What is an Estoppel Agreement?
What is an Estoppel Agreement?
An estoppel agreement or estoppel certificate is a document which confirms the terms of a legal agreement (often a tenancy / lease, but not always) and states that there has not been any breaches. In the context of property agreements, an estoppel agreement will confirm that the agreement is in full force and effect and unmodified, if applicable. The agreement will usually also set out the rents and the dates upon which these fall due.
An estoppel certificate will refer to the tenant, the landlord, and if there is one, the lender, since lenders will commonly be the brokers of a mortgage. If the original agreement was subject to additional charges or incentives, these will be detailed on the form as well. The key objective of an estoppel form is to both protect the parties to the agreement and to ensure that third parties have the necessary access to the information they require regarding the property. Lenders and third parties may request this form in relation to various transactions and as property law has become increasingly commercialised over the years, an estoppel agreement is now one of the most central documents to have attached to legal agreements of all descriptions.
While the purpose of an estoppel agreement is universal, it is most commonly referred to in real estate contexts . As many buildings and properties are now developed as a result of third party investment and partnership arrangements, such agreements are justifiably seen as standard and necessary. With so many individuals and businesses from different countries, cultures, and backgrounds involved in the same deal, it is only natural that the agreement be exactly confirmed and certified in writing, given the large sums of money at stake in such arrangements. Particularly where agreement regarding the state of the property is required, an estoppel agreement leaves little room for doubt or dispute.
In situations where a buyer wants to move into premises quickly, they may not be willing to wait until the agreed completion date for confirmation that they can do so and may wish to rush the process. In this situation, an estoppel agreement would be used, allowing the parties to confirm whether the deal is in a position to proceed in an expedited manner. Whether there are leases involved, or it is more simply a matter of purchase or sale of property, it is important that the information is passed onto the new owners of the rights. Even when an agreement has been forgotten, an estoppel agreement can serve to eliminate this risk for individuals and groups involved in a transaction.
Elements of an Estoppel Agreement Form
An estoppel agreement form generally contains the following elements:
Names of the Parties Involved: At a minimum, the names of the parents and children involved in the formation of the entity should be included. Oftentimes the grandparents and other family members will be listed as parties as well.
Address of Property: Addresses of the property should include both the real estate holding company and all owned properties.
Legal Description of Property: The legal description will typically include the name of grantor, grantee and party of interest.
Name of Entity: The name of the business or corporation should be included in the agreement.
Name of Bank: The bank involved in the agreement should be clearly mentioned.
Address of Bank: The address of the bank should be clearly shown and frequently, a physical address is required and a P.O. box cannot be used.
Signing Authority Disclosure: Any agreements regarding signing authority for the entity should be disclosed in detail.
Utilization of Trust Funds: An itemization illustrates how much money from the trust will go toward support and whether these distributions will be fixed or more discretionary.
How to Utilize an Estoppel Agreement in Real Estate
Estoppel agreements are used in all sorts of real estate transactions. In this section I explain more about what the form is, and how it is used to protect you in a sale of the property or transfer of leasehold rights.
Sales of property
An estoppel agreement will of course be used and is essential when selling property to a subsequent purchaser. If an estoppel agreement was not used, then the seller may be liable to the subsequent purchaser for losses arising because the seller failed to honor an obligation he had to the tenant.
Lease Transfers
Similar to sales, an estoppel agreement protects a seller of property from future liability arising from a liability to a tenant. Therefore, an estoppel agreement protects the landlord from the liability discussed above but it also protects the tenant by confirming the tenant’s rights and obligations. An estoppel agreement applied to leasehold interests can also restrict the landlord from requiring a higher rent from a tenant simply because the property passes over to the new buyer.
United States Bankruptcy Code
A tenant is now protected against an exclusive right to sell issued by its bankrupt landlord. This is because the United States Bankruptcy Code provides that a debtor (a person who has filed for bankruptcy) cannot, in the absence of an agreement from the tenant, sell or otherwise assign its rights when a lease remains in existence. Therefore, the seller of the land cannot sell the land without selling the tenant’s rights in the land.
Loan Documents
Real Estate lenders often ask for an estoppel agreement as a condition of the loan. The lender needs to know that it can foreclose on the property free and clear of any obligation to the tenant associated with the tenant’s estoppel.
Advantages of Estoppel Agreements
By clarifying and confirming the key terms between the parties, estoppel agreements provide benefits to both the current and future landlord and tenant:
Clarification: The use of estoppel agreements provides clarity to all parties as to the obligations and limitations in the lease. All parties can understand and rely on the terms stated in the estoppel agreement, creating certainty and fairness.
