Tenant's Estoppel Letter Does Not Trump the Lease

Blank Space

The form of estoppel certificate had been chosen by the landlord and contained a paragraph stating that there were no renewal of extension rights “except as set forth below.” Apparently, the blank lines below that statement were intended for listing specific renewal or extension rights. However, the tenant signed the certificate and left those lines blank. It is not clear from the court's decision whether the lease was attached to the certificate or whether the buyer had any knowledge of the option.

The purchaser took the position that the estoppel certificate modified any renewal rights in the lease, and the tenant argued that since the landlord and the purchaser knew of the lease, the certificate language was designed to elicit a statement only of those option rights that were not contained in the lease, such as separate agreements for purchase options. The court held that even though the literal language of the estoppel certificate operated against the tenant, under the circumstances, the language in the estoppel was ambiguous and the purchaser had to honor the renewal options in the lease.

In supporting the tenant's position, the court stated:

There is an ambiguity in the contract because the Lease contains an option, but the Estoppel Certificate states (1) the Lease remains in effect and (2) there are no options 'except as follows,' and the lines that follow are not filled in. These contradictory provisions create an ambiguity as to whether an option exists as of the date of the Estoppel Certificate. None of the rules of construction in the Civil Code remove this ambiguity. As provided in Civil Code Section 1654: 'In cases of uncertainty, not removed by the preceding rules, the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist.' Under these rules, the Lease and Estoppel Certificate should be interpreted against the landlord. In addition, Civil Code Section 1641 requires that: '[T]he whole of a contract is to be taken together, so as to give effect to every part. … The landlord's interpretation of the Estoppel Certificate ignores Paragraph 1 of the Estoppel Certificate and its reference to the Lease. Therefore, the Landlord did not carry its initial burden on its summary adjudication motion to establish as a matter of law that no option existed.

…

Thus, the purpose of Paragraph 7 [of the Estoppel Certificate] in this case should be to cut off option claims beyond those expressed in the four corners of the parties' contract, as embodied in the Lease and Estoppel Certificate, or to notify the landlord of option rights not contained in the Lease.

Contract Analysis

The court's analysis was somewhat strained, because it concluded that since the landlord had selected the estoppel form, the ambiguity should be interpreted against the landlord, and by extension, against the purchaser. The problem with that analysis is that the court treated the lease and the estoppel certificate together as a contract, which it then interpreted as ambiguous, when read together. That is an unusual approach to an estoppel certificate, which is not customarily considered as part of a lease.

In addition, even if it should be considered as part of the lease, the purchaser did not select the estoppel form. By what logic is the purchaser tarred with an ambiguity created by the seller's choice of estoppel certificate? Also, even if one assumes that the ambiguity created by the certificate was a mistake, as between two “innocent” parties, isn't the tenant in a better position than the purchaser to avoid the mistake?

A common definition of the word “estoppel” is that it is “a bar to alleging or denying a fact because of one's own previous actions or words to the contrary.” (Webster's Seventh New Collegiate Dictionary). In this case, the “bar” did not work for the purchaser.

If the issue in the case is viewed as an interpretation of an estoppel certificate, as contrasted with an interpretation of a contract, it should not make any difference who drafted it. The better question would be whether the buyer was reasonable in relying on a certificate that contained inconsistent language.

Practical Implications

If purchasers or lenders cannot rely on estoppel certificates, they will have to be more careful about reviewing the leases themselves. Ideally, to avoid ambiguity, an estoppel certificate could attach the actual lease and any lease amendments. However, sometimes leases run dozens of pages, and some properties have hundreds of leases. As a matter of convenience, it would be simpler if the leases could be identified by date and other specific information (including the number of pages) instead of the alternative of attaching all of those pages. The purchasers would then be alerted to examine the appropriate documents.

Remember, lease options could substantially affect the value of a property. For example, a lease could contain renewal option periods amounting to 50 years or more, at rents that are well below market rates. It is important for a prospective lender or purchaser to know about those options. Also, purchasers and lenders rely on other information in estoppel certificates, including whether there are any side deals, or any unwelcome post-transaction surprises that could affect the building's income stream, such as prepayment of rent, lease violations, modifications or amendments, security deposits, completion of requested improvements, subleases or assignments, or whether the tenant is solvent.

From a tenant's perspective, the case highlights how important it is for a tenant not to treat requests for estoppel certificates in a casual manner. Miner almost lost his option rights, merely because he left some lines blank in the form. That is not a, um, minor omission. And, if instead of leaving the blank space, Miner had made the mistake of specifically writing “none” in the blank space of the form that called for a listing of any renewal or extension rights, the court would have apparently ruled against him.

An “estoppel certificate” is a written statement by a party having an interest in property that defines and describes that interest so that other parties contemplating taking an interest in the same property will be informed about the nature and extent of that interest. Typically, the party signing the certificate is not a party to the transaction by which the third party is acquiring its interest. But the certificate is worded in such a way so that the party signing it is made aware of the reliance of the third party, and thus the signing party would be “estopped” from asserting matters different from those appearing in the certificate as against the third party upon completion of the transaction.

