking to enter the real estate market, you’ll need to know why estoppel is so important to commercial real estate, as well as what it typically entails.
A quick search through Mirriam-Webster would get you the definition of estoppel as “a legal bar to alleging or denying a fact because of one’s own previous actions or words to the contrary.” This phrase can be vague if you don’t understand the full context, so we’re here to break it down into plain language. Estoppel is a way of making sure that all parties involved are adhering to the agreements they’ve previously made. This can include agreements made through previous actions or through previous statements.
The specific type of estoppel that is most commonly used in commercial real estate is the tenant estoppel. It is a document, signed by a tenant, that verifies the terms, conditions, and status of the lease they have signed off on. The main purpose of this document is to provide proof that the tenant is aware of and complying with the lease agreements they’ve made with the landlord. In many commercial leases, a tenant estoppel certificate or letter is required to be provided upon request.
The terms “tenant estoppel,” “estoppel letter,” and “estoppel certificate” are often used interchangeably, which can lead to some confusion. No worries: all of these terms refer to the same document, which verifies the terms of the lease and the tenant’s adherence to them.
One of the main reasons that estoppel is so important is because it provides proof of cash flow. Since an estoppel prohibits a tenant from going back on their word, it essentially confirms that the tenant will be paying rent and observing the lease agreements. This is extremely valuable information for investors and lenders, who are often making decisions based on the likelihood of good cash flow from a property.
Aside from proving cash flow, a tenant estoppel also certifies third-party verification. It confirms that the landlord is not confusing or changing any information in order to put themselves in a better position. This helps to ensure that all parties are being honest and transparent in their dealings, which is essential in any business transaction. It also prevents tenants or landlords from denying or changing the terms of the lease at a later date. This can be extremely valuable in court cases, as it provides clear, written evidence of the agreements that were made.
In addition to the above, an estoppel letter also can provide security to lenders and investors in the property. If they're considering lending money or investing in a property, they want to be sure of the terms of the lease, which rent payments are made and if there are any defaults in the property which might effect their investment. An estoppel letter can provide the third party the security they need to make the investment and close the deal.
Now that we know the circumstances in which estoppel is particularly significant, let’s take a look at what it typically contains. In most cases, an estoppel letter or certificate will include the following information:
The start date of the lease
The date to which rent has been paid
A verification that there are no defaults in the lease
A statement of any defaults that have been made by the landlord or tenant
A verification that the lease is unmodified
A statement of any modifications that have been made to the lease
The requirements can vary, but these are among the most common points that should be included in an estoppel letter or certificate. If you are a commercial real estate owner and planning to bring on investors or lenders, it would serve you well to put a provision in each lease that requires your tenants to provide an estoppel letter upon request. It will put you in a better position when making real estate contracts or property arrangements of any kind.
In summary, an estoppel can provide proof of cash flow, third-party verification, and hold each party to the truth. By including a provision in your leases for a tenant estoppel, you’ll be in a better position to close deals and attract investors or lenders. There are several online resources and services that exist to keep track of all your leases, and estoppel letters.
We hope you've found this post informative and helpful. As always, the team at Unreal Estate is here to help you navigate the world of commercial real estate with confidence. If you have any further questions, don't hesitate to reach out to us or follow our blog for more tips and tricks on managing real estate.
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