Canada. Estoppel Certificates - Do They Work?
As a general matter, estoppel certificates, sometimes referred to as status statements or acknowledgments, essentially set forth and confirm the veracity of a lease and identify its key terms. Rooted in the principle of promissory estoppel, estoppel certificates are intended to "estop" a party who signs the certificate from thereafter asserting a fact inconsistent with what is set out in the certificate.
Although most often requested by potential buyers or lenders in connection with the sale or financing of an owner's interest in a commercial property, it is not uncommon for tenants to request an estoppel certificate from a landlord when negotiating the transfer of their interest under a lease.
While the intended purpose of an estoppel is to permit the addressee to prevent the addressor from subsequently claiming that the circumstances surrounding the lease or tenancy are other than as set out in the certificate, the question arises – do they actually work? Well, it depends.
There are a number of general principles which are applied by the courts in determining whether an estoppel certificate is enforceable. Most significantly, it will have to be shown that the party signing the estoppel intended to affect the legal relationship between it and the recipient of the estoppel (i.e. it understood it was waiving rights otherwise available to it) and that the recipient both relied upon the estoppel certificate and changed its course of conduct as a result (i.e. it took some action or refrained from taking some action as a consequence of such reliance). In many cases, one or more of these elements are absent from the fact situation, thereby reducing the effectiveness of the estoppel certificate as a binding instrument.
Estoppel certificates cannot create contractual rights which would not otherwise exist at law or through the existing lease documentation. Courts have held that a unilateral declaration by one party lacks the requisite elements of offer and acceptance necessary for the formation of a contract.
Accordingly, by way of example, where a lease is otherwise unenforceable at law (such as where it does not include the required certainties for a valid lease), the fact that the tenant executed an estoppel confirming the lease will not transform the lease into a binding agreement.
Estoppels also cannot be used to alter or contradict specific, unambiguous terms of a lease. For instance, where a tenant indicates (mistakenly or not) in an estoppel that it does not have any remaining options to renew the term, when in fact one or more remaining options are determinable from the lease documents themselves, the
estoppel will not preclude the tenant from later asserting that it continues to have the benefit of the option(s). As such, an addressee will not be able to rely upon misstatements in an estoppel certificate about matters that are discoverable by its own efforts. The practical effect of this is that an estoppel certificate should not be viewed as a substitute to completing one's own lease review due diligence.
An estoppel should also not be used as a means to amend the lease, as there is no additional consideration being given for this "new bargain" which typically only benefits one party. While many leases contain a provision compelling a party to execute an estoppel if requested, courts have held that such a clause does not amount to consideration for any "new bargain" that first appears in an estoppel certificate. And so, a purchaser should not use an estoppel certificate to amend a tenant's exclusivity or add relocation or redevelopment rights in favour of the new landlord.
Similarly, where a lease calls for an attornment – upon which a mortgagee wants to rely – the mortgagee is better advised to negotiate some form of a subordination, non-disturbance and attornment agreement (SNDA) with a tenant than to place such effecting language in the tenant's estoppel. If a lease amendment is needed, or a new covenant is required, it should be made into a proper permanent agreement and not just a provision in a tenant estoppel.
In light of the foregoing, is there any value in obtaining estoppel certificates? For purchasers and lenders of commercial real estate, estoppel certificates are useful to "smoke out" ongoing or potential landlord/tenant disputes that cannot be gleaned from the lease documentation or in any other convenient way. This will help avoid "walking into a lawsuit".
Estoppel certificates also afford an opportunity to have the tenant confirm its own understanding of the terms of the lease. This includes a confirmation of the documents that comprise the lease, as well as the rent payable under the lease. Purchasers and lenders can then flush out any discrepancies by comparing the estoppel information against the lease documents, rent roll, confidential information memorandum and other due diligence materials available to the purchaser or lender.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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