What is an Estoppel Certificate?
Overall, the real estate community agrees that we are in or near the peak of a long and bullish run. For tenants, this can mean the possibility of facing steeper rents, and an even more competitive market for space. But for investors and developers, this often marks a period of increased sale activity, which could result in a building’s trading hands. This bears the question: What does new ownership mean for a tenant?
What is it?
One important component of this process is the estoppel certificate, formally known as the Tenant Estoppel Certificate (TEC). The TEC serves as an affirmation of the critical terms in your lease agreement for the new owner and any potential lender to the owner. It supports important dates like the lease commencement, expiration, and other options. It also clearly documents how much money will be paid in rent, and when the rent will be paid. It details default clauses, and any important security deposit information.
Why is it so important?
The estoppel certificate serves as the formal documentation of a promise between a tenant, the new owner, and their lender. Because it’s such a vital component to the process, execution of an inaccurate estoppel certificate could cause both unnecessary financial implications and lease liabilities.
What does it have to do with operating expenses?
The estoppel certificate also serves as a key mechanism regarding operating expenses. As the market strengthens, vacancy rates will decrease. If you sign a lease in a 50 percent occupied building that is set to close at 10 percent vacant, such a dramatic drop in vacancy is accompanied by a spike in operating expenses, which could be passed on to tenants. If you affirm an estoppel that artificially inflates the amounts due to your original landlord, you could unnecessarily become exposed to inflated charges.
What does the estoppel certificate not do?
The estoppel certificate period can act as a significant point of leverage for tenants, providing a third-party insight into the relationship between a landlord and a tenant, and how well the building is performing. The estoppel does not necessarily provide an opportunity to renegotiate a lease, but that doesn’t mean you’re at a complete loss if you’re looking to address any concerns with your space, building, or landlord. Instead, all issues should be resolved prior to executing the representations outlined in the estoppel, so there are no unresolved issues between the landlord, the potential buyer, and their lender.
If you have any questions about this critical documentation, be sure to reach out to a trusted advisor at Cresa. Our understanding and experience working with estoppel certificates can ensure a smooth experience for all parties.