A Brief Introduction About the Estoppel Agreement
What is estoppel? The definition of estoppel is that it is a legal principle where a party cannot deny facts due to their previous conduct, denial, or allegation.
What is an estoppel certificate? An estoppel letter or certificate is a document used for due diligence in real estate and mortgage activities. The prospective purchaser of the property will verify the representations made by the landlord through this certificate.
Estoppel in real estate ensures that the prospective buyer has complete information regarding the tenants occupying the property so that they cannot make any false claims regarding the terms of the rental agreement. A tenant estoppel certificate is extremely important for the buyer of the property, which has tenants.
An estoppel agreement, therefore, is an agreement between the buyer of the property and the existing tenants. There are always rewards and risks involved for a prospective real estate buyer. When you are buying real estate that has existing tenants, the tenants are a risk.
Who Takes the Estoppel Agreement? – People Involved
An estoppel agreement is taken by the future owner and the existing tenants of a particular property. The reason for this agreement is that there are some tenants who might cause problems in the future by distorting certain facts. These tenants pose a risk for the future owner. The tenant has to declare in this agreement that all the information provided is true and correct. This ensures that the tenant cannot claim something after the contract of purchase is complete. As the current property owner will examine the statements made by the tenants in the estoppel agreement, the tenant will not furnish false information.
Purpose of the Estoppel Agreement – Why Do You Need It?
When you invest in a property, you consider the future returns from the property as well as the risk. When you buy a property with tenants, you are at risk due to false claims made by the tenants regarding the rental agreement.
Scrutinizing an existing lease might not reveal these issues as some unscrupulous landlords and tenants might conceal facts when the ownership is changing. You can take legal action against them.
An estoppel agreement prevents the tenant from making any claims after the sale has taken place. The tenant will think twice before providing false and misleading information as their claims will be examined by the current property owner. These issues could relate to the advance rent paid, the amount of security deposit paid, or any dues settled.
This agreement contains pertinent information relating to the tenants like lease duration, rent payable and due dates, other agreements with the landlord, ownership status of the appliances, payment of utilities, repairs required, or pets.
The aim of the agreement is to protect the interests of the prospective buyer of the property. The buyer is investing in the property with the expectation of returns, and the existing tenants are the biggest risk. The estoppel agreement will ensure that the buyer does not face any problems from the existing tenants.
Contents of the Estoppel Agreement – Inclusions
An estoppel agreement is an agreement between a real estate buyer and the existing tenants. The agreement protects the buyer from any risk of false claims made by the tenant with respect to rent, security deposit, or advance rent paid. The risk is reduced, and the returns for the buyer are more stable.
The agreement must include the following:
- Parties to the agreement: The parties to the agreement are the buyer and the existing tenants.
- Date of agreement: The effective date on which the agreement was signed needs to be mentioned
- Property details: The location of the property and the number of floors are to be mentioned
- Tenants and occupants: The names of all the tenants and occupants in that property need to be mentioned along with all identifying information which can be verified
- Lease term: The start and end date of the lease term for all tenants need to be incorporated
- Rental payment: The rental payment and the basis of charging rent, as well as when the rental amount is due every month, should be mentioned. Penalty for late payment of rent should also be stated
- Security deposit: The security deposit paid by each tenant along with the date paid
- Utility bill payments: Whether the responsibility for payment of utility bills lies with the tenant or landlord
- Appliances: Are the appliances owned by the landlord or tenant?
- Pets: What is the policy with regard to pets in the building and how many tenants keep pets
- Repairs: Are there any major or minor structural repairs needed in the building
How to Draft the Estoppel Agreement?
While drafting the estoppel agreement, the following points need to be kept in mind:
- Parties involved: The names of the parties to the agreement and the relationship between them
- Location of the property: The exaction location of the property needs to be mentioned
- Total consideration: The consideration paid by the buyer for the property
- Tenant details: The details of the tenants in the building including all relevant information relating to them along with identity proof
- Applicable laws of the state: The agreement should be drafted in accordance with the applicable laws of the state
- Lease duration and type: The starting and ending dates of the lease relating to all the tenants should be included in the agreement. The type of lease should also be stated as well as if there have been any modifications in the lease
- Other agreements: Whether any tenant has any other agreement with the landlord than the one mentioned
- Rental status: The due date every month on which the rent is payable by each tenant and the penalty for delayed payment should be stated
- Security deposit: The security deposit paid by each tenant and the basis of charging this deposit
- Utility payments: Determining who is responsible for paying the utilities
- Appliances: The ownership of the appliances
Negotiation Strategy
As far as negotiation strategy with regard to estoppel agreement is concerned, the buyer should inspect the condition of the building and determine the quality of the tenants before making a firm offer to the seller of the property. The price should be quoted according to the condition of the building and quality of the tenants.
Benefits & Drawbacks of the Estoppel Agreement
The benefits of the agreement are:
- Protection of buyer’s interest: This agreement ensures that the interest of the buyer is not compromised. The buyer is clear about the status of the tenants in the building with regard to payment of rent, outstanding dues, or advance payment. The investment he or she makes in the building is protected by this agreement, and returns will be much higher
- Claims by tenants: Since the agreement requires the tenants to provide detailed information regarding their status in the building, the buyer can take them to court if they make any false claims after the purchase contract is signed
- Lesser disputes: The agreement ensures that the possibility of disputes between the new owner and the existing tenants is minimized as all the information regarding the tenants is included in the agreement. This will help the new owner operate the property better.
The drawbacks of the agreement are:
- Sale or loan against property: Landlords are more likely to resolve issues rather than using the estoppel agreement against the tenant and documenting the issue. The reason for this is the landlord will have difficulty getting a loan or selling the property if there are disputes recorded in the agreement
- Statements by the tenant: Tenants in most cases merely acknowledge the facts, and it is the responsibility of the owner to verify the authenticity of the facts
What Happens in Case of Violation?
An estoppel agreement is a legal document to ensure that the buyer’s right is protected against any false claims made by the existing tenants of the property.
The tenant has to provide all the required information in the agreement relating to the lease period, the amount of rent being paid, the due date for the rent, and any other agreements with the existing landlord.
If the existing tenant tries to make any false claims and violates the agreement(1), then the new owner can take the tenant to court.
While this agreement should protect the rights of the new owner, there is no guarantee that the facts provided by the existing tenants, which are examined by the existing landlord, are accurate. The tenants simply acknowledge the information.
Hence it is important for you to have the information provided checked by a legal professional to determine whether it is authentic or not. Otherwise, if you take the tenant to court for violation of a clause in the agreement, you would lose the case if the information provided is not accurate. The information provided by the tenant should have sufficient supporting documentation to be acceptable.
Both the new owner and the existing tenant should examine the estoppel agreement thoroughly before signing it(2).
When you think of buying a property that has existing tenants, you must proceed with caution and have an estoppel agreement signed.
There are both risks and rewards associated with buying a property for investment: existing tenants are one of the major risks. That is why the agreement insists that the tenants provide information about the rent payable, the due date of rent payment, the payment of utilities, the lease dates, security deposit, and any other agreement with the landlord.
The information provided by the tenant cannot be taken at face value as they might be unscrupulous and provide misleading information. You need to verify the facts.
Even though this agreement protects the owner from any hassles due to the tenants, but using this agreement against the tenants might prove counterproductive during a sale or a loan.
These agreements are of great value for buyers of properties with tenants. However, you need to do your background check as well.