Prevent Unsigned Estoppel Certificate from Jeopardizing Your Financing or Sale

Tenants that drag their feet over signing an estoppel certificate can ruin your plans to get a loan or sell your property. If you can't give a tenant's signed estoppel certificate to a prospective lender or buyer, the lender may deny you a badly needed loan or the buyer may walk away from your deal.

If your lease is like many we've seen, your only remedy in this situation is to seek the tenant's eviction. But by the time you can actually do that, it may be too late for you to get your loan or sell your property. Plus, you'll be stuck with an empty space to fill.

Fortunately, there's a way you can you can beef up your lease to motivate a tenant to promptly sign an estoppel certificate, says Chicago attorney Neil T. Neumark. We'll tell you how to do this and give you Model Lease Language that you can adapt and use in your lease's estoppel certificate clause. CLLI0065 We'll also tell you how to get a remedy in addition to seeking an eviction that you can use if the tenant delays too long in signing the certificate.

Why Estoppel Certificates Are Important

Many prospective lenders or buyers will insist on getting an estoppel certificate from each of your tenants before they give you a loan or buy your property. In an estoppel certificate, a tenant certifies certain information about its lease—such as its current rent, the lease term, and any claims it may have against you. Most leases require a tenant to sign an estoppel certificate when asked. They often will also set out the information the tenant must certify to if asked to sign an estoppel certificate.

Because the tenant must certify that to the best of its knowledge, the information in the certificate is true and correct, the tenant is supposed to modify the certificate accordingly before signing it, says Neumark. So for example, suppose the lease requires the tenant to certify in an estoppel certificate that no hazardous materials exist in the space. But the tenant has brought hazardous materials into the space. The tenant might modify the estoppel certificate to say, “To Tenant's best knowledge, there are no hazardous materials in the Premises, except as follows: [insert exceptions, e.g., asbestos-containing materials in the coating of the floor tiles],” Neumark explains.

A tenant may refuse for various reasons to sign an estoppel certificate when asked. For example, the tenant may fear that signing the certificate will prevent it from suing later over some problem it discovers. Or it may withhold its signature to extract a favor in return—such as your making an improvement that you've previously refused to agree to.

In real life, you can't force a tenant to sign an estoppel certificate when you want it to, says Neumark. But you can increase the likelihood that you'll get your loan by putting some teeth into your lease's estoppel certificate clause.

Accelerate Default to Motivate Quick Signing

The standard estoppel certificate clause does little to motivate many tenants to quickly sign an estoppel certificate and return it to you. Instead, it lets the tenant drag its feet. For instance, typically a tenant will want a certain amount of time to sign the estoppel certificate that you provide with your request for its signature. If the tenant doesn't meet the deadline, a standard lease labels the inaction a default. You then must give the tenant notice of its default—and time to “cure” (that is, fix) the default by giving you the estoppel certificate.

Only at that point can you take action against the tenant for its default. But by then, it may not matter anymore. If too much time has passed without getting the certificate from the tenant, you could easily have lost your loan or sale. Lenders give you a limited time in which to provide the appropriate certificates; they may not extend the time through a lengthy cure period. And buyers may have lost patience and walked away.

So what should you do to avoid that situation? Accelerate the tenant's lease default, advises Neumark. That is, shorten that time it takes for you to be able to take action against the tenant for its default. By accelerating a tenant's default, you'll motivate it to sign quickly and avoid dragging its feet. Neumark suggests a hardball approach and compromise approach, depending on your negotiating power:

Hardball approach: Eliminate notice of default and cure period. Eliminate from the lease's estoppel certificate clause any requirement that you give the tenant a default notice and a cure period if it doesn't sign the estoppel certificate by a set deadline after getting your request. Then, the tenant's failure to give you an estoppel certificate is an immediate lease default. You don't have to give the tenant the customary notice or time to cure the lease default. You avoid giving the tenant the leeway to stall.

Compromise approach: Agree to two requests for certificate, but no default notice or cure period. While the hardball approach is a better way to “get tough,” a tenant with bargaining power may balk at it. It may say that if you want it to give up the default notice and cure requirements, you must send not one—but two—requests for a signed estoppel certificate, says Neumark. Plus the tenant may require that the second request contain bold lettering on the outside to flag the request's importance and the consequences of the tenant's failure to respond within a set deadline, he says.

