Estoppel certificates are not the topic of many conversations. They just don’t come up as often as do equity, appreciation, and mortgage rates. Nonetheless, tenants, landlords, and, especially, prospective owners of income property should have some familiarity with the use and importance of estoppel certificates.
Estoppel is a legal concept whose meaning is essentially that you have to keep your story straight. Derived from an old English word meaning to stop or prevent, estoppel is defined by Webster as “the barring of a person, in a legal proceeding, from making allegations or denials which are contrary to either a previous statement or act by that person or a previous adjudication.”
Estoppel certificates are statements signed by tenants, both residential and commercial, outlining the terms of the lease or rental agreement, the current rent rates, amounts of money that have been deposited for security and such things as special keys, and other items that may be considered important by either the tenants or the owners.
Usually estoppel certificates come into play at the time an income property is sold and in escrow. This is to insure that all the parties affected by the transfer — buyer, seller, and tenants — are on the same page, so to speak, with regards to the tenants’ obligations to the owner, and the owner’s obligations to the tenants.
Without estoppel certificates, things like this have been known to happen: The seller-owner tells the buyer that the tenants are each paying $1,000 a month rent for their one-bedroom units. This may make the property look good economically. But, then, after escrow closes, the tenants inform the buyer — and may even support their claims with rental agreements — that they are only paying $800 a month.
Hard as it is to believe, seller-owners have been known to understate to buyers the amount of deposits that have been given by the tenants (and that would have to be credited to the buyer in escrow). In this kind of situation, the error might not be uncovered until months after the close of escrow.
I am personally aware of one unusual case where no estoppel certificates were required and the seller-owner actually understated the rental rates for the various units. As it turned out, unbeknownst to the owner, rents had been raised by the property management company who was then skimming the difference!
Not long ago, a California Court of Appeal decision noted that estoppel certificates are binding, and that, therefore, they had better be accurate. In the case (Plaza Freeway Limited Partnership v. First Mountain Bank), the tenant bank had signed an estoppel certificate in 1992 that, among other things, specified that the lease termination date was October 31, 1998.
Later, in the spring of 1998, the bank attempted to exercise its option to renew the lease. However, the new landlord rejected the request as untimely, because the option had to be exercised a year before the lease expired. Although the bank argued that the correct termination date was March 29, 1999, the appellate court upheld the new owner’s right to rely on the estoppel certificate. The tenant bank was not allowed to contradict what it had said earlier.
Although the First Mountain Bank case involved a commercial tenant, the same law applies to residential tenancies as well. For that reason all tenants who are called upon to execute an estoppel certificate should be careful to ensure that it accurately reflects the facts.
Both the residential and commercial lease forms produced by the California Association of Realtors® (CAR) contain clauses that say that, if asked to execute an estoppel certificate, the tenant shall do so and return it within three days. If the tenant fails to do so, the certificate as executed by the landlord will be deemed to be correct. In the commercial lease, but not the residential, fail to execute and return an estoppel certificate may be treated by the landlord as a material breach of the agreement.