Lots of buildings are selling right now. It seems like every day there’s another announcement of a building in the Dallas Fort Worth area trading hands. As part of the sale or refinancing of an office or warehouse 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 put in default.
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 to another party (building purchaser or lender) about the lease. It has two goals. First, verify the terms of the lease (dates, rent, options, security deposit). Second, prevent the tenant from asserting claims related to the lease at a later time which are not consistent with the representations made in the estoppel. 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.
The lease will typically specify that the tenant must sign the estoppel within a given number of days. This is necessary because estoppels are usually the last thing to be done before a sale or loan is closed so there isn’t a lot of time to get them done. Furthermore, most leases will state that if the tenant doesn’t sign the estoppel within the required time, the landlord can sign it on behalf of the tenant and the tenant may then be in default as well.
In negotiating the estoppel provision of a lease, the tenant should be sure to allow enough time to review the document and make comments to it, delete language allowing the landlord to sign the estoppel on the tenant’s behalf, negotiate the estoppel itself and attach it as an exhibit to the lease, and add language allowing the tenant to request an estoppel from the landlord and/or lender.
What should you do when you get an estoppel from your landlord? Most importantly, be careful because it could change the terms of your lease. Estoppels are often not accurate because they are prepared for all tenants in the building at one time and by people usually not familiar with the building or tenants. Here are some things to keep in mind:
1. Note how much time you have for review.
2. Review the lease including amendments taking special note of the estoppel provision.
3. Verify that the names and addresses of all parties.
4. Verify that the original lease, amendments and other documents related to the lease are properly reference in the definition of “Lease” including the dates of those documents.
5. Confirm facts with personnel in the local office to which the lease applies to be sure there are no operational concerns with the building – HVAC, plumbing, electrical, etc.
6. Be sure that all of tenant’s options to renew, expand, terminate, etc. are noted.
7. Check to be sure of the status of the payment of rent and other charges to be sure the amounts in the estoppel are accurate.
8. Delete any language which adds new obligations on tenant that are not shown in the lease.
Remember, the estoppel is supposed to simply record the facts of the existing lease and not renegotiate it.
Bob Gibbons is a Real Estate Advisor & Tenant Advocate with REATA Commercial Realty, Inc. which is a tenant advisory firm based in Plano, Texas. Bob serves companies in Plano, Frisco, McKinney, Allen, Richardson, Addison, Dallas and the surrounding areas and specializes in companies which lease or buy office and warehouse properties.