We all hear about the big commercial deal where millions or even billions exchanged hands. But what we don’t hear about is an unusual document that can make or break that deal. Yet, few agents not only don’t know about this document and even fewer address this document during lease negotiations. This means that you can be leaving your clients exposed to risk and that you’re not using your full negotiation power to get better terms.
What is this Document?
This powerful document is the Tenant Estoppel Certificate (TEC). The TEC is a legally binding document where a tenant represents or promises certain things to be true. These “things” relate to the relationship between the landlord and the terms of the lease. Common “things” found in TECs are:
- Dates: when the lease started, when it was last renewed and its expiration date;
- Rent: how much rent the tenant pays and what’s due over the term of the lease;
- Defaults: if either party defaulted on any rights and responsibilities under the lease;
- Contact information: the parties’ addresses, phone numbers and email information;
- Deposits and Letters of Credit: if any deposits exist and if interest is being collected, how the deposit can be used and so on; and
- Renewals or Extensions: if such rights exist, the terms and the notification periods.
Why have it?
The TEC is a promise made to a lender or a potential buyer. The lender or buyer wants these promises because they support whatever the landlord claims to be true about its leases, rent and so on. Clearly, the TEC is imperative to the due diligence process of the sale or refinancing of a property.
After all, if you’re going to spend significant amounts of money, you’ll want the security that it won’t be hit with financially devastating surprises.
In other words, a TEC prevents unsubstantiated surprises because it provides the buyer or lender with a “snapshot” of the status of the lease and because it legally precludes the tenant from maintaining any claims inconsistent with the terms in the TEC.
For example, after we acquired a property, I’d be inundated with tenants claiming they wouldn’t be paying a few months of rent because the previous landlord owed them money for tenant improvements. Before I did a thing, I’d look at the TEC that the defaulting tenant signed. If what they said was inconsistent with the TEC, I’d tell them they had no claim or right to avoid paying rent.
What do I do if I see it?
Recognize this as an opportunity to negotiate in certain terms into your lease. The TEC is very important to landlords and you can use this provision to extract better rent rates or other terms important to the tenant. To be clear, when the obligation to sign the TEC arises it’s not the time to negotiate terms in the lease; rather, it’s just the time to ensure that the terms in the lease are true.
The most common issues related to TECs are who pays for the preparation of the document, how many times the landlord may request a TEC and what terms the tenant will agree to in the TEC. Pay attention to these issues and ensure that you put in as many “caps” as possible. But, this is just scratching the surface….
Many leases will further include a “deeming provision” if the tenant does not object to or execute the draft estoppel within the required timeframe. This means that, if the TEC goes unsigned, the tenant is deemed to have accepted the representations in that draft TEC it received. Some leases will further allow the landlord to appoint its own agent who can sign the TEC on tenant’s behalf. This is highly problematic, especially if the tenant disagrees with the representations in the TEC, because the tenant will be held to the potentially incorrect statements in the TEC. Examples include exaggerated rental rates or the elimination of any specially agreed rights.
Tenant representatives should further request that the obligation to sign an estoppel certificate is mutual. This means that the landlord will also have to sign an estoppel certificate should a prospective subtenant request one, for example. Also, request that both parties must agree to all of the terms in the TEC, that the tenant has a right to add in her own comments and that the default isn’t the landlord’s standard TEC. This ensures that the tenant isn’t unwittingly held to certain representations that are inaccurate and can advise the potential purchaser or lender if the landlord is not upholding its obligations.
Consider how much time the tenant has to review the TEC and what happens if the tenant doesn’t respond on a timely basis. Ensure that you define your review period as X “business days” to avoid getting confusion over whether or not holidays and weekends are included in the calculation.
Finally, delete any language that deems the draft submitted approved or appoints an agent to sign the document should the tenant not reply in a timely manner.
As mentioned, above, if the tenant misses the opportunity to review the document this may hold her to unfair or untrue terms.
What Should I tell my tenant to do when the obligation arises?
If you think a tenant doesn’t have to provide a TEC, think again. The power to require a tenant to sign a TEC typically stems from a term in the lease, as alluded to above. And not providing a TEC could result in serious repercussions.
Distinguish yourself as an excellent agent by guiding your client through the potential pitfalls of a TEC. Consider the following as you help:
- Ask the tenant if she received the certificate under the stipulated time period and in the form that the lease provides. You want to make sure your tenant was given enough time to review the document and the landlord may have put itself under an obligation to provide the TEC a certain number of days before the TEC must be executed.
- Review not only the lease, but also all of its amendments. Compare the terms of these documents to the estoppel provisions to ensure accuracy. For example, check that the names and addresses of all parties are correct and that all documents are included in the definition of “Lease”. I’ve come across missing documentation during this process which could be problematic if there is a foreclosure or need for refinancing.
- Confirm that the landlord hasn’t defaulted on its obligations. Speak with other tenants and walk the property to determine if the landlord has not yet fixed a defective HVAC, for example, as required under the lease.
- Be sure that the TEC reflects any special terms negotiated between the landlord and tenant. For example, does the TEC include the tenant’s option to renew, expand or terminate early, as well as any tenant improvement rights, self-help remedies and audit rights? Confirm that the TEC doesn’t negate any of these rights
- Be specific when responding to any statements requiring the tenant confirm that the landlord has not defaulted on its obligations “to the best of tenant’s knowledge”. The tenant may only have knowledge about specific types of landlord obligations, especially if the tenant operates in multiple facilities.
- Confirm how much the tenant is paying by contacting the tenant’s accounting department and reviewing the latest rent invoices.
- Don’t let any landlords pull a fast one by using the TEC as an opportunity to expand the tenant’s obligations or delete the tenant’s rights. If something is unclear, qualify the language be inserting “as required under the Lease….”
Remember, success in the real estate business is all about the value you can provide to your client. By knowing a bit more about the secret TEC you’ll be sure to stand heads and shoulders above the crowd, as well as protect your client.
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