What is an Estoppel Certificate? Dealing with inherited tenants.

What is an Estoppel Certificate or an Estoppel Letter

I got this question a lot “what is a real estoppel?” An estoppel certificate is a document that is signed by the tenant of a property that confirms the details of their rental agreement with the owner.  The confirmed details will include their monthly rent, security deposit, length of the lease, history with the property and owner and perhaps most importantly this estoppel letter will also include any and all claims the tenant has or will have against the property owner.

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Why do you need an Estoppel Certificate?

If you are buying a property from a landlord and he tells you that he has five tenants who are paying $2,000 a month each and they are locked in to 10 year contracts, how would you know he is telling the truth?  What if they aren’t paying $2,000 a month?  What if the contracts are for less than one year? 

Or what if there are no contracts?  What if one tenant is suing the landlord for negligence and is about to get a multi million dollar judgement against the landlord and property and THAT is why he is selling?  Before a seller will sign an estoppel certificate they will usually confirm cash flow, their lease agreement, for commercial real estate this may include confirming commercial leases with a certificate or letter at the landlords request or possibly from an hoa management company, etc.  The hoa estoppel works the same way it is just confirmed through an hoa.

An estoppel certificate helps to verify the details about tenants and their rental contracts.

How Reliable or Trustworthy is an Estoppel Letter?

When done correctly an estoppel certificate is reliable and a good indicator a property’s income.  An estoppel letter will often include bank statements, checks, pay stubs, credit history, signed/notarized leases and you can compare the credits and deposits with the bank statements the owner provides on the property. 

The tenants, owner or anybody else that signs an estoppel letter is not legally allowed to later contradict what they signed.

Also when a tenants signs off and and says that they do NOT have any claims against the seller, this gives you protection if they try to come back later and make a false claim against you.  The tenant is unlikely to come back and say that you need to build a $465 million play ground for example, because all their claims have been listed, isolated and dealt with ahead of time.  Thanks to the estoppel letter.

How much does an estoppel letter cost?

There really isn’t any “cost” other than the time it takes to go through the paperwork and get one.  You’ll also want to get it notarized when the tenant signs it.  The notarizing may not be something that is required but you should do it anyway because it verifies the tenant really did sign it in case you have issues later.

Who provides the estoppel certificate?

You can download an example of an estoppel letter form us here, if you are buying a property you MUST REQUIRE that the owner provides one for each tenant.  If you are selling you want to provide it as well, although it may not be legally required – do it anyway.

Other uses of an Estoppel Certificate

Let’s the the owner of a property wants to refinance, or purchase a property or use on as collateral – in all these cases the banks will want to see an estoppel letter for each tenant.  The same usually goes for any kind of net worth calculations, valuations of estates, probate valuations, appraisals, etc.

Also a homeowners association (HOA) or overseeing property association may provide an estoppel letter to confirm that the property owner is in 100% compliance with their dues, fees, etc. and they have no pending claims or back payments against the property or owner.

Any time you need to determine the value of any kind of rental property, you will most likely be using an estoppel certificate to confirm details of tenant’s payments.

Estoppel certificates for real estate investors.

When you or a client of yours is looking at buying a property has existing tenants, a big part of the due diligence process is verifying the payment history and relationship that the current owner has with the tenants.  This can be done with an estoppel certificate.

As an investor going into a property with existing or inherited tenants, there is a key piece of due diligence to execute, before the deal is completed, in the form of an Estoppel Agreement.

What does an estoppel letter do for you?

Like I said above an estoppel certificate outlines the specifics about a tenant’s lease or rental agreement.  if you are buying a property you want to go through it because it removes liability to you as the new owner (investor) in certain matters with the existing tenants of the property.

Among other things, the estoppel letter is a way of putting forth new and legally documented outlines that the tenants must follow as the property changes hands from on owner to the next.

An Estoppel Certificate is kind of like the class getting a new teacher…

Imagine a classroom, and you are the new teacher in the room with students that have been there with another teacher all year.  The first time one of the students has a late assignment, they might say something like “Miss Brown (the previous teacher) said I could have more time to turn in my assignments.  I’ve never had to turn them in when the other kids do!”

Now that leaves you as the new teacher in a situation to deal with.

The Estoppel Letter helps to avoid that problem.

So apply that classroom situation to a tenant.

Let’s say you’ve just purchased a multifamily rental property, and rent is due on the 1 st of the month.  Most of your tenants pay on time, but a few do not.  When you approach them about late rent, you get the feedback just the same as in the mock classroom example, “Jim (the previous owner) never made me pay on the first, he always gave me a couple of extra days or weeks to pay.”

That’s where an estoppel certificate would come into play because you would’ve already settled this.  You would’ve seen the previous payments and made necessary adjustments in the rental agreements ahead of time.  There’s a new sheriff in town, and all the tenants knew that ahead of time.

The Estoppel Letter isn’t just about rent

It isn’t just related to rent, but let’s say a tenant comes to you and says that Jim promised to build a new roof over their unit.  Now the tenant demands the roof and is going to sue you for millions in order to get you to pay for it.  This kind of claim would’ve already been addressed in the estoppel letter.

An estoppel letter will include a number of things to limit the new owner’s liability in cost, claims and any potential promises or guarantees the tenants are expecting.  This is why you want to make sure to study the estoppel letters and take them seriously.

10 Key Points of an Estoppel Certificate

If you are any of your clients are dealing with income properties then you want to make sure you are familiar with these items, also make sure watch the video Azam made for the craziest estoppel certificate story that we’ve ever encountered lol.

So the tenants are given the estoppel certificate and given a set time to have it filled out and returned, here’s an example of what they will sign off on:

1.)  Agreements made with previous owner

This will include any promises, practices and/or expectations that tenants have, etc.  The biggest of these  issues is going to be the claims that a tenant has, you don’t want surprises later so they are to disclose any and all claims in the estoppel letter.  

