When dealing with tenant-occupied properties, the term "estoppel" often comes up. But what exactly is an estoppel, and why is it such an important document in real estate transactions? In this blog post, we’ll break down everything real estate agents and property managers need to know about estoppels, including their purpose, common pitfalls, and best practices for using them effectively.
What is an Estoppel?
An estoppel is a legal document signed by a tenant that verifies key details about their lease agreement and the status of their tenancy. It serves as a tool for potential buyers, lenders, and property managers to confirm the terms of an existing lease when a property is sold or refinanced.
In short, it’s a snapshot of the landlord-tenant relationship, providing assurance that the lease terms presented by the property owner are accurate.
Why Estoppels Matter
Estoppels are crucial in protecting the interests of all parties involved in a real estate transaction. Here’s why:
For Buyers and Lenders:
Estoppels help confirm:
- The terms of the lease (rent, duration, renewal options and deposits).
- Whether there are any disputes or unpaid amounts.
- Whether tenants have been granted special arrangements, such as concessions or modifications.
Example: A buyer investing in a tenant-occupied property can rely on the estoppel to verify cash flow expectations and avoid surprises.
For Tenants:
- Provides tenants an opportunity to confirm that their rights are accurately represented.
- Protects tenants from unexpected changes after a property changes ownership.
For Sellers:
- Demonstrates transparency and builds trust with buyers and lenders.
- Reduces the risk of disputes post-sale.
Common Issues with Estoppels
Despite their importance, estoppels can sometimes become a sticking point in real estate transactions. Here are the most common issues and how to address them:
1. Missing Information
Problem: Estoppels are sometimes incomplete, missing critical details such as lease start dates, renewal terms, or security deposit amounts.
Solution: Create a detailed template that prompts tenants to include all necessary information. Double-check the document before submitting it to buyers or lenders.
2. Tenant Disputes
Problem: Tenants may raise issues with lease terms or claim discrepancies.
Solution: Address disputes proactively by maintaining clear documentation of lease agreements and payment histories. Be prepared to resolve concerns before the estoppel is signed.
3. Delays in Completion
Problem: Tenants may delay completing the estoppel, slowing down the transaction process.
Solution: Communicate early and often. Provide tenants with clear instructions, a deadline, and an incentive (such as a gift card) to encourage timely responses.
4. Legal Compliance
Problem: Mistakes in estoppel documentation could lead to legal complications.
Solution: Consult an attorney to ensure your estoppel template complies with local regulations and accurately reflects the lease terms.
Best Practices for Handling Estoppels
1. Use a Standardized Template
Your closing attorney will likely have a preferred template, otherwise creating a clear, standardized template can save time and ensure consistency. Your estoppel should include:
Tenant name(s).
Lease start and end dates.
Monthly rent amount and due date.
Security deposit amount.
Any modifications or addendums to the lease.
Outstanding issues, if any.
2. Communicate Clearly with Tenants
Explain what the estoppel is, why it’s needed, and how it benefits them. Tenants are more likely to cooperate when they understand the purpose behind the request.
Pro Tip: Include a sample completed estoppel form to help tenants fill it out accurately.
3. Verify and Cross-Check Information
Once the tenant returns the signed estoppel, verify the information against your records. This is your chance to catch discrepancies before they become bigger issues.
4. Create a Timeline
Set a clear timeline for the completion of estoppels. Make this timeline part of the transaction process and ensure all stakeholders are aware of it.
Estoppels in Action: A Case Study
Scenario: A buyer purchases a multifamily property, only to discover post-sale that one tenant was granted a rent reduction that wasn’t disclosed in the lease summary.
How an Estoppel Could Have Helped:
If the tenant had completed an estoppel, the buyer would have been aware of the rent reduction upfront, allowing them to adjust their offer or renegotiate terms.
Frequently Asked Questions About Estoppels
1. Is an Estoppel Legally Binding?
Yes, once signed, an estoppel is legally binding. Tenants are affirming that the details they’ve provided are accurate to the best of their knowledge.
2. Can a Tenant Refuse to Sign an Estoppel?
In most cases, lease agreements include a clause requiring tenants to complete estoppels when requested. If this clause is missing, you may need to negotiate cooperation.
3. Who Prepares the Estoppel?
Typically, the property owner or their agent prepares the estoppel and provides it to the tenant for completion. In NC your closing attorney may have their own version that they want your client to use so you should check with them first to make sure you don’t have to redo the process!
Final Thoughts
Estoppels may seem like just another piece of paperwork, but they play a critical role in ensuring transparency and trust in real estate transactions. By understanding their purpose, addressing common challenges, and implementing best practices, you can streamline the process and protect the interests of all parties involved. Getting and Estoppel at the start of your listing will help greatly with interested parties, don’t wait till your under contract to make this happen.
Want a free Estoppel template? Send us an email and we will send you over a free, easy to use template that you can modify to your needs!
