An estoppel certificate is an essential document if you are a landlord who owns residential or commercial properties. Also called a tenant estoppel certificate (TEC), this piece of paper can make selling a property that includes tenants so much easier. The estoppel allows potential buyers to confirm with tenants the details of their written lease.
If you’re just new to the rental industry, or if you already have an extensive portfolio of rental properties, knowing about estoppel certificates will save you a lot of hassle. You are able to provide a legal document of the current rental situation to the prospective buyer.
Of course, many things to do with real estate contain a lot of legal jargon. Although you may be up to speed on “legalese,” you might have to explain to existing tenants in layman’s terms why they have to sign a tenant’s estoppel agreement. In most cases, it’s in their best interest to sign one.
What is an Estoppel Certificate?
Simply put, a tenant’s estoppel certificate contains the most important terms and specific clauses of the written lease. So, the document should include details such as the amount of rent they pay, how much was the security deposit, and renewal dates. If you, as the current landlord, want to sell the property or take out a loan, the buyer or lender needs a TEC as part of their due diligence process.
To become a legal document, the tenant has to sign the TEC. With their signature, they confirm that all facts on the certificate are accurate. Tenant estoppel certificates benefit the landlord, tenant, and subsequent purchaser or lender.
Why are Estoppel Certificates Essential?
Without getting your current tenants to sign an estoppel certificate, it will be challenging to sell your property. Savvy investors are wary about taking on risks—and buying an investment property without TECs is a significant risk. The estoppels give potential buyers or lenders a clear understanding of the lease terms.
There are three main reasons why estoppel certificates are essential for landlords and investors:
- They confirm that the tenants pay the amount of rent the landlord says.
- TECs guarantee that the terms the landlord has stated match the tenant’s conditions.
- They assure investors or lenders that there are no pending disputes that could cause cash flow problems.
What Should an Estoppel Certificate Contain?
If you are selling your rental property or refinancing the mortgage, the estoppel document should contain up-to-date information about the lease terms and any special terms included. Of course, a TEC should have the necessary active lease information, including the following:
- Start and end date of the lease.
- The monthly rent and the payment schedule.
- Renewals and extensions, including information about the renewals—are they automatic or to be negotiated?
- Verification that the active leases are in full force and unmodified.
- Security deposits and interest rates.
- All maintenance obligations are up to date.
- Any other relevant terms of the current agreements.
The purpose of an estoppel certificate is to give a snapshot of the lease’s current status. You should include any verbal agreements or agreed-upon clauses that you have made with the tenant. For example, this could be information about allowing pets, providing a storage area, or free use of a parking spot.
Any of the following additional information can also be included on a tenant’s estoppel certificate:
- Any past-due rent is owed.
- Concessions that you have agreed with the tenant.
- Information about any defaults on your part or the tenant’s part.
- Information about any ongoing disputes.
Remember that tenants may refuse or hold off signing a TEC if they spot inaccuracies.
Are Tenants Obliged to Sign an Estoppel Certificate?
One of the challenges landlords face is getting a tenant to sign the TEC. Tenants can be suspicious when the current landlord hands them a document to sign. If you are a responsible landlord, most tenants are happy to help. But some may not know what an estoppel certificate is, and they will be unsure if they need to sign.
One of the most crucial questions is: are tenants bound by law to sign an estoppel certificate? Yes—but only if there is a lease provision requiring the tenant to sign. So, when preparing a lease agreement, be sure to include the possibility of signing an estoppel certificate if needed. In the end, the tenant could be evicted due to being in breach of the lease agreement if they refuse to sign.
If the tenant’s estoppel letter contains mistakes or inaccuracies, they can request that they are resolved before they sign. Of course, there must be no errors in the estoppel. A signed estoppel certificate can take precedence over the lease. In one case in California, the commercial tenant lost their right to a lease extension because they didn’t realize the lease termination date was wrong.
What if a tenant refuses to sign a TEC?
There are a few reasons why a tenant may be hesitant about signing an estoppel certificate. What should you do if a tenant refuses to sign? Let’s look at two main reasons why this can happen and what you should do, starting with the most common one:
- Lack of understanding—Most tenants have never seen an estoppel letter before. Therefore, they may be worried that the document could put their rental agreement at risk. In those circumstances, the best thing to do is walk them through the process. You can stress that the TEC protects their rights when a new owner takes over. Show them how the lease agreement corresponds to the estoppel certificate.
- Disputes—If you’ve fulfilled your obligations, conflicts will rarely occur. But if the tenant kicks up a fuss about something, it’s good to resolve the issue quickly. After all, you don’t want one petty dispute to put the spanner in the works of your sale.
Of course, when signing an estoppel certificate, it’s not the time for a tenant to renegotiate the lease. Legally, they can’t object to signing if they simply want to modify the original contract. Think of the tenant’s estoppel certificate as a rubber-stamping the original lease.
How TECs Protect Landlords and Tenants
Although tenant estoppel certificates are necessary to sell or refinance an investment property, there are other reasons why you need them. Apart from providing proof of cash flow, TEC can protect you in the future.
1. Tenant estoppel certificates verify the lease agreement
A TEC is a legally-binding document, and it lets the prospective buyer know that you are upfront and honest. Basically, the tenants substantiate your claims.
If you are putting the property up as security for a mortgage or refinancing one, the TEC improves your chances of getting approval. The lender can verify your cash flow and assess the risk
2. Protect yourself
Tenant estoppel certificates also protect you from disputes with a tenant. You get the chance to resolve any issues before it’s brought to the attention of the prospective buyer.
3. Avoid a lawsuit
You get peace of mind when you have a tenant estoppel certificate as it reduces the chances of getting sued. Everything regarding the current status of the lease is down in writing. So, a tenant can’t sue you after the sale because of supposed discrepancies or damages.
Selling an investment property that includes an estoppel certificate also speeds up the sale of the apartment building. The new buyer can buy with peace of mind, knowing that they won’t face lawsuits from tenants due to breach of any rental agreement.
Do You Need Estoppel Certificates for Residential Properties?
Estoppel certificates are useful for many types of residential properties, as well as commercial ones. Although less is at stake than selling a commercial building, landlords can still benefit from a TEC. For example, it can prove your ability to pay back a loan. Or, it can give a potential buyer peace of mind.
Selling a multifamily property can come with many variables. Getting tenants to sign a TEC means that buyers are aware of their responsibilities. They know the status of security deposits and also if the residents were expecting expensive property repairs.
Even when selling smaller residential properties, a tenant estoppel letter is useful. Usually, written agreements between a landlord and a single family are less informal. After a few years, however, many verbal arrangements could be added without putting them into writing. As the current owner, you can protect these agreements by getting tenants to sign a TEC.
Tenant Estoppel Certificates: A Takeaway
A tenant estoppel certificate is a crucial document if you are selling an investment property or taking out a loan. The TEC affirms the current status of the tenant’s lease and allows a buyer or lender to calculate cash flow.