Beware of Use of Estoppel as a Shield in Commercial Real Estate

The New Jersey Appellate Division case of Commerce Limited Partnership, Plaintiff-Appellant v. Edison Furniture, LLC, Defendant-Respondent, 2020 WL 820338, is a cautionary tale on the use of estoppel certificates.  Although the opinion is unpublished, does not constitute precedent and is not binding on any court, it highlights a pitfall of sending a party an estoppel which does not cite any defaults or other material issues (i.e., a “clean” estoppel) when, in fact, defaults exist.

At the trial court level, Plaintiff (landlord) filed a complaint alleging Defendant (tenant) breached its lease by failing to pay late charges and rent. Plaintiff also claimed Defendant failed to carry adequate insurance in accordance with the lease. Plaintiff demanded all outstanding amounts due under the lease, plus reasonable attorney’s fees and costs. Plaintiff also sought to evict Defendant.

During discovery, Plaintiff sent a letter, entitled “Estoppel Letter,” to Defendant and asked Defendant to execute and return the estoppel.  For those unfamiliar with them, whether referred to as an estoppel letter, estoppel agreement, estoppel certificate, or the like (for our purposes, an “estoppel”), it provides confirmation of certain facts set forth in the estoppel by the signatory to it.  Estoppels are used in many real estate transactions such as acquisitions, financing, lease assignments and subleasing of property.  The party requesting an estoppel wants to use it as a means to confirm certain facts the other party to its transaction claims to be true.

In the case at issue, the letter instructed the Defendant to “make … corrections in ink and initial same” if any of the statements in the estoppel were incorrect. The Appellate Division noted that “[a]lthough the parties were engaged in contentious litigation related to Defendant’s breaches under the lease”, the letter requested defendant certify as true, inter alia, that paid all rent due from Defendant was paid in full and that Defendant was not in default in the performance of any covenant, agreement or condition contained in the lease.  The Defendant never signed the estoppel.

After the conclusion of the trial, in a written decision, the Superior Court judge determined Defendant owed money under the lease to the Plaintiff. However, the judge ruled that the unsigned estoppel delivered to Defendant constituted a “waiver of any rights available to [Plaintiff] in this suit,” and that Plaintiff was precluded from enforcing the lease based on defaults arising prior to the date of the estoppel. The judge denied Plaintiff’s claims in their entirety, and dismissed its complaint with prejudice.  The Appellate Division withheld the lower court decision.  In this case, it was the mere sending of a clean estoppel to a tenant in default that led to the waiver of a landlord’s rights.

Oftentimes a tenant will receive a request for an estoppel and will sign it “as-is” and without the benefit of an attorney’s review of it.  The landlord may then try to use the estoppel as a “shield” against such tenant if it thereafter claims a breach of the lease contradicted by certifications made by the tenant in the estoppel.  The landlord may assert such a defense even though it may have had knowledge of contrary facts at the time the estoppel was delivered to it.

The fate of the Plaintiff in the referenced decisions and our experience in the real estate industry highlight the need for the party issuing an estoppel to carefully review the certifications it is being asked to give and make any necessary changes to the estoppel to correct or qualify the certifications set forth therein. There also may be certifications or other provisions set forth in the estoppel which should be deleted because the issuing party is not required to provide the certifications or agree to the other provisions pursuant to the terms of its lease, loan agreement, guaranty or other instrument and/or the certifications and other provisions go beyond the confirmation of facts and are not appropriate for an estoppel.

While by no means an exhaustive list, when reviewing any certification or statement in an estoppel consider (a) limiting it to the party’s actual or best knowledge (without investigation, if appropriate), (b) limiting the knowledge qualifier in (a) to a certain employee(s) or agent(s) of the issuing party most familiar with the property or loan at issue (so that the knowledge of every employee and agent of the issuing party is not imputed), (c) stating that the certification is null and void if the requesting party has knowledge of facts to the contrary (e.g., a default the requesting party is aware of, which the issuing party may not know exists), and (d) stating that it shall not constitute a waiver with respect to any act of the requesting party for which approval by the issuing party was required but not sought or obtained (i.e., a default the issuing party was not aware of).

The issuing party should also consider stating that the estoppel is solely for the benefit of the purchaser, lender, assignee, subtenant, etc. who has a legitimate need for the estoppel to confirm certifications made by the other party to its transaction and that there is no third party beneficiary of the estoppel.  The estoppel should also state that it is being given based on information known to the issuing party on the date the estoppel is signed and delivered and the issuing party is not obligated to inform the requesting party of a change in any information in the estoppel occurring after such date of signature and delivery.  In order to limit claims against the issuing party, it should also be made clear that regardless of any inaccuracy or misstatement, the estoppel does not create liability on the part of the issuing party to any person or entity, but the issuing party shall be estopped from denying the accuracy of the certifications.