Making Estoppel Provisions More Effective for Commercial Landlords

by | Jun 11, 2024 | Uncategorized

Making Estoppel Provisions More Effective for Commercial Landlords

The timely provision of estoppel certificates, SNDAs and other items requested from a tenant, especially in connection with the potential sale or refinancing of a property is a critical issue for commercial landlords. Unfortunately, landlords often encounter delays as tenants may be slow to return these items for a variety of reasons, tenants may also use these requests as an opportunity to exert leverage over the landlord. These delays and obfuscations can place landlords in a precarious position, as the completion of a sale or refinancing deal is often contingent upon the timely receipt of the requested items.  Commercial leases generally provide that a tenant’s failure to timely provide an estoppel certificate constitutes an event of default under the lease. However, initiating legal action can be a lengthy process, potentially taking months or even years. Given this context, it is prudent for landlords to implement additional measures that ensure the prompt return of estoppel certificates, SNDA, and other items required under the Lease.

What is an Estoppel Certificate and When Might One be Requested?

An estoppel certificate is a document used in real estate transactions where a tenant confirms certain facts about their lease agreement. These facts typically include the lease’s status, the rent amount, and any claims the tenant might have against the landlord. Lenders and buyers rely on these certificates to verify the terms of the lease and to ensure that leases are still in effect at the time of a sale/refinancing and there are no undisclosed issues that could affect the property’s value or the transaction’s viability.

Common Challenges with Estoppel Certificates

Tenants may delay returning estoppel certificates for several reasons:

1. Lack of Priority: Tenants are focused on their own business objectives and may not see the urgency or importance of the landlord’s request.

2. Misunderstanding: Less sophisticated tenants might not fully understand what an estoppel certificate is or why it is necessary.  They may be confused by the request and intimidated by the legal language contained in an estoppel.  Often, less sophisticated tenants do not have a trusted lawyer to review the requested estoppel and may be delayed in responding to the landlord’s request as the tenant retains new counsel to review the estoppel form.

3. Negotiation Leverage: Some more sophisticated (or more devious) tenants use the opportunity of the landlord’s request to negotiate more favorable terms or concessions from the landlord.  It is not uncommon for tenants to raise new concerns not previously voiced to the landlord, request repairs/improvements to the premises, or even assert that they have been promised additional rights not reflected in an existing lease.

4. Administrative Delays: For large corporate tenants juggling multiple locations, internal processes and approval chains within the tenant’s organization frequently cause delays.  These tenants, understanding that most landlord’s sole remedy in connection with the tenant’s failure to timely return a requested estoppel or other item is to declare a default under the lease and pursue legal action, recognize that such a response is an unwieldy and largely impractical option for the landlord.  As a result, these tenants frequently do not take seriously the time frame for compliance set forth in the lease.

Given these potential obstacles, and the importance of timely receiving estoppels / SNDAs / financial reports, etc. landlords are well advised to incorporate into their leases additional strategies to mitigate delays and ensure timely compliance.

Implementing an Effective Solution

A very practical solution to this common problem is to insert a clause in the commercial lease agreement that imposes a reasonable fee for each day the tenant is delayed in providing the necessary documents. This approach has multiple benefits:

1. Clear Incentive for Compliance: The prospect of incurring daily fees provides a strong incentive for tenants to prioritize the timely return of estoppel certificates.

2. Reimbursement for Administrative Costs: The fee helps cover the costs associated with follow-up communications and potential delays in the transaction.

3. Reduced Legal Cost: A fee associated with a delay in returning an estoppel creates a tool the landlord can use itself directly in interacting with a tenant and does not require the cost and potential delay of involving the landlord’s lawyer.

Drafting the Lease Provision

When drafting the lease provision, it is essential to ensure that the language is clear, reasonable, and legally enforceable. Here’s an example of how such a clause might be structured:

Tenant agrees to provide any requested estoppel certificate within ten (10) days following receipt of Landlord’s written request. If Tenant fails to provide the requested estoppel certificate within such ten (10) day period, to reimburse Landlord for its administrative costs incurred in connection with such nonperformance, Tenant shall pay to Landlord a fee of $200 per day for each day after such ten (10) day period that Tenant fails to provide the requested estoppel certificate in the condition required by the terms of the Lease.”

Conclusion

By incorporating a reasonable fee for delays in providing estoppel certificates, SNDAs, and other required items into the lease agreement, landlords can significantly improve compliance and reduce the administrative burden associated with chasing down these documents. This proactive approach not only expedites transactions but also helps maintain a smoother relationship between landlords and tenants. As always, it’s advisable to consult with legal counsel to ensure that the lease provisions comply with local laws and regulations. Implementing this quick tip when signing a lease can save you significant headache and expense down the road.

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