Q: I am the Buyer’s Agent on a duplex with Tenants in possession; both of whom have leases which will extend beyond the scheduled closing date. The Buyer has stated that she wants Estoppel Certificates from the Tenants. What are Estoppel Certificates and where do I get them? What are they for?
A: An Estoppel Certificate is basically a declaration by a Tenant as to the status or condition of the tenancy. It is not uncommon for the Landlord to complete the Estoppel Certificate and then the Tenant will be asked to confirm that the information supplied by the Landlord is correct. After reviewing the Estoppel Certificate, the Tenant can either sign it “as is” or make any changes that the Tenant feels are necessary to make it accurate. The Estoppel Certificate will state that once completed, the document will be relied upon by a Buyer or Lender which is why it is important for Estoppel Certificates to be as accurate as possible.
See, e.g., zipForms “Tenant Estoppel Certificate” form TEC. PRDS also has a Tenant Estoppel Certificate Form TEC.
PURCHASE AGREEMENTS: Estoppel Certificates are generally required by Purchase Agreement forms to be provided to Buyers by Sellers of Tenant-occupied property. For example, paragraph 9.D of the CAR Residential Purchase Agreement (“RPA”) indicates that, by checking the box, the Parties are including a “Tenant in Possession Addendum” (“TIP”) which requires Seller to Deliver to Buyer copies of all Estoppel Certificates sent to and received back from Tenants within the specified time frame. Paragraph 13.C of the Residential Income Purchase Agreement (“RIPA”) contains a similar requirement.
Paragraph 14 of the SFAR Purchase Agreement requires Sellers to deliver to Buyers of Tenant-occupied property a similar document entitled “Rental Information Questionnaire.” The current PRDS Purchase Agreement references a new form that will soon be available, the Residential Income/Tenant-Occupied Property Addendum which includes an obligation in Paragraph 3C for the Seller to provide a Tenant Estoppel Certificate(s).
LEASE AGREEMENTS: Not all residential lease agreements contain a provision that requires the Tenant to sign an Estoppel Certificate. (It is universally required in commercial leases.) The current version of the CAR Residential Lease Agreement (zipForms form LR) contains such a provision. The PRDS Residential Lease or Month-to-Month Rental Agreement contains an obligation for Tenants to complete Estoppel Certificates. Older versions of this CAR form, and many other residential lease forms, do not have such a requirement. It is generally easier to get Tenants to complete Estoppel Certificates if such a provision is in the lease.
When a Tenant signs and returns an Estoppel Certificate (or, if the Tenant refuses to comply with a lease requirement to do so), the Tenant is then deemed to be “estopped,” or prevented, from later claiming that the status of the tenancy is different than what the Landlord has stated.
For example, if a Tenant will not cooperate with a request to sign an Estoppel Certificate required by the Lease and that Tenant later claims that the prior Landlord (Seller) verbally agreed to extend the lease, or reimburse Tenant for improvements in the unit, but that is not reflected in the Estoppel Certificate, that Tenant will be prevented from making such a claim as long as the Landlord can prove that the Estoppel Certificate was actually received by the Tenant.
NOTE: Certain local rent control ordinances specify that Tenants cannot waive any of their claimed rights. As such, an Estoppel Certificate may not estop or prevent the Tenant from making a later claim regarding the status of the tenancy. In such cases, actual Estoppel Certificates should not be used and are referred to as “Tenant Questionnaires,” which is what is used with the SFAR Purchase Agreement. Local rent control counsel should be consulted if there are any questions as to the effect of local rent control laws on the use of Estoppel Certificates.
WHEN REQUIRED: Tenants are not required to sign Estoppel Certificates by state or local law. Sellers are only required to Deliver Estoppel Certificates to Buyers if the Purchase Agreement makes that a Seller obligation. Tenants are only required to sign and Deliver an Estoppel Certificate to a Landlord if required to do so by the Lease or some other agreement.
PRACTICE TIPS:
Buyer’s Agents:
(a) On Tenant-occupied properties, make sure that the Purchase Agreement includes a Seller obligation to Deliver to the Buyer signed Estoppel Certificates from all Tenants. Buyers should be advised not to remove their investigation contingency unless they have a clear picture of the existing tenancies and any claims that may be made by the Tenants;
(b) Since Estoppel Certificates may also bar a later claim by the Tenant that was not previously disclosed by the Seller to Buyer, Buyers should be advised to carefully compare the Tenant’s Estoppel Certificates against the leases and other documents (e.g., a rent roll, or income and expense statement from Seller) to determine if there are any discrepancies.
Seller’s Agents: Because it may take some time for Tenants to return the signed Estoppel Certificates, the best practice is to review the existing leases early in the Listing period to determine if the Tenants are required to sign Estoppel Certificates. If there is an Estoppel Certificate requirement, Seller should be encouraged to get the completed Estoppel Certificates to the Tenants at the outset of the transaction.
It is not uncommon for a Tenant to delay returning an Estoppel Certificate to Seller until late in an escrow, perhaps even after the Buyer has removed contingencies. When that happens, if there is no provision in the Purchase Agreement covering what is to occur (and there usually is not), the Buyer should immediately consult with their own qualified California real estate attorney as to whether or not the Buyer may have additional, reasonable time to review and approve the Estoppel Certificate. If the Estoppel Certificate contains new or adverse information, the Parties should be directed to discuss the matter with their own qualified California real estate attorney.
This Weekly Practice Tip is an attorney-client privileged document for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2020 02/07/20