Negotiate Modern Estoppel Certificate Provisions
Although it’s a common provision in leases, don’t make the mistake of agreeing to just any terms in the owner’s standard form language for the estoppel certificate clause. Changes in the economy and the need for increased flexibility on the part of tenants make it crucial to push back against terms that could paint you into a corner later. Don’t underestimate the estoppel clause’s power. Instead, carefully negotiate its terms so you end up with a clause that helps, not hurts, your interests.
As a starting point, you need to understand an estoppel clause’s purpose and its consequences. The owner of the center or office building where you rent space may need an estoppel certificate from its tenants if it’s working with a prospective lender, buyer, or investor for the property. That’s because any party preparing to spend money will want to know that it won’t be blindsided later with tenant claims that it’ll be responsible for resolving. For example, a tenant could assert that the owner has defaulted on the lease for any number of reasons, such as failing to pay for tenant improvements it agreed to or not making necessary repairs to a space. That’s where an estoppel certificate comes into play: The tenant providing the certificate must commit in writing the position it takes as to the status of its lease—that is, whether or not the owner—and the tenant itself—are performing the lease obligations adequately.
Even though you’ll see standard language in the owner’s lease form, such as points about preparation costs, the frequency with which the owner may ask for an estoppel certificate, and the compliance period, there are new things to consider as well. In fact, several new terms have come into play, and the way in which tenants should negotiate and draft these provisions has changed as a result. Ask the owner to:
Grant mutual clauses. Making the estoppel clause mutual can give you an exit strategy if your need for space changes; very often, parties to which leases are being assigned, or prospective subtenants, want certificates from landlords.
Provide sample certificate forms. The negotiation strategy for you and the owner should change according to the new landscape of commercial real estate; it’s key to protect your own flexibility. In the past, some owners would give tenants a sneak peek at the terms that could appear in a future certificate. They’re less likely to do so today. That’s because, for an owner, the problem with attaching a certificate ahead of time is that the owner really doesn’t know what questions will be asked, because lenders and buyers have different forms.
You should still push for the owner to attach a sample estoppel certificate form to the lease. Even a short sample form can give you an idea of some of the items you’ll be asked for, such as a statement of the rent rate and that the lease is in good standing, is in full force and effect, and hasn’t been modified, changed, or altered.
For more tips on how to negotiate the narrowest possible language in your estoppel clause so it protects you in the changing face of the economy, and Model Language to adapt for your leases, see "Protect Interests When Negotiating the 'New' Estoppel Certificate Clause,” available to subscribers here.