2.)  A list of who owns what in the property (appliances, furniture, parking, etc.)

You don’t want tenants moving out and taking the fridge for example, or neglecting the lawn or taking furniture that come with a furnished unit that was provided by the owner.  In some cases abroad, we’ve seen parking and storage spaces have their own individual ownership so just to be safe we always document who owns or has access and ownership to any and all amenities. 

It may go without saying that the owner owns the parking spaces, the storage sheds, the dumpsters, etc. but you always want to be legally clear about everything.  Remember what’s it is signed off in the estoppel letter the tenants pretty much have no way legal of contradicting what they signed.  You want to see a clear itemization of everything owned and NOT owned by the tenant.

3.)  Any repairs/maintenance that are needing done at the time of purchase

Again you want to avoid a tenant trying to sue for a foundation repair that they thought was promised to them.  If there are any problems with the property that a tenant knows about it, you want to outlined in detail.

If the tenant signs off they are making it clear that any and all upkeep has been done and there are no problems with the maintenance.  This is even more important when the estoppel is from a HOA (homeowner association) or a group like that because you want to know that everything is up to code.

4.)  Pets allowed and currently there

If one tenant is a pet store and all of a sudden they start carrying German Shepherds and now you have to pay higher insurance because of they are a “high risk breed”… you want this settled ahead of time so the tenant knows they need permission to add ANY pets to the property.

5.)  Who is paying utilities

The owner or the rents are paying utilities, it may seem like you should always switch it to the tenants paying but that isn’t always the case.  We have talked about this in our landlording guide here.  You just want to know the situation and make sure you are clear on it, you may or may not change.

6.) When rents are due and the exact amount

You will see bank statements, checks, credits and debits, etc.   You want to see detailed information on this because it is the most important and biggest driver of the overall of the property.

7.)  Names of all renters and those occupying units

In residential this may include the renter, renter’s dependents, long term ‘guests’ of renter, etc.  You want to know everybody in the property and everybody with access to the property.  In commercial you may want to run background checks on anybody who is given keys to the property.  You also may have certain sensitive and high risk businesses like medical clinics, rehab centers, drug or DNA testing, etc. that will require certain levels of security and information about each and every employee, delivery person and staff member.

8.)  Lease terms with dates and history

You want to know when each lease started and when it ends and the history of each tenant.

9.)  Security deposit information, ANY advance rent paid (refundable, nonrefundable, amount and terms)

This is can be a big deal and it if often missed.  In some cases like with factories or manufacturing the safety deposits can be enormous and the tenants may fight to get it returned.  You also want to know if there was any advance rent paid that may be due to a tenant.  In real life the seller will NEVER have this available or leave it in the pot for the new owners, so you will have to come out of pocket for this unless you do this right. 

You want to EXACTLY how much was paid and it is refundable what is the exact criteria and has it been met, in either case the seller should provide those funds for you in the way of cash or a lowered purchase price.  This is a good and overlooked negotiating tool.

We have a client who does this a lot.  Let’s say he is working on a deal and the owner has a tenant that is a sports bar.  Our client will search headlines and old news articles for nightmare stories about sports bar tenants suing or getting huge judgments against their landlords over security deposit issues.  He will then use these articles to negotiate better deals when talk to the seller.

10.)  Any and all CLAIMS

If the tenant thinks the a parking lot should be repaved and that it is a health hazard or that they are losing money from their retail store because of it, you need to know.  You don’t want to buy a property only to get a multi million dollar lawsuit or judgment against you. 

By have the estoppel letter ahead of time you can refer to it later if an issue comes and show the tenant that this issue was not discussed or agreed on when they signed with you.

That’s a lot of stuff, what if the tenants does NOT do the Estoppel Letter

Normally the lease and rental agreements will require the owner to give the tenant a short period of time to complete the estoppel certificate.  If the tenant does not comply then the owner can complete it.  The tenant will still have to sign it.

Once the estoppel letter is signed the tenant is responsible for the representations and claims (or lack of claims) made.  This is why it is in the tenants best interest to take it seriously and fill it out themselves so they know what they are committing to and legally promising.  Make sure to watch Azam’s video for more on how an estoppel letter can be used in a bad way.

In Conclusion Remember…

The Estoppel Certificate protects sets expectations, verifies claims and protects all parties involved.  It will be at least signed by all current tenants, ideally they go through each form as well.  This is part of your due diligence in purchasing any income property with existing tenants aka inherited tenants.

Inherited tenants can be a great thing in terms of having monthly rental income from the start, everybody wants good, quality renters ‘preinstalled’.  To make things go smoothly make sure that you or your clients always have legal documentation of what is expected from yourself as the owner/s and from your renters. 

This policy will keep your profits, and sanity, safe.

Use the Estoppel Letter as a Reference

If issues or challenges do come up later with your tenants, simply reminding them of their estoppel certificate can help a great deal.  If it still escalates to a lawsuit or small claims court, the estoppel letter is on your side (as long as you listed to US!) and it is a legally binding document and an asset to you.  It will prove that you as the owner had set forth the updated terms that were agreed upon by the renter when they signed.  Explaining and showing this to your tenant will usually help to avoid going to court in the first place. 

Estoppel Certificate Example Template:

You can download this sample of a Estoppel Letter Certificate here from us for free. 

It is in Word so you can edit it any way that you want.

Also here are two other helpful places:

http://www.legaldocs.com/htsgif.d/xestop_cert.htm (example estoppel agreement)

https://en.wikipedia.org/wiki/Estoppel_certificate  (Wikipedia article w/more information)

Make sure to check out the comic below and get your free stuff below.

Thanks all!  = )

Annisa