Confirmation: Estoppel agreements may also be used to confirm matters considered incidental to the lease, such as the identity of the parties, tenant’s occupancy status and the term of the lease, although direct confirmation is not mandatory. This reduces uncertainty and misunderstandings amongst the parties by documenting the relevant lease terms.
Prevention of Disputes: The resolution of disputes arising out of leases can lead to significant delay and expense. The use of estoppel agreements can mitigate these costs and achieve an outcome to the satisfaction of all parties. It is unlikely that there will be negotiation of the key lease terms if all parties agree the same, which reduces the cost of negotiations.
Common Problems and Issues
Despite the utility of the estoppel agreement form, there are certain pitfalls and risks that practitioners should be aware of:
- Miscommunication and Misunderstandings: When an estoppel agreement is signed at the time an owner sells his or her unit, the seller is frequently in the process of acquiring another home. The realities of buying and selling real estate can result in scheduling conflicts, miscommunication as you will control multiple closings on different dates, inaccurate information on your estoppel agreement, and closing delays. An example of such an issue could be where the buyer of the home learns from the seller of the home that maintenance and assessment payments on their new property are current, whereas the board has not yet issued the estoppel letter. Such legal action may ensue to determine who is responsible for unpaid costs from the closing. That said, it is possible to get the board to release the closing agent and buyer from liability for any unpaid assessments by submitting to the board the attorneys’ letter and estoppel authorization and release form with closing confirmation letters , purchase agreement, closing statement, and any other documentation the board may need to confirm payment history and to show that appropriate notice was given.
- Inaccurate Information: An estoppel agreement is only valid if the information contained within the agreement is accurate. All parties signing the estoppel agreement, including the board, the seller, and the buyer, should review all information, including financial statements and declarations, for all information completely and accurately. Further, all signatories should ensure that their signatures and seals are notarized. Failure to do so could lead to serious legal action. It is the best practice to have an attorney prepare these agreements, as attorneys are trained to catch details that many laymen could overlook.
- Association Liability: Inaccurate information contained in an estoppel letter where an Association has full knowledge of the inaccuracy and does not act to correct that information may expose the Association to liability. See Davidson v. Stayza.
Drafting and Personalizing Your Estoppel Agreement Form
While parties are free to draft an estoppel agreement from scratch, they may find it more convenient to customize an existing form. The sample language I showed you in an earlier section of this module is a simple example of the type of provisions that would be included in an estoppel agreement. If your agreement includes them, then it will likely cover most of the issues that are considered in a simple office lease and thus serve as a good starting point. But please be informed that an estoppel agreement does not need to follow this template. For instance, the parties may wish to avoid all references to the terms of the lease or to the conditions of a letter-of-credit even though that is now a common feature. Moreover, if the estoppel agreement is lengthy and very complex or has several future contingencies that will be provided for, e.g., potential alterations or options to extend or expand, then it may be worthwhile to have new provisions specifically tailored to address those issues.
Most major law firms have their own library of standard forms. However, leases are rarely standardized among important firms. With few exceptions, public companies, hedge funds, real estate investment trusts and other major institutions tend to almost exclusively lease space from major property owners such as publicly-traded REITs or multibillion-dollar private fund management companies. These large property owners typically engage in over one hundred substantial leases per year, are principal tenants at anchored malls, investment banks and private equity investment vehicles, and often own large portfolios of commercial and residential properties. Therefore, it is not surprising that their clients can frequently afford to hire big law firms. Thus, it would be safe to presume that most lawyers in these large law firms are accustomed to answering questions regarding standard features in leases, and have had to provide estoppel certificates to their clients on multiple occasions. As someone who has represented major public companies, REITs, pension funds and lenders, I can assure you that I have exchanged thousands of estoppel certificates with major tenants and landlords.
