Loan Due Diligence: Estoppel Certificates

Estoppel certificates are often the source of much angst for both lenders and borrowers in the context of closing a commercial mortgage loan. Where the collateral property relies upon commercial leases for a material portion of its income, tenant estoppel certificates are crucial to verifying the stream of rents necessary to support the subject mortgage loan. Since delivery of the estoppels relies upon the responsiveness of a third party typically receiving no direct benefit from the mortgage loan, tenant estoppel certificates may be difficult to obtain quickly or may be held up by a tenant conditioning delivery of its estoppel on the landlord’s willingness to remedy an issue with the lease or demised premises. As such, the number of acceptable estoppel certificates that must be obtained prior to closing (whether based on a percentage of rentable square feet or a percentage of tenants in occupancy) is often a well negotiated point in the term sheet stage of a loan transaction. All too often, however, after a challenging collection process and the rush to close a transaction, the estoppels themselves may contain problems, whether of a technical nature pertaining to the execution and delivery of an estoppel or, more frequently, to particular lease terms that conflict with the actual lease itself. This article addresses some common issues that arise for lenders reviewing or seeking to enforce estoppels found to be problematic after funding of a loan.

As a general matter, estoppel certificates are delivered by a tenant in favor of a property owner and/or its lender setting forth and acknowledging the veracity of certain facts related to its lease and tenancy, including, in most cases, the precise term of the lease, the current monthly rent due (including any prepayments thereof), the status of any defaults under the lease and the existence of any options to extend or shorten the term. Additional terms are frequently added to clarify ambiguities in the original lease document or to verify that certain lease milestones have been achieved. Property purchasers as well as lenders rely upon estoppel certificates to verify both their own diligence as well as rent rolls provided during underwriting stages. Once an estoppel certificate is signed and delivered, the tenant is expected to be estopped from claiming anything contrary to the statements set forth therein. As such, sophisticated tenants take the execution of estoppel certificates very seriously and seek to limit the content of such estoppels quite deliberately. Other tenants tend to be less precise with the content and manner of delivering their estoppels. Questions of corporate authority and enforceability are raised, for instance, when such estoppels are signed by a local property manager rather than an authorized officer of the property owner. Relying on improperly executed and delivered estoppels can raise significant issues for the property owner and landlord.