Prudent SBA lenders should be familiar with estoppel certificates and the circumstances when an estoppel certificate may be required or used to obtain factual information it can rely on prior to financing certain types of loans. An estoppel certificate is “[a] signed statement by a party (such as a tenant or a mortgagee) certifying for another’s benefit that certain facts are correct, such as that a lease exists, that there are no defaults, and that rent is paid to a certain date. A party’s delivery of this statement estops that party from later claiming a different state of facts.” Black’s Law Dictionary (11th ed. 2019).
Estoppel certificates are almost always used in commercial real estate transactions and act as “a legal bar to alleging or denying a fact because of one’s own previous actions or words to the contrary.” Merriam Webster. An estoppel certificate is typically required by a lender, buyer, and/or title agent as part of a real estate purchase or refinance transaction either when: (i) the property is subject to a condominium or homeowner’s association; or (ii) a third-party tenant occupies a portion of the real estate to be purchased or refinanced. As many SBA loans also involve additional real estate collateral, a SBA lender may also see a requirement for an estoppel certificate as part of a title agent’s requirements to issue a loan policy on that collateral.
Obtaining an estoppel certificate from a condominium or homeowner’s association is a tool that the lender can use to confirm the owner is in good standing with the association and has paid current any applicable assessments and/or fees and that there are no open violations or liens affecting the property which should be resolved prior to or at closing. It is important for a lender to request, obtain, and review any required estoppel certificate prior to closing. Typically the title agent will order an estoppel certificate as part of the title insurance requirements for issuance of the owner’s or lender’s policy, but sometimes the title agent relies on the lender or owner to request and obtain the estoppel certificate on their own. In this situation, the sooner the lender is aware that the title agent will not order the certificate, the better so that this requirement does not delay closing. Sometimes it can be a challenge to obtain current contact information for the association or the estoppel certificate may take longer to obtain than expected to obtain. It should also be noted that the association may charge a fee for an estoppel certificate and this fee can be passed on to the seller, borrower, or owner, as applicable.
Similarly, obtaining an estoppel certificate from a third-party tenant located at the property to be purchased or refinanced is a great way for a lender to confirm the actual, current lease terms prior to the sale or refinance. Many leases include a requirement for the tenant to complete and return an estoppel certificate in a timely manner when requested. An estoppel certificate provides factual information about the lease, including: (i) whether the lease is presently in full force and effect; (ii) lease commencement date; (iii) lease expiration date; (iv) lease extension options; (v) amount of any security deposit; (vi) party holding the security deposit (vii) current rent payable; (viii) date through which rent has been paid; (ix) whether there exist any events of default or any circumstance which, with the passage of time or giving notice or both, would constitute a default under the lease; (x) whether the tenant has any claim of lien or offset; (xi) parties in possession; (xii) use of the property; and (xiii) whether the tenant has right of first refusal to purchase the property.
For more information regarding estoppel certificates in the context of commercial real estate loan transactions, please contact the attorneys at Starfield & Smith, PC at (215) 542-7070 or visit us at www.starfieldsmith.com.