When you’re an investor looking to purchase a residential income property, one thing you need to look out for is whether the property already has a tenant. There are things you need to consider if you’re looking at a rental property with tenants, for example, you’ll need to clarify with the current landlord what the lease is like and what the rent is.
If you want to know the truth about such a situation, an estoppel certificate is something you need to ask for. It’s an important document, and in this post, we’ll answer the question, “What is a tenant estoppel certificate?” and much more.
What is an Estoppel in Real Estate Terms?
What is a tenant estoppel certificate is a question every real estate investor should know the answer to.
It is a signed document containing details of a property’s rental situation. Tenant estoppel statements are certified and verify the terms, conditions, and status of a property’s lease.
To avoid misunderstandings or the current landlord telling you one thing and the tenant telling you another, you should ask for an estoppel certificate.
Due diligence plays a key role when purchasing an income property, and the estoppel clarifies specific details that nobody can change their minds about later. An estoppel certificate could also be required by the lender if you’re taking out a mortgage on the rental property.
The question “What is a tenant estoppel certificate?” is also relevant if you’re looking to purchase or refinance commercial real estate. They’re not used so often in residential situations because there is typically a signed lease that will provide all the important details.
However, that doesn’t mean you shouldn’t ask for one if you’re buying a residential rental property. It means there will be no surprises.
Do You Need a Lease Estoppel Certificate?
If you’re an investor purchasing a rental property, tenant estoppel is essential. We’d all like to trust the people we deal with, but it’s not realistic, and the days of a handshake deal are long gone. Everything concerning your latest real estate deal needs to be documented and in writing.
The role of tenant estoppel is proof of cash flow. This is generally the central point of most rental property purchases. Not only that, but it also stops the tenant from changing their mind and taking a different position further down the line.
However, most important is that it gives you peace of mind. You’re not going to be surprised by any details that surface after the sale. For example, suppose the rental property you’re buying already has tenants. In that case, estoppel ensures no surprises relating to parking arrangements, pets, misstatements from a property management firm, or other details.
Estoppel is even more critical if you’re buying a commercial property. Finding tenants can be challenging, so businesses tend to sign multi-year leases. If the commercial rental property you’re considering is nearing the end of a lease, it puts a whole new complexion on the deal and makes it a much riskier proposition.
What’s Included in Tenant Estoppel Statements?
There are specific details that must be included in an estoppel certificate. They include:
- The date the lease started
- The date the lease is due to expire
- Terms of the lease
- Protected tenancy status
- How much rent has been paid to date
- Whether there are any defaults by either the tenant or landlord
- It verifies whether the lease has been modified and is in full effect
- Any modifications or amendments to the lease will be listed
- Whether there are any options to buy the leased property
- Verification that the landlord has met maintenance obligations and completed all improvements
- A copy of the lease, if there is one
- Whether a security deposit was paid and how much
- Parking and storage arrangements
- Details of the property
- Oral agreements with the landlord
- Agreements concerning the payment of utilities such as gas and water
The Purpose of an Estoppel Certificate and When You Should Use One
You may be wondering what is the purpose of an estoppel certificate? Let’s see if we can give you the answer.
The main reason for tenant estoppel letters is to prevent tenants from going back on their word. Therefore, such documentation has several purposes.
The most common situation is when a landlord sells or mortgages a property. The lender or prospective buyer could ask for an estoppel certificate from the current tenant. This will confirm the status of the existing lease.
Tenant estoppel letters might also be required when a landlord is asked to present them during a corporate transaction. An example is if a business is being sold and currently leases the property in which it operates. The prospective buyer of the business will ask for the tenant estoppel agreement so they can confirm the tenant has been complying with the lease. Such information is critical before committing to purchase the tenant’s business.
If you’re the prospective purchaser of a commercial or residential rental real estate property, you will set a time frame in which the tenant or the seller must respond.
An understanding of what is a tenant estoppel certificate is crucial if you’re thinking about investing in rental property. When given the certificate, make sure you review it carefully for any red flags. It’s an essential part of the due diligence process and will limit your risk in your rental real estate transaction.
If you find yourself in the position of a seller, this certificate is equally important. It demonstrates to buyers that there’s less risk in the purchase.
Does a Tenant Have to Sign an Estoppel Agreement Form?
Theoretically, there should be no reason why residential or commercial tenants would have a problem signing an estoppel agreement form. It simply verifies the terms of the lease.
Unfortunately, this type of agreement has received a lot of bad press in recent years. Many people have also been giving “so-called” advice online, warning people not to sign estoppel because it restricts their rights.
Quite often, the requirement to sign estoppel is in the lease agreement. If this is the case, then there is no argument. However, it helps avoid disagreements and keeps various processes running smoothly.
If you encounter a tenant that’s not happy about signing the estoppel, you should try to assure them that there is no risk to their rights. The certificate merely clarifies what’s in the lease agreement. They should review it carefully, and as long as everything is OK, sign it in a timely manner. If there are any errors, you need to know so that you can correct them.
You also need to know whether there are details agreed to with the current landlord that are not included. Such verbal arrangements can be written down in a letter and turned in with the estoppel. Side agreements might consist of:
- Free use of a parking spot or storage area
- Permission to have a pet
- An agreement to maintain part of the building in exchange for reduced rent
- Exclusive use of a backyard
- Permission to have a roommate
- Permission to sublet
If the property is in a rent-controlled jurisdiction, the estoppel certificate protects the tenant against certain types of eviction because of age, disability, or terminal illness.
Final Thoughts
If you want to purchase a rental property, whether it’s commercial or residential, a tenant estoppel certificate is something that’s likely to come up during your due diligence checks. We’ve answered the question “What is a tenant estoppel certificate” and provided lots of relevant information which will help mitigate risk in your purchase.
Do you have questions about Mashvisor? Read our FAQs and learn about our tools.
