W Tenants, landowners need to take caution

FRIDAY, AUGUST 31, 2012
CHICAGOLAWBULLETIN.COM
Volume 158, No. 172
Tenants, landowners need to take caution
hen entering
into financing on
a piece of
commercial real
estate, it is
common practice for lenders to
request that tenants and
property owners execute
estoppel certificates for existing
leases on the property. An
estoppel certificate is “a signed
statement by a party (such as a
tenant or mortgagee) certifying
for another’s benefit that certain
facts are correct, as that a lease
exists, that there are no defaults
and that rent is paid to a certain
date.” Black’s Law Dictionary, 591
(8th Ed., 2004).
The estoppel certificate has
become a useful tool in financing
on commercial property and is
meant to: “1) to give a prospective purchaser or lender information about the lease and the
leased premises and 2) to give
assurance to the purchaser or
lender that the lessee at a later
date will not make claims that
are inconsistent with the statements contained in the estoppel.”
Alvin L. Arnold and Jeanne
O’Neill, “Real Estate Leasing
Practice Manual,” Section 35:1
(West Online 2005).
Although estoppel certificates
have become routine within
commercial real estate lending,
they should not haphazardly be
executed without first diligently
confirming the accuracy of the
representations contained
within. Inaccuracies in an
estoppel certificate can be used
against the executing party at a
later time, leading to unintended
disputes between tenants and
landlords. In addition, failing to
investigate existing events of
default before executing, may
result in the waiver of future
claims of default.
Courts throughout the country
have held parties to representations within estoppel certificates.
In Plaza Freeway Limited
W
Partnership v. First Mountain
Bank, 81 Cal.App. 4th 616 (2000),
a landlord of a shopping center
and its tenant disagreed over the
proper termination date of a 25year lease agreement. In
conjunction with the landlord
purchasing the property, the
tenant previously signed and
delivered an estoppel certificate
to the landlord that set forth a
termination date. However, the
tenant remained on the property
beyond the date it represented in
the estoppel certificate and the
landlord filed a forcible detainer
action. The trial court determined that the termination date
contained in the estoppel certificate was incorrect and found the
tenant in lawful possession of the
property. A California appellate
court reversed, finding that
under the evidence rules of
California the tenant was
estopped from contradicting the
clear lease termination date
contained in the estoppel certificate and found the tenant in
unlawful possession.
In JRK Franklin, LLC v. 164
East 87th Street LLC, 27 A.D.3d
392, No. 7571, Index 106961/05
(N.Y. App. Div. March 30, 2006),
the tenant sought a declaration
from the court that a storage
A party
that relies
on outside
evidence to
contest the
express language
of an estoppel
certificate does
so at its own
peril.”
BY CHRISTOPHER R.
PARKER
Attorney Christopher R. Parker is a
partner at Michael, Best & Friedrich
LLP in the firm’s Chicago office. His
practice focuses on complex litigation
in commercial contract, products
liability, real estate and construction
matters. He litigates cases in both
federal and state courts, including the
Northern District of Illinois.
He can be reached at
crparker@michaelbest.com
or (312) 222-4954.
structure on the premises that
predated the tenant’s lease did
not constitute a violation of a
lease. The landlord issued a
default notice to the tenant predicated on the claim that the
structure was constructed
without the landlord’s prior
written consent as required
under the lease. However, the
default notice conflicted with an
estoppel certificate, which the
tenant had demanded from that
landlord as a condition
precedent to taking over the
lease. The landlord represented
in the certificate that to the best
of its knowledge there existed no
default under the lease. Finding
that the storage structure
existed at the time the landlord
made this representation, and
that the landlord had a duty to
investigate before voluntarily
certifying an absence of any
tenant defaults, the court
estopped the landlord from
claiming that the structure
constituted a default under the
lease.
In the primary Illinois case
addressing estoppel certificates,
K’s Merchandise Mart, Inc. v.
Northgate Limited Partnership,
359 Ill.App.3d 1137, 835 N.E.2d
965 (4th Dist. 2005), the new
landlord of a shopping center
attempted to impose a management fee on the tenant, relying
on the tenant’s representation in
an estoppel certificate that it was
paying a certain amount in
“common area charges.” The
certificate made no mention of a
management fee, but an earlier
reconciliation statement
received by the tenant stated
that management fees were
being charged as part of common
area expenses. The landlord
argued that by executing the
estoppel certificate, the tenant
agreed to pay management fees.
The court disagreed. Because
the management fees were not
expressly identified in the
estoppel certificate, were not
disclosed in the lease and the
parties had no prior course of
payment of the fees, the court
refused to impose the management fees on the tenant. In
reaching its decision, however,
the court explained that, where
an estoppel certificate expressly
states lease terms and other
essential facts about a lease, a
party should be held to its representations, that “a party’s
delivery of this statement estops
that party from later claiming a
different set of facts” and that
“[a] party who executes an
estoppel certificate should not be
allowed to raise claims of which
it knew or should have known at
the time the certificate was
executed.”
The court also confirmed that
a party “is under a duty to
inquire and determine, insofar as
reasonably possible, what claims
exist.”
Estoppel certificates can have
a profound impact on landlord
and tenant relationships. Thus,
parties should ensure the
accuracy of specific lease terms
described within, as well as diligently investigate to make sure
there are no existing defaults
under the lease. A party that
relies on outside evidence to
contest the express language of
an estoppel certificate does so at
its own peril.
Copyright © 2012 Law Bulletin Publishing Company. All rights reserved. Reprinted with permission from Law Bulletin Publishing Company.