Estoppel Certificates and Lease Amendments: Comparing Apples and Oranges
January 14, 2022
Estoppel Certificates and Lease Amendments: Comparing Apples and Oranges – Applying Maryland contract law, the 4th Circuit determines that an estoppel certificate does not modify a commercial lease.
Most commercial leases contain a requirement that upon reasonable request the tenant will sign and deliver an estoppel certificate – a statement certifying that certain facts about the lease are correct. At its core, the substance of a typical estoppel certificate benefits neither the landlord nor tenant directly; rather, banks and prospective purchasers of commercial property are the most interested in receiving estoppel certificates as the lender and buyer want to make sure that their real estate investment is predicated upon a stable landlord/tenant relationship. The estoppel certificate facilitates this lender and purchaser “due diligence” by requiring the tenant to certify whether the rent has the been paid to the owner-borrower or seller and that there are no defaults. Thus, an estoppel certificate is designed to recite facts; but by doing so does it also memorialize a binding amendment or modification of a lease? A unanimous three judge panel of the 4th Circuit Court of Appeals in Expo Props., LLC v. Experient, Inc. 956 F.3d 217 (2020) held that it doesn’t, thereby clarifying the role of estoppel certificates. In this case, a landlord leased commercial office space in Frederick, Maryland to a Maryland corporation. An important provision of the lease dictated that the costs for repairs and maintenance to the premises were to be shared between the parties. Over a decade after the original lease was executed, the landlord sold the building. To finance its acquisition of the property, the buyer took out a mortgage. As part of the financing, the buyer’s lender required an estoppel certificate from the tenant, and an estoppel certificate was duly executed by tenant and supplied. Contradicting the express provisions of the underlying lease, however, the estoppel certificate recited that the tenant was responsible for all repairs.
Five years later, the lease terminated, and the tenant vacated. The landlord thereafter asserted claims against the tenant for several expensive repairs, which included structural roof work, replacement of the carpets, and replacement of the HVAC units. The tenant disputed that it was solely responsible for the landlord’s high-ticket repair demands, and the landlord subsequently filed the suit giving rise to the 4th Circuit’s appellate review.
The Decision
At the outset, the 4th Circuit recognized that Maryland contract law applied, which requires mutual assent to modify a contract. The court found it significant that the estoppel was “signed by one party only,” noting that through the years multiple amendments to the lease had been signed by both parties. The court held that the failure of the estoppel to be signed by both landlord and tenant demonstrated “no evidence of intent to be bound.” The 4th Circuit also noted that the estoppel certificate did not label itself as an amendment and accordingly lacked the requisite definitiveness of terms to effectively amend the lease.
In sum, the 4th Circuit made clear the distinction between the force and effect of a lease amendment versus an estoppel certificate. A lease amendment modifies the lease; a standard estoppel certificate does not – at least not under the facts of this case. This decision is important as it affirms that an estoppel certificate does not ipso facto modify the terms of an underlying lease. Instead, in order for a given estoppel certificate to amend a lease it must satisfy the requirements of Maryland contract law.
Lessons Learned
Here, the landlord’s efforts to transform the estoppel certificate into a lease amendment would have significantly changed the parties’ responsibilities and resulted in the tenant paying substantially more for the structural repairs to the premises than was bargained for under the lease. Tenants should be wary of any misguided efforts by landlords to seek to modify a lease under the guise of an estoppel certificate, and should carefully read all documents entitled “estoppel certificates” to avoid such a result. A tenant has no duty to sign what is otherwise identified as an “estoppel certificate” if the document seeks to amend the provisions of the underlying lease. It should be noted that the opinion gives short shrift to the legitimate expectations of a party receiving an estoppel certificate – that is, to receive a reliable statement as to the lease terms signed by a party to be charged with complying with such terms. In this case the appellant landlord who received the estoppel certificate ultimately was denied the ability to rely on the estoppel certificate. Accordingly, in Expo Props., LLC, the delivery of the signed certificate by the appellee tenant did not estop that party from later claiming a different set of facts. This undermines the appropriate use of estoppel certificates and is a cautionary reminder that estoppel certificate recipients need to examine draft estoppel certificates carefully as well, to ensure that there are no discrepancies between the lease terms and the statements set out in the estoppel certificate.
