An Estoppel Certificate is a document typically used in performing due diligence prior to the purchase of tenant-occupied property. The purpose is for a lender and purchaser to have written confirmation from tenants of certain terms. Important among these are: the rental amount; security deposit; duration of lease; and, as discussed further below, a “subordination” clause.
The subordination clause is used to confirm that the tenants have agreed, in their lease, that their interest is subordinate to future mortgages. Without such confirmation, the tenants’ leases have priority over mortgages that are subsequently obtained. Furthermore, only a tenant whose interest is subordinate to the mortgage can be evicted. A purchaser (and their lender) may be stuck with tenants for an indefinite period without the ability to earn market rental values. A tenant may be locked in for years, and potentially even forever—courts have upheld provisions giving the tenant the right to perpetual renewal of leases.
Read more about the importance of the estoppel certificate and how important it is to ensuring that you profit from owning a tenant-occupied building.
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