What is an Estoppel Agreement?
In this week’s frequently asked question blog series we will address the question of “What is an Estoppel Agreement”. An estoppel agreement (also known as an estoppel certificate) is a legal document that's used to verify certain representations made by the landlord. It is typically requested during the due diligence process and contains verbiage referencing how much the tenant pays in rent, if there are any security deposits (and where they are held), the expiration date of the agreement, etc. Essentially, it highlights the terms of the agreement between the landlord and the tenant.
Additionally, it should clarify that neither the landlord nor the lessee owes money to the other. For example, if the landlord is responsible for replacing major mechanical components within the building and due to the landlord’s inaction, the tenant is forced to replace their own water heater, the landlord may owe the tenant over $1,000. If a signed estoppel agreement is not presented to the tenant during the due diligence period, the tenant may decide to sue the new owner for the balance once they take possession of the property.
Having said that, once all parties (landlord & lessee) have signed the document, it provides a shield of protection for the purchaser from future claims regarding past debts. For example, if an estoppel certificate is presented and signed by a tenant, and then several years later, the tenant sues the Purchaser for $2,000 they claim was owed to them by the previous landlord, a judge will likely toss out the case. This is because the tenant signed a legally binding document that stated that neither party (Landlord & Lessee) owed anything to the other. Along with that, you relied on this information to make an informed decision regarding purchasing the property.
Typically, your purchase contract should request that all signed estoppel agreements be provided to you within 2-4 weeks of the contract execution date. Having said that, you should ensure that you receive these signed documents prior to the expiration date of your due diligence period. That way, you have time to address any discrepancies that arise and, if necessary, back out of the contract without forfeiting your earnest money deposit.
P.S. If you're a business owner interested in leasing commercial property, be sure to grab a copy of my book "Before You Sign That Lease: The Small Business Owner's Guide To Leasing Commercial Space". To buy your copy, click the following link: