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 [email protected] 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.
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