Shopping Center Lease Due Diligence – The Importance of Estoppel Clauses in Commercial Leases


May 27, 2022

In this post, I talk about doing due diligence on a pile of leases for a shopping center.

The shopping center had long been owned by the same family. That is always the first sign that the leasing is going to be problematic – when the same family owns any real property for multiple decades and multiple generations, they get sloppy.

But of course, the client told me, “Don’t worry, Michelle. Many of the leases are short, only six to eight pages.” Sorry, this is not good news either. Here, the short-form lease, worked up by someone probably by cutting and pasting from various forms, was devoid of a section requiring that tenants give landlord, promptly upon demand, an estoppel certificate (“Estoppel Clause”). This is not insignificant.

Estoppel Clauses provide an obligation by the tenant to deliver an estoppel certificate within a specified time, certifying to the landlord certain matters relating to the lease. In the context of leases, estoppel certificates are critical documents.

Almost all the important encumbrances on title are disclosed by the public record. A lender or purchaser can easily learn, with respect to a fee owner, the amount of judgments, the size of mortgages, and the amounts claimed by mechanic’s lienors. This is not so with leases. Leases are not generally reflected on the public record. Leases are frequently amended, and the landlord and tenant relationship is constantly evolving via renewals and modifications.

Absent an express obligation to give an estoppel certificate, a tenant is not obligated to execute or deliver one. Of course, a seller can represent things about the tenants’ rights, but such representations, if given, typically lapse after a stated survival period and might not be backed by meaningful credit. Thus, the importance of the estoppel certificate becomes apparent.

Estoppel certificates generally contain the following elements:

(1) Identification of the Lease and All Amendments and Related Documents

By identifying all documents that constitute the “lease agreement” package, the party receiving the estoppel certificate can satisfy itself that it has received and reviewed all relevant lease documents. Documents that could potentially be included in defining the “lease agreement” include: commencement date agreements; alteration agreements and consents; the exercise (or waiver) of options; consents to prior assignment and subletting; settlement agreements regarding disputes under the lease; subordination, non-disturbance, and attornment agreements; recognition agreements with ground lessors; change of address notices; material correspondence; and even prior estoppel certificates.

(2) Confirmation of Factual Matters Not Documented in the Lease Itself

Once the lease document is defined, the next most important job the estoppel certificate performs is to require the party giving the estoppel to confirm that certain elements of the landlord and tenant relationship have occurred or, conversely, do not exist. These may include:

(a) setting forth key lease dates, such as the commencement date, the rent commencement date, and the expiration date, at least where these dates are not certain but depend upon the occurrence of certain events;

(b) determining that contingencies or conditions precedent referred to in the lease have been satisfied;

(c) confirming satisfactory performance by the landlord of any required work (or, if not, what loose ends remain), the payment of monies owed by the landlord to the tenant in connection with the build-out of the premises, and the taking of occupancy of the premises by the tenant;

(d) confirming the current escalated rent where it cannot be determined within the four corners of the lease; and

(e) establishing whether any default exists.

(3) Form Estoppel Certificates Annexed to Commercial Lease

Normally, a lease specifically sets forth what information may be required in the estoppel certificate. Some leases include a form of estoppel certificate as an exhibit to the original lease. Frequently there is a clause at the end of the lease provision covering estoppel certificates, which enables either the landlord or the lender to obtain such additional information as such party may reasonably request. This generally is intended to ensure that novel requirements of future lenders or purchasers can be satisfied.

Since these short-form leases lacked Estoppel Clauses, how was my client supposed to handle estoppel certificate requests from lenders or potential purchasers in the future if it purchased the shopping center?

Again, I am NOT a transactional attorney. I represent clients on neither leasing nor sales and acquisitions. Rather, I am hired by transactional attorneys and potential purchasers to review leases as part of the due diligence for commercial acquisitions. Thus, here, after explaining all this to my client, my suggestion was that transaction counsel insist on some type of condition of closing that the current owner (seller) obtain lease amendments to all leases that include an estoppel clause. And while they are at it, they should also get estoppel certificates from each tenant as well.

Respectfully submitted,

Michelle Itkowitz