Nevertheless, there are no formal rules that the drafters of estoppel agreements must follow. The forms tend to get longer as the transactions get larger and involve more sophisticated parties. For example, a CMBS (Commercial Mortgage Backed Security) pooling and servicing agreement is often several hundred pages long. However, there is no consistency in the length of estoppel agreements. In my experience, estoppel agreements that were ten pages long often contained less detailed information than an estoppel agreement that was more than fifty pages long. There are probably many valid reasons for the variations in length. A landlord’s lawyer has a completely different workload and set of priorities than the general counsel of a major tenant. What is most critical to a landlord’s lawyer in a sale-leaseback transaction may be completely different from what is most critical to the general counsel of the tenant of a commercial site rental obligation. Likewise, an estoppel agreement for a CMBS transaction is typically much more complex than an estoppel agreement for a delegated servicer that packages a large group of leases together. In any case, a lawyer is not bound by the practices of his or her colleagues who used to practice with a major law firm. For that reason, landlords and tenants are always free to develop their own form of estoppel certificate. There is a high degree of flexibility and creativity that can be used in drafting estoppel agreements. By developing your own estoppel agreement form, you can always ask your client what their lease looks like if it is not entirely confidential. If the lease is available, you can use it to draft an estoppel agreement that remains within the intent of the original agreement. There are, however, potential downsides to this approach. One potential downside is that a sample agreement from a fellow or sister property owner may be highly advantageous to include in the estoppel agreement. However, if you did not represent the property owner when the original lease was negotiated, you may not be able to procure it. Therefore, a relatively unique aspect of an estoppel agreement is that when one party sends the other party an estoppel agreement that the other party is to sign, then typically the party who first made the request had absolutely no input in the agreement at all. The party who receives the estoppel agreement usually signs it and sends it to the requesting party. Therefore, if that party does not want to sign the estoppel agreement because there is a provision that they consider unusual, then the party simply ignores the request to sign or sends back a letter of comments that requests to renegotiate the terms. Therefore, it is not uncommon for the lessor to send the estoppel agreement to both parties for simultaneous signatures so that the tenant will not delay execution by silently refusing to sign. While my sample agreement will likely not get most readers in trouble, it is important to emphasize that these documents are prepared by their parties with the advice of their counsel. If there is any doubt about the wording of the estoppel agreement, then ask your lawyer or advisor to review it.
Legal Implications and Professional Support
Estoppel agreement forms hold significant weight in various legal agreements, given the rights they impact, the scope of liability they cover, and the obligations they may enforce. One way to understand what an estoppel agreement form is obliged to do or not is by examining what the law does not allow an estoppel agreement form to do.
An estoppel agreement form might look like this:
In order for a mortgage or mortgage deed to take effect, an estoppel agreement form is required to be executed by all parties to the mortgage, but before any of the parties to the mortgage take possession of the mortgaged property. In cases where there is a mortgage and any other encumbrance on the mortgaged property, all parties to the encumbrance need to be included in the estoppel agreement form.
This is a basic example of an estoppel agreement form. The sections missing from the above form are the following:
The legal implications of an estoppel agreement form are serious. Before signing an estoppel agreement form, all parties involved must ensure it has been drafted and/or reviewed properly by counsel. Professionals agree that estoppel agreement forms that have been prepared improperly can limit the rights of parties during the later stages of the agreement.
For instance, an estoppel agreement form may contain an obligation that all parties agree to participate in future mortgages on the property, even without the approval of one or all parties. If the wording in an estoppel agreement form is not clear, a party may inadvertently agree to this. To avoid this possibility, you should always ensure that an estoppel agreement form is drafted clearly, with all unambiguous conditions spelled out.
FAQs
I thought that when a community has an estoppel agreement form, the association must sign the form if I request it before selling my unit. Not true. The law says that the association must prepare an estoppel agreement form if a unit owner requests it, but still allows the association to determine how you obtain the required review and approval for the transfer of the unit.
I thought that an estoppel agreement form must be created within a certain number of days after I request an estoppel agreement. Not true. The law says that to obtain an estoppel agreement form quickly, you must write to the association specifying the request.
I thought that an estoppel agreement form requires only a signature for the statement to be effective. Not true. A proper estoppel agreement form must include a statement, which then is signed by an association representative certifying that the information provided in the statement is correct , to be effective.
Doesn’t the seller or his representative fill out the estoppel agreement form? Not necessarily. The specific estoppel agreement form used in your community may have sections that require information from the association and, if so, the association will provide the information directly to the closing agent.
Can I request additional information to be included in the estoppel agreement form? Certainly you can request additional information, but the association is not obligated to include the additional information unless it is practical or permissible and pertinent to the request.
Must the sale contract be attached to the estoppel agreement form to be deemed effective? Not necessarily. The specific estoppel agreement form for your association may or may not require a statement indicating that the buyer has requested the transfer as contemplated in the sale contract. If so, then the sale contract should be attached to the estoppel agreement form.