If you must give in to a two-request requirement, set it up this way: Decide how many days in total you're willing to wait for the signed estoppel certificate. Then split that number between the first and second requests, advises Neumark. For example, suppose you're willing to wait a total of 20 days for the tenant to give you a signed estoppel certificate. The tenant would get only 10 days after each request to give you the signed estoppel certificate. That prevents the tenant from using the double request requirement as a delaying tactic, Neumark points out.

Model Lease Language

If Tenant fails to execute and deliver an estoppel certificate within [insert #, e.g., 10] days after Tenant's receipt of a written request therefor from Landlord, and if such failure shall continue for [insert #, e.g., 10] days after Tenant's receipt of a second (reminder) written request therefor from Landlord which includes the following legend in capital letters: “IMPORTANT NOTICE—FAILURE TO RESPOND WITHIN [insert #, e.g., 10] DAYS SHALL CONSTITUTE A LEASE DEFAULT,” then such failure shall constitute an Event of Default.

Practical Pointer: Send any estoppel certificate request to the tenant by certified mail, return receipt requested. That way, you can prove that the tenant got the request and didn't respond in time.

Get Additional Remedy if Tenant Won't Sign

Accelerating the tenant's lease default often will be enough to pressure a tenant into signing the estoppel certificate. But to avoid jeopardizing your financing or sale if a tenant is stubborn and refuses to sign, you need an additional protection, Neumark says. It's important to have a remedy that allows you to take steps in addition to—or as an alternative to evicting the tenant from its space, he says. He recommends getting the right to use one of these three remedies:

Alternative #1: You get power of attorney to sign for tenant. Have the lease say that if the tenant won't sign the estoppel certificate, you have the power of attorney to sign on the tenant's behalf—as its “attorney-in-fact,” says Neumark. Lenders and buyers often prefer this alternative because it gives them a signed estoppel certificate, he notes. But most sophisticated tenants won't give you this power of attorney, he says. They'll typically argue that their company bylaws don't give them the authority to give you a power of attorney. So you'll probably get a power of attorney only from a smaller or weaker tenant.

Model Lease Language

If Tenant fails to execute and deliver an estoppel certificate within [insert #, e.g., 20] days after Tenant's receipt of a [insert as needed: second] written request therefor from Landlord, Tenant irrevocably appoints Landlord as its attorney-in-fact, in Tenant's name, to execute such instrument.

Alternative #2: Tenant is deemed to accept estoppel terms. An alternative is to have the tenant agree that if it refuses to sign the estoppel certificate, it will be deemed to have accepted the certificate's basic terms, says Neumark. These basic terms typically include statements that the lease is in full force and effect, the rent hasn't been paid for more than one month in advance, you're not in default, and the tenant has no claims against you.

For some lenders and buyers, this alternative is less desirable than Alternative #1 because they won't have a signed estoppel certificate in hand. But tenants will agree to the “deemed” language remedy more readily than to the power of attorney, says Neumark. They'll recognize the serious problem an owner may face without a signed estoppel certificate and consider this a practical alternative.

Model Lease Language

Tenant's failure to execute and deliver an estoppel certificate within [insert #, e.g., 20] days after Tenant's receipt of Landlord's written request(s) therefor shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord, that there are no uncured defaults in Landlord's performance, not more than [insert #, e.g., 1] month's rental has been paid in advance, and that all other statements required to be made in the estoppel certificate are conclusively made.

Practical Pointer: Consider attaching a copy of the standard estoppel certificate you require tenants to sign to your lease as an exhibit. And say in the lease that the estoppel certificate the tenant must sign will be “substantially” like the exhibit (since you may change your standard estoppel certificate in the future), advises Neumark. Attaching your standard estoppel certificate to the lease as an exhibit will make it easier to prove that the tenant understood exactly what would be in a certificate you signed as attorney-in-fact or is deemed accepted if the matter ever goes to court.

Alternative #3: Tenant pays damages for not signing. Another alternative is to get your tenant to pay a preset dollar amount—known as “liquidated damages”—for each day past the deadline that it hasn't given you the estoppel certificate, says Neumark. The liquidated damages should be as high as possible—but not so high that a court might refuse to enforce them. Discuss the amount with your attorney. Neumark says he has gotten tenants to agree to liquidated damages as high as $2,000 per day.

This last alternative is the least desirable one for you, he notes. If the tenant is a real deadbeat, it may refuse to both pay the liquidated damages and sign the estoppel certificate, warns Neumark.

