As part of the sale or refinancing of an office, industrial, or retail building, tenants will be asked by the Landlord to sign a document known as an estoppel. In fact, most leases require a Tenant to sign an estoppel and failure to do so can result in a tenant being considered in default.
As part of the due diligence process, a buyer or lender wants to know that the lease information the landlord gave them are, in fact, accurate and that there are no outstanding claims or defaults by either landlord or tenant. So exactly what is an estoppel? In the simplest terms, an estoppel is a legal document where a Tenant confirms the terms of the lease and makes representations about their lease to another party, in most cases, the building purchaser or the purchasers lender. Its purpose is to accomplish two things. First, to verify the terms of the lease. This includes non-economic terms such as dates and options to renew, as well as the economic terms like rate, escalation, and if the Tenant has a security deposit. Second, it prevents the Tenant from asserting claims related to the lease later in the term with the new ownership which are not consistent with the representations made in the estoppel.
The lease will typically specify that the Tenant must sign the estoppel within a given number of days as the buyer’s due diligence period is limited. It is important for the Tenant to act as soon as it receive an estoppel. The main reason being that many leases state that if the Tenant doesn’t sign the estoppel within the required response time, the Landlord can sign it on the Tenants behalf, leaving the Tenant in a position for potential default.
When a Tenant is negotiating its new or initial lease, being cognizant of the estoppel provision can help prevent favorable estoppel language for the Landlord. Be aware of the number of days given for response-are they days or business days? Allow enough time to review the document with your broker and/or counsel and make comments to it. Delete language allowing the Landlord to sign the estoppel on the Tenant’s behalf. Add language allowing the Tenant to request an estoppel from the Landlord and/or lender and consider negotiating the estoppel itself, attaching it as an exhibit to the lease.
What should you do when you get an estoppel from your landlord? Most importantly, be conscientious of your response time and make its review a priority. Review the document with your Tenant Rep and counsel to ensure no aspects are getting overlooked. Estoppels are often inaccurate as they are prepared for all the Tenants in the building at one time by people that were not involved in your initial lease negotiation and are not familiar with the building or Tenants. The estoppel is supposed to simply record the facts of the existing lease and not renegotiate it. However, do remember, an inaccurate estoppel could change the terms of your lease!