CRE Buyers of leased properties will include language in their purchase contracts requiring Sellers to deliver just prior to close estoppel letters from all existing tenants. An estoppel letter is a statement by an existing tenant that the Landlord has done everything it is obligated to do under the terms of the written lease agreement in place. It will further state that no side agreements outside the terms of the written lease agreement have been made and will outline the dates through which rents have been paid. Once a tenant has signed an estoppel letter they are “estopped” or barred from later making claims inconsistent with the estoppel letter.
The best practice is to include form estoppel letters as exhibits to the purchase contract. Sophisticated tenants will sometimes include in their lease agreements provisions stating that they will only deliver a previously agreed to form estoppel letter upon request. Large corporations can require significant lead time requirements as well as significant set charges for the issuance of estoppel letters.
Sellers typically wait until due diligence has closed and the parties have scheduled a closing before contacting their tenants to request estoppel letters – not wanting to notify their tenants of the sale transaction until such time as they are sure the deal will close. Many contracts will not require delivery of the completed estoppel letters until as late as ten days prior to close.
While estoppel letters will often arrive late in the transaction timeline and during an especially busy time in a typical transaction it is important to carefully review the completed and signed estoppel letters. Handwritten inserted language in estoppel letters oftentimes include significant ongoing disputes or open issues important to tenants.