Model Lease Language

If Tenant fails to execute and deliver an estoppel certificate within [insert #, e.g., 20] days after Tenant's receipt of Landlord's written request(s) therefor, then such failure shall constitute a material default by Tenant under this Lease, and in such event, Tenant agrees to pay to Landlord as liquidated damages therefor (and in addition to all other remedies available to Landlord) an amount equal to $[insert amount] per day for each day that Tenant fails to so deliver such certificate to Landlord after the expiration of such [insert #, e.g., 20]-day period.

Practical Pointer: A savvy tenant will want to keep the damages amount low. It may also demand that the liquidated damages be your only remedy if it defaults—so that you can't get any other damages or evict the tenant. Neumark sees no problem with negotiating this point because your real purpose is to have a way to scare the tenant into signing the estoppel certificate.

Will Lenders or Buyers Accept Substitute Certificate?

Will lenders or buyers accept an estoppel certificate signed by you, as the tenant's attorney-in-fact, or one that has been “deemed”? While a lender or buyer would obviously prefer to have the signed estoppel certificate from the tenant, if that's not possible, it sometimes may accept either of these substitutes, says Neumark. But, of course, there's no guarantee that it will. Every circumstance is different, and lenders look at each loan on a case-by-case basis, just as buyers will consider the particular sale.

If the missing estoppel certificate relates to an anchor or major tenant, a lender or buyer is unlikely to accept an estoppel certificate signed by you, as the tenant's attorney-in-fact, or the deemed language, notes Neumark. Also, a lender will rarely agree in its loan commitment to accept either substitute in place of an actual tenant-signed estoppel certificate, he adds. But as the loan's or sale's closing date approaches without a certificate, the lender or buyer may soften—if it believes the loan or sale to be a good one, he says.

Ohio attorney Abraham Lieberman reports that a lender accepted the deemed language as a substitute for the tenant's estoppel certificate from an owner he represented. The lender also wanted an additional statement from the owner that the tenant's lease was in effect with no defaults. That was no problem, says Lieberman, since it just added detail to the status report that owners usually give on all leases in the loan documents. Also, the lender may require that you promise to use your diligent efforts to get the signed estoppel certificate from the tenant after the loan is funded. It's okay to agree to this, he says.

Practical Pointer: Try to get your lender or buyer to agree in advance that it will go forward with the loan or sale, even if you can't provide estoppel certificates from all of your tenants, says Neumark. For example, a lender or buyer may be satisfied with certificates from only 75 percent of the tenants, as long as they include the anchor or major tenants. It may not be as concerned about missing certificates from smaller tenants. Agreeing to this compromise up front means that you won't necessarily lose the loan or sale if a stubborn tenant won't give you an estoppel certificate, says Neumark. Just make sure the lender spells out the compromise in its commitment letter to you and in other loan documents—or that the buyer spells out the compromise in the sale contract, he says.

CLLI Sources

Abraham Lieberman, Esq.: Member, Baumgartner & O'Toole, 5455 Detroit Rd., Sheffield Village, OH 44054; (440) 930-4001; alieberman@b-olaw.com.

Neil T. Neumark, Esq.: Partner, Schwartz, Cooper, Greenberger & Krauss, Chtd., 180 N. LaSalle St., Ste. 2700, Chicago, IL 60601; (312) 845-5402; NNeumark@scgk.com.

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Watch Out for ‘Dirty’ Estoppel Certificates

Getting a tenant to promptly sign an estoppel certificate may not be your only concern. A tenant may try to send you a “dirty” estoppel certificate, instead of the estoppel certificate you expected. A dirty estoppel certificate is a modified estoppel certificate that sets out a “laundry list” of problems and defects with the lease and/or space, notes Chicago attorney Neil T. Neumark. This gives the tenant an opportunity to vent its complaints, in writing.

The tenant doesn't expect you to submit the dirty estoppel certificate to your prospective lender or buyer. Rather, it assumes you'll bend over backwards to fix the problems and defects so that it will sign a “clean” estoppel certificate—that is, one without the list of problems and defects, Neumark notes.

If the tenant's list of problems and defects is false, you could threaten to take legal action against the tenant for falsifying statements on the estoppel certificate, says Neumark. But if they're true, you may have to quickly fix those problems and defects to get a “clean” estoppel certificate that will satisfy your prospective lender or buyer, he notes.

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