What is an Estoppel Agreement?
Estoppel Agreement Defined
An estoppel agreement (in the real estate sense) is, in basic terms, an agreement by two or more parties which ends a dispute or confirms a certain fact or status, while preventing either side from arguing anything to the contrary. The term likely comes from the Latin word exstoppolare, meaning to hinder or stop.
For example, in a seller financing deal, the seller may be concerned that the buyer will later claim that their agreement was oral and not in writing despite the existence of an agreement . As a protection so that he is not forced to prove the written agreement was executed to the judge on a later date, the Seller may ask the Buyer to sign an estoppel agreement, confirming that the written agreement exists and is valid. It makes it much harder for the later judge to ignore the Seller’s written claim that the contract exists.
This Declaration of Ostensible Facts (or Declaration of Estoppel), as it is known, allows the signor(s) to certify facts in the written language of the document, such as: date, which are instead supported by the signor’s verbal testimony. Put simply, an estoppel agreement is used to "stop" one party from arguing something to the contrary at a later date.
Essential Elements of an Estoppel Agreement
A well-structured estoppel agreement generally includes the following elements:
- Parties: The tenant and the landlord under the lease, and other necessary parties as appropriate.
- Assertion of Facts: The tenant typically includes an assertion of facts, which may include the commencement date of the lease, the square footage of the premises under the lease, the date on which the tenant has an option to purchase the leased premises, a statement of whether the lease is in good standing or has been breached, the rental dates and amount, the amount of any rent concessions, the status of any improvements provided or contemplated by the landlord, and any other information the potential buyer or lender may find relevant.
- Estoppel for Failure to Provide a Correct Estoppel Certificate: Typically, the estoppel agreement provides that the landlord and any lender have the right to request an updated estoppel certificate if the tenant fails to provide a correct estoppel certificate with respect to the same property at closing, and that the tenant would be required to be correct in any subsequent estoppel certificate and the estoppel agreement. The estoppel agreement also provides that in the event the tenant breaches this provision, it would be required to indemnify the landlord for losses incurred by it (or its lender) as a result.
When to Employ an Estoppel Agreement
An estoppel agreement comes in particularly handy in all sorts of real estate transactions. It is also a common tool for use in lease transactions. A tenant will typically need the protection of an estoppel agreement because its landlord’s lender may want to see one along with the lease. A lender that holds real estate as collateral for a loan will want to confirm the terms of a lease with the tenant and the tenant’s understanding of the lease terms.
In commercial real estate transactions, an estoppel agreement is commonly requested by the seller’s lender. A tenant may be asked to provide an estoppel agreement to confirm the terms of the lease in place between the seller and tenant. Sometimes an estoppel agreement is also requested as part of a sale to show a lease in place that may affect the value of the property. Other times, an estoppel agreement may be used by the buyer to confirm the existence of the lease in place with the seller and a tenant.
A buyer may also request a form of an estoppel agreement from a landlord. The buyer uses the estoppel agreement to confirm the lease terms. This is often the case in a sale where the tenant may have an option to purchase the property. This type of estoppel agreement will often contain an estoppel certificate signed by the landlord confirming a tenant’s rights to purchase the property.
In the context of an acquisition, the seller often provides an estoppel agreement to a tenant asking the tenant to fully disclose its rights under the lease. This may be to confirm or waive the existence of options to purchase or other outstanding rights that a tenant may have.
Crafting an Estoppel Agreement Template
Creating a template for an estoppel agreement is not all that difficult, provided you have some knowledge of contract law and simple documentation management. The most important thing to remember when you’re developing an estoppel agreement template is that it must focus on the specific points of information relevant to you and the applicable laws in your state.
The following steps will help you outline an effective estoppel agreement template for your specific purposes:
- Include the legal name of the property using common industry standards, such as address, unit number, garage or other identifying features like brownstone, coop, condo, nation, building, etc.
- Write out additional details regarding the nature of the property such as the number of bathrooms, appliances included, square footage and even any specific processes related to the property.
- Identify the specific parties involved, including both the lessee or tenant’s and lessor’s legal names, signatures and relationship to the property.
- Include a section that specifically states what is being agreed to by each party.
- Add any additional provisions or clauses found necessary for your particular situation.