A recent California case highlights the unreliability of tenant estoppel letters. Frequently, purchasers and lenders will condition their deals on receiving tenant estoppel letters setting forth the lease terms. These third parties often rely on the accuracy of certificates in the process of closing their deals. What happens, however, if a tenant does not fully or accurately complete a tenant estoppel certificate and, therefore, provides misleading information about a lease? Will the tenant be bound by the certificate, or will the tenant be able to avoid that and invoke its rights under the terms of the lease?

In the case of Miner v. Tustin Ave. Investor , 10 Cal. Rptr. 3d 178 (Cal. App. 2004) an estoppel certificate signed by the tenant indicated that the tenant had no renewal options, but it referred to the lease that contained those options. In that case, the court held that the actual lease trumped the estoppel certificate, and therefore, the purchaser was bound by the renewal options.

Blank Space

The form of estoppel certificate had been chosen by the landlord and contained a paragraph stating that there were no renewal of extension rights “except as set forth below.” Apparently, the blank lines below that statement were intended for listing specific renewal or extension rights. However, the tenant signed the certificate and left those lines blank. It is not clear from the court's decision whether the lease was attached to the certificate or whether the buyer had any knowledge of the option.

The purchaser took the position that the estoppel certificate modified any renewal rights in the lease, and the tenant argued that since the landlord and the purchaser knew of the lease, the certificate language was designed to elicit a statement only of those option rights that were not contained in the lease, such as separate agreements for purchase options. The court held that even though the literal language of the estoppel certificate operated against the tenant, under the circumstances, the language in the estoppel was ambiguous and the purchaser had to honor the renewal options in the lease.

In supporting the tenant's position, the court stated:

There is an ambiguity in the contract because the Lease contains an option, but the Estoppel Certificate states (1) the Lease remains in effect and (2) there are no options 'except as follows,' and the lines that follow are not filled in. These contradictory provisions create an ambiguity as to whether an option exists as of the date of the Estoppel Certificate. None of the rules of construction in the Civil Code remove this ambiguity. As provided in Civil Code Section 1654: 'In cases of uncertainty, not removed by the preceding rules, the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist.' Under these rules, the Lease and Estoppel Certificate should be interpreted against the landlord. In addition, Civil Code Section 1641 requires that: '[T]he whole of a contract is to be taken together, so as to give effect to every part. … The landlord's interpretation of the Estoppel Certificate ignores Paragraph 1 of the Estoppel Certificate and its reference to the Lease. Therefore, the Landlord did not carry its initial burden on its summary adjudication motion to establish as a matter of law that no option existed.

…

Thus, the purpose of Paragraph 7 [of the Estoppel Certificate] in this case should be to cut off option claims beyond those expressed in the four corners of the parties' contract, as embodied in the Lease and Estoppel Certificate, or to notify the landlord of option rights not contained in the Lease.

Contract Analysis

The court's analysis was somewhat strained, because it concluded that since the landlord had selected the estoppel form, the ambiguity should be interpreted against the landlord, and by extension, against the purchaser. The problem with that analysis is that the court treated the lease and the estoppel certificate together as a contract, which it then interpreted as ambiguous, when read together. That is an unusual approach to an estoppel certificate, which is not customarily considered as part of a lease.

In addition, even if it should be considered as part of the lease, the purchaser did not select the estoppel form. By what logic is the purchaser tarred with an ambiguity created by the seller's choice of estoppel certificate? Also, even if one assumes that the ambiguity created by the certificate was a mistake, as between two “innocent” parties, isn't the tenant in a better position than the purchaser to avoid the mistake?

A common definition of the word “estoppel” is that it is “a bar to alleging or denying a fact because of one's own previous actions or words to the contrary.” (Webster's Seventh New Collegiate Dictionary). In this case, the “bar” did not work for the purchaser.

If the issue in the case is viewed as an interpretation of an estoppel certificate, as contrasted with an interpretation of a contract, it should not make any difference who drafted it. The better question would be whether the buyer was reasonable in relying on a certificate that contained inconsistent language.

Practical Implications

If purchasers or lenders cannot rely on estoppel certificates, they will have to be more careful about reviewing the leases themselves. Ideally, to avoid ambiguity, an estoppel certificate could attach the actual lease and any lease amendments. However, sometimes leases run dozens of pages, and some properties have hundreds of leases. As a matter of convenience, it would be simpler if the leases could be identified by date and other specific information (including the number of pages) instead of the alternative of attaching all of those pages. The purchasers would then be alerted to examine the appropriate documents.

Remember, lease options could substantially affect the value of a property. For example, a lease could contain renewal option periods amounting to 50 years or more, at rents that are well below market rates. It is important for a prospective lender or purchaser to know about those options. Also, purchasers and lenders rely on other information in estoppel certificates, including whether there are any side deals, or any unwelcome post-transaction surprises that could affect the building's income stream, such as prepayment of rent, lease violations, modifications or amendments, security deposits, completion of requested improvements, subleases or assignments, or whether the tenant is solvent.

From a tenant's perspective, the case highlights how important it is for a tenant not to treat requests for estoppel certificates in a casual manner. Miner almost lost his option rights, merely because he left some lines blank in the form. That is not a, um, minor omission. And, if instead of leaving the blank space, Miner had made the mistake of specifically writing “none” in the blank space of the form that called for a listing of any renewal or extension rights, the court would have apparently ruled against him.