United States: Real Estate

We suspect that an erroneous reply to such an apparently casual request gave rise to the years of litigation leading to the recent decision in Plaza Freeway Limited Partnership v. First Mountain Bank, 81 Cal. App. 4th 611 (2000). In that case, Plaza Freeway LP purchased a Southern California shopping center in which First Mountain Bank was the tenant under a ground lease and on which it had constructed its bank offices. A bank officer signed the estoppel certificate, incorrectly confirming that the lease expired on October 31, 1998, even though the bank later learned that the termination date was March 29, 1999.

Some months later, when First Mountain Bank elected to exercise its option to extend the ground lease, it was told that the exercise was untimely when measured against the October 31, 1998, date. (Lease options typically require exercise of the option of a stated number of months before the expiration date of the previous term.)

The bank asserted that its exercise was timely, and the trial court agreed with the bank that its erroneous estoppel certificate did not bar the bank from exercising its option. Upon appeal, however, the Court of Appeal reversed, citing Evidence Code section 622 that ìthe facts recited in a written instrument are conclusively presumed to be true as between the parties thereto. In short, the bank had estopped its way out of an otherwise binding option right.

One of our landlord-clients, who was entitled to receive a percentage of the tenant’s net cash flow from the tenant’s subleasing activities, recently presented us an estoppel certificate. Although the certificate asked simply that the landlord confirm that no default had occurred under the lease, it contained language stating that both the borrower and its lender could rely on the statement. At the time, the landlord was about to undertake an audit to determine why it had not received any portion of the cash flow from many years of sublease activities and was concerned that signing the document might waive its right to conduct the audit.

1. The advice given in that case holds true for similar situations:

1. Do not gratuitously provide responses to such requests. While many leases require parties to provide estoppel certificates to the other parties and their lenders, many leases and the law of many jurisdictions do not. Executing an estoppel certificate, can only hurt the signing party. If there is no contractual obligation to deliver the certificate, why do it?
2. Limit the response to matters required under the lease. If the lease requires affirmation that a lease is in effect and requires confirmation of the date through which rent is paid, confirm only that. Don’t volunteer the ending date of the lease or confirm that there are no defaults under the lease.
3. Limit no-default language to actual knowledge. While parties often assume that a lease is being fully performed if base rental obligations have been timely paid, they are often unaware of the myriad of other obligations that can, at any given point in time, be out of compliance with lease terms. Unless a party reviews the lease to determine each of the obligations thereunder (including payment of taxes, maintenance obligations, etc.), the party can be unaware of its right to declare a default and can inadvertently waive that right by confirming that no such defaults exist.
4. Identify all agreements that embody the lease terms. Oftentimes, leases are modified by both express written modifications and conduct implying other terms. We frequently see estoppel certificates asking for a confirmation that the original printed lease form is the only agreement with respect to the property. In many such cases, options have been granted, terms have been extended or obligations modified through means ranging from tacit understandings to written lease amendments. To the extent that such changes exist, be sure they are reported to the requesting party, since the absence of such a report may bind you to the only agreement reported.
5. Limit the parties who may rely on the certificate. In many cases, leases call for one party to execute an estoppel certificate only for the benefit of the other party’s lender at the time of financing or refinancing the property. However, certificates are often delivered by the parties themselves. Who is entitled to rely on the responses? To the extent that the lease calls for an estoppel certificate for the benefit of a lender, the certificate should be modified to state that it is intended only for the lender’s benefit and that no one else has the right to rely on the document.