Expo
Properties and Merchants Properties own an office building in Frederick,
Maryland, which was leased to Experient. When the lease term ended, disputes
arose regarding who should pay for work to restore the premises.
To complete the purchase, Expo and Merchants
relied on a Tenant Estoppel Certificate they received several years prior,
signed by Experient. Litigation followed.
The 20 year leasing history is
relevant.
In March 1994 owner John Laughlin
leased the premises to tenant Galaxy Registration for a five year term with a
renewal option. Two lease amendments were signed. The first related to
construction of a 25,700 SF addition and lease term extension. The second
adjusted the rent and further extended the lease term.
Laughlin wrote a letter to Galaxy in
May 1998 attempting to clarify that Galaxy is responsible for the expenses of a
new fire protection system. That letter was not counter-signed by Galaxy.
In 2002 Laughlin and Galaxy executed
a third lease amendment providing for another renewal term, and confirming that
Galaxy had changed its name to Expo Exchange.
Laughlin sold the property in 2004
to new owner Expo Properties (not to
be confused with tenant Expo Exchange).
In 2005 landlord Expo Properties and tenant Expo Exchange executed a fourth
lease amendment, demising additional space of 11,150 SF to Expo Exchange.
The fourth lease amendment provided
that the new 11,150 SF space would be rented to tenant Expo Exchange on a
“triple net” basis. There is no similar language in the Lease or any of the
signed amendments.
Merchants Properties succeeded Expo
Properties as owner in 2006. As part of the acquisition, tenant Expo Exchange
executed an Estoppel Certificate on July 18, 2006, for the benefit of
Merchants. Merchants’ lender likely also required an Estoppel to support
various loan covenants and for underwriting purposes.
The Estoppel Certificate signed by
Expo Exchange provided that Laughlin’s 1998 letter was a “clarification,” and
that “Tenant acknowledges that all repairs . . . are the responsibility of
Tenant . . .”
Next, Defendant Experient succeeded
Expo Exchange as the tenant at the Maryland property.
In 2011 Landlord executed yet
another lease amendment – number five – with tenant Experient. That document,
in its recitals, identifies the Lease Agreement, four subsequent lease
amendments, and the Estoppel Certificate of July 18, 2006.
Experient elected to vacate the
leased premises and issued notice in 2012. The Landlord requested various
inspection reports of the Tenant, which reports were sent to Landlord in
January 2013. Landlord responded by sending out its own inspectors.
Landlord’s inspectors prepared a
detailed assessment, which in turn was sent to Tenant in May 2013 with a
request that Tenant perform all repairs. Tenant did not do so, and vacated in
July 2013. So Landlords Merchants and Expo sued Tenant Experient for damages.
Defendant Experient’s defense was
premised on its belief that neither the 1998 Letter nor the Estoppel Certificate
amended the Lease, and as a consequence, Experient was not responsible for
additional repairs or Plaintiff’s damages. Plaintiffs Merchants and Expo thought
overwise.
The district court agreed with
Defendant Experient that neither the Estoppel Certificate nor the 1998 Letter
amended the Lease. Plaintiffs Merchants and Expo appealed.
The Court of Appeals looked hard at
the Letter – not counter-signed by the
Tenant – and the Estoppel Certificate – which
did not contain any form of lease modification or amendment language. The
heart of the issue was “mutual assent” to modify the Lease, which evidently
was lacking in both instruments.
The Court found it significant that
both the 1998 Letter and Estoppel Certificate were signed by only one party. The
Court noted that the Lease required amendments to be signed by both Landlord
and Tenant. And that all of the docs captioned “Amendment” were, in turn, duly
signed by both Landlord and Tenant.
There was no evidence of Landlord’s
and Tenant’s intent to be bound by the 1998 Letter and Estoppel Certificate.
Lacking mutual assent, neither the Estoppel Certificate nor the 1998
Letter modified the Lease and its various fully-executed-by-all-parties
Amendments.
Plaintiffs-Appellants contended that
mutual assent is irrelevant to the analysis with regard to the Estoppel Certificate,
since such Certificates are routinely only signed by tenants but substantially
relied on by buyers, investors, and lenders across the USA. The Court was not
moved, holding that “If an estoppel certificate does not explicitly modify the
terms of the lease, it is not a mechanism by which a lease agreement may be
modified.”
The Court’s conclusion: “Plaintiffs
sued to enforce promises that the Defendant never made.” Tenant-Defendant
Experient wins and is only liable for the obligations contained in writing duly
executed by Landlord and Tenant. See Expo Properties, LLC and Merchants
Properties, LLC v. Experient, Inc.; Case No. 19-1750; US Court of Appeals,
4th Circuit; April 15, 2020: https://law.justia.com/cases/federal/appellate-courts/ca4/19-1750/19-1750-2020-04-15.html.
Lessons
Learned / Questions Asked:
- Lesson / Question: Does your Lease Amendment contain recitals which specify by name and date all docs signed previously? Of course it does. It might be helpful to state, in the main text of the Amendment, that all recitals are incorporated and bind all parties.
- Lesson: Is your Estoppel Certificate intended to be signed by both Tenant and Landlord? I didn’t think so – neither is mine. Time to change and add signatures for Landlord too, and consider also adding a provision that all referenced documents amend the original Lease and control conflicting provisions in the original Lease.
- Issue: This well-reasoned appellate decision holds that buyers and lenders cannot 100% rely on the statements contained in a Tenant Estoppel Certificate. Careful buyers, investors and lenders may now need to investigate further, as mere reliance on Estoppel Certificates may no longer be sufficient to satisfy underwriting requirements.
Stuart A. Lautin, Esq.*
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