While the above steps are very general, the specifics of an estoppel agreement template inevitably depend upon what your situations call for. For instance, if you’re worried about a property not being properly maintained, you could write a clause that precisely outlines the approved maintenance process and how problems should be addressed.
The most important thing to remember when drafting an estoppel agreement template is to follow the laws of your specific state to avoid issues later on. Be sure to have a professional look at your template to ensure it will cover your interests.
Common Estoppel Agreement Mistakes
It is all too common to see errors made in the descriptions used in an estoppel agreement. Descriptions are the Achilles heel of an estoppel agreement. Examining even a descriptive portion of a commercial lease or mortgage will reveal an unusual pattern that most commercial real estate lawyers can instantly recognize. Whether the parties are developers, landlords, tenants or lenders, the pattern was striking: • The reference is to a Section and not a number. • The reference is to a map or a book and not a section. • The reference is simply inapt. What is inapt you might ask? At the end of a particular street, there was once an abandoned railroad track. A track was once there, and so was a certificate of occupancy§ Since the owners continued to hold the property and maintain it as if the improvement never left, the designation or description in each of their schedules continued to read "On the east side of Anytown Boulevard, 300 feet from the easterly boundary of Airport Land." That description, translated, meant that the property was located at the end of Anytown Boulevard, and implied a 300-foot boundary along the street from the easterly boundary of what became the airport. That was the description used in the original schedule from forty years ago. Though the airport and no longer existed, the description was unchanged. Sometimes, a better geographic indicator or description is provided, but is overlooked. The more generic "In the City of Anytown" was the description used in the tenant estoppel agreement for the entire commercial center where a regional mall was built. Further , there was great latitude in the geographic description. The property could have been or should have been described in relation to the New York State Thruway interchange to specific streets. The center was across from Route 5, which razed the original scope of the upper Erie Canal. Historically, the area had an entirely different name depending on what period of history you were studying. However, the applicant for the large regional shopping area where they plopped down the mall only had an application that required it to disclose its address. All it provided was the simple description "In the City of Anytown" with an address. And because it didn’t cover the entire geographic scope of the center, the entire center was required to provide an estoppel certificate. I came across this section and the error during the preparation of a study on the uses of an estoppel agreement, including its use in dealings with the downstate New York public authorities. About two years ago, I had been asked to present a special seminar at the NYU Law School General Counsel’s Conference regarding the link between the estoppel certificate and significant public development deals they were considering, including deals previously discussed. I created the study and attached a template of an estoppel agreement that I would be using in the presentation. I received the same pattern of responses in the schedules that had always originated from them. The responses contained a mixture of references to maps and books referring to sections that were not compliant with the sections in the general description. I have been collecting an array of estoppel agreements, and when I have a moment, I will provide further synopses of the patterns I have seen.
Legal Enforceability and Effectiveness
The enforceability of an estoppel agreement under a given set of facts depends on consideration of the whole agreement, the surrounding circumstances at the time of the agreement and the nature of the estoppel at issue. The law of estoppel is constantly developing. For example, the law in Alberta and British Columbia concerning rezoning with regard to a private right of action for breach of a "promise" made by a municipality is unsettled because no court has approved or determined the validity of such a promise. However, estoppel by representation has been made an exception to the principle of unfettered municipal discretion. In Abbott v. Edmonton (City), the Alberta Court of Appeal held that the tests for determining the enforceability of an estoppel were the following: (1) whether there has been a clear representation; (2) whether the representation was intended to be acted upon; and, (3) whether the person asserting the estoppel would suffer prejudice if the estoppel was not enforced. Same test in British Columbia but British Columbia court held that estoppel by representation can only be evoked against the executive function of a municipality and never against the legislative function.
Locating and Utilizing an Estoppel Agreement Template Online
A search on the internet can usually yield a number of relevant estoppel agreement templates. Trusted legal resources are always a good bet. There are also many professional real-estate organizations that offer estoppel agreement template tools for their members and others in the industry as well. Your attorney will likely be happy to provide you with a copy of an estoppel agreement template as well for your particular jurisdiction .
While these templates available online can be extremely valuable, it is important to always use additional legal resources to verify the validity of any particular form. What is important is that the portion of the template that is most critical to your process is worded correctly. In certain cases using the drafting software contained in most word processing programs may allow you to customize the template considerably in a legal and valid way.
Whether or not you use a template provided online, it is always best to consult with legal counsel to ensure the validity of your estoppel agreement.