While working with commercial real estate buyers, sellers, landlords, tenants, title agents, and lenders, I am often asked to assist in developing Estoppel Certificates. Properly worded Estoppel Certificates assure no claims or defaults exist in critical third-party documents.
The need for clear, current Certificates looms large when buying or leasing income-producing property. Transaction parties and their lenders need to know there are no significant issues regarding those whose financial obligations make the investment worthy, and to cover title and survey matters.
Usually the estoppel request relates to tenants, but sometimes the signatories are other parties who have an interest in the asset such as option beneficiaries, easement estate holders, prime and ground lessors, mortgagees, past owners, HOAs and POAs, those responsible for shared amenities, and similar.
Sometimes an exact form of Estoppel is attached to a purchase and sale agreement and Seller or Landlord must furnish it as a condition to Closing. In other situations the parties agree to cooperate to obtain Certificates before Closing or within an inspection period.
In 2022 CEZ entered into a contract with 755 N Prior Ave. The agreement provided that for $26 million CEZ would purchase from 755 a building occupied by commercial tenants.
The contract obligated 755 to “reasonably cooperate” with CEZ to obtain tenant estoppel certificates.
Before Closing the parties discovered errors in the square footage measurements of tenants’ units. These measurements were used to assess and collect base rents, common area maintenance charges for taxes, insurance, OpEx, property management fees, and other amounts identified in the leases. Because of these errors some tenants owed base rent and others owed additional NNN reimbursements.
Some owed both rent and expenses.
Due to the computational errors determined as a function of the new measurements, the parties agreed to reduce the purchase price to $15.1 million. Closing was scheduled for October 30, 2023.
As Closing approached, CEZ asked to delay Closing to February or March 2024, while suggesting that tenants needed to be notified that lease rental rates would increase after the purchase was concluded. The opinion doesn’t clearly state it, but the implication is that CEZ proposed that the form of Estoppel Certificate reflect the new rate structure.
755 refused. 755 asserted that its duty to “reasonably cooperate” did not include addressing CEZ’s requests, which – 755 claimed – would have necessitated the pre-Closing renegotiation of lease terms of almost 50 tenant leases.
755 believed that 755 had already assumed responsibility for rental deficits caused by the erroneous measurements, which was reflected in the 40% purchase price deduction provided in the Contract amendment. Consequently there was no need to further address the issue in the Estoppel Certificates.
The matter was not resolved. On the date set for Closing CEZ demanded that 755 furnish satisfactory Estoppel Certificates. When Estoppel Certificates were not delivered and the deal failed to close, 755 notified CEZ of its intent to terminate the Contract.
CEZ sued 755 in November 2023 for breach of contract and to prevent 755 from terminating it. The district court denied CEZ’s request for preliminary injunction.
CEZ appealed.
The Appellate Court reviewed the factors required to issue an injunction. And agreed with the district court.
There was no abuse of discretion and even assuming the possibility of irreparable harm, CEZ failed to demonstrate a probability of a successful outcome at trial. 755 prevails. See CEZ Prior LLC v 755 N Prior Ave LLC; US Court of Appeals, 8th Circuit; Case No. 24-1389; January 24, 2025: https://law.justia.com/cases/federal/appellate-courts/ca8/24-1389/24-1389-2025-01-24.html.
Questions / Issues:
1. For Want of a Nail. The contracting parties failed to agree upon an exact form of Estoppel and attach it as an exhibit to the Contract. All that remained of this mission-critical issue was an obligation of the parties to reasonably cooperate. It could have been dangerous for CEZ (and its lenders) to proceed without the minimal assurances in a properly worded Estoppel Certificate.
2. Purchase Price Reduction. Danger of a missing or incomplete Estoppel Certificate notwithstanding, wasn’t the purpose of a 40% purchase price reduction intended to serve as an incentive for overlooking the estoppel requirement? And if that is correct, why didn’t the contract amendment waive that obligation, or otherwise address it by attaching a form of Certificate?
3. Practice Point. Be sure your
Contracts have both an Estoppel Certificate form attached as an exhibit as well
as language requiring insertion of such additional provisions as buyer or
tenant (or its lenders or the title agent) may require after site inspections
and review of diligence docs. If the executed Certificates don’t contain what
is needed or reveal issues, then properly drafted Contracts should give buyers
and tenants the right to exit and recover all earnest monies and deposits.
Stuart A. Lautin, Esq.*
* Board Certified,
Commercial and Residential Real Estate Law,
Texas Board of Legal Specialization
Licensed
in the States of Texas and New York
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