The article below, by two lawyers at BLG in Canada, and reprinted with their permission, highlights the pitfall of simply signing an estoppel certificate provided by the Landlord.
An estoppel is a concept that, in certain circumstances, restricts a party from relying on its full legal rights. A lawyer conversant in contract law will tell you that there are many different types of estoppels and that there is no one universally accepted form of estoppel. However, the seemingly simple one or two page estoppel is a very powerful legal document, as you will see.
For the purposes here though we will stick with estoppels as they are commonly used in commercial real estate. The most common estoppels are provided by the Landlord to the Tenant when the Landlord is engaged in a transaction whereby another third party is going to rely on the lease contract provided to it by the Landlord. Generally, this happens if the Landlord is selling the property and the intended purchaser wants to know that the lease contract is the only agreement between the Landlord and you, the tenant; or when the Landlord is seeking financing (or refinancing) and the lender also wants assurances that the contract is the only valid agreement in existence.
You can understand why a third party wants this verification. Most landlord-provided estoppels outline the basic business terms, such as the length of the lease, the rent being paid, etc. The document the landlord wants you to sign also contains seemingly innocuous language; which can be problematic as the article points out.
Therefore, it’s important to understand from a business and real estate perspective what should be included in the estoppel if it is not clear, and what should not be included. We recommend that any estoppel you receive from the landlord be reviewed by a commercial real estate consultant – not a real estate agent as they do not deal with estoppels; and after that review, it should be reviewed by a good commercial real estate lawyer, such as either of the article authors.
Before we get to the article itself, it may help to look at a case where the Greenstead Consulting Group was asked to review a landlord’s standard estoppel provided to a tenant client, because the current landlord was selling the property.
The estoppel contained language that said neither the tenant nor landlord were in default of the lease. We knew from prior correspondence that the floor of the premises was heaving and a technical study done by the landlord revealed sub-standard soils compaction below the on-grade slab.
After we reviewed the lease, we also noted that the landlord was solely responsible for ‘latent defects’ in the construction of the building.
The landlord was pressing our client, the tenant, to sign what the landlord referred to as a ‘clean estoppel’ (without any changes to the form the landlord provided) within the 10 days provided in the lease. As a directly related aside to the issue at hand, we negotiate lease wording amendments on behalf of tenant clients. In the estoppel section of the lease we add the ability for the tenant to amend an estoppel form provided by the landlord. Watch for language that states the tenant will sign the form of estoppel attached to the lease. That could be problematic.
Working with our client’s in-house general counsel, we advised our client to strike certain provisions of the estoppel and provide an addendum outlining the issue, and past correspondence. We advised our client that without doing this, we were concerned that a subsequent owner would say the tenant was stopped (estopped) from making a claim for repair by the property purchaser, since the current owner had not fixed the issue.
Peter D. Morris, CEO, Greenstead Consulting Group
Here is the Article:
The Ontario Superior Court’s judgment in 1960529 Ontario Inc. v. 2077570 Ontario Inc., 296 Brunswick LP Corp., and CMLS Financial Ltd. 2017 ONSC 5254 provides a cautionary reminder to tenants to carefully review their lease before signing an estoppel certificate.
1960529 Ontario Inc. carried on business as a bar and game arcade using the name Tilt Arcade Bar (“Tilt”). Tilt, the tenant, leased the first floor of the property located at 296 Brunswick Avenue, Toronto, from the landlord, 2077570 Ontario Inc. (“207”). The lease between Tilt and 207 contained a right of first refusal provision which stated that 207 agreed to provide Tilt with a copy of an offer to buy the building prior to accepting any offer for the sale of the property and that Tilt would have 24 hours to provide 207 with an offer that was the same as the offer that 207 intended to accept.
On October 17, 2016, 207 entered into an agreement of purchase and sale with 296 Brunswick LP Corp (“Brunswick”) for the sale of the property. On February 14, 2017, the President of 207 attended at the property with a form of estoppel certificate informing Evan Oswald (“Oswald”), Tilt’s President, that the property had been sold and that the estoppel certificate was required immediately to effect the assignment of the lease from 207 to Brunswick.
The estoppel certificate was addressed to CMLS Financial Ltd., Brunswick’s lender (the “Lender”). 207 was identified as the landlord, and Tilt was identified as the tenant. The estoppel certificate confirmed that there were no defaults under the lease. No reference to the right of first refusal was made in the estoppel certificate. Oswald, who didn’t realize he had a right of first refusal under the lease, signed the estoppel certificate.
The property was transferred from 207 to Brunswick on February 17, 2017. Brunswick then exercised a demolition provision in the lease and gave Tilt notice of termination. It was only at this point that Tilt realized that it should have been given the right to buy the property pursuant to the right of first refusal in the lease. Tilt commenced an application seeking relief in support of its claim for enforcement of a right of first refusal. Tilt also brought a motion for injunctive relief restraining Brunswick from demolishing the property, which was the subject of this decision.
The Court denied Tilt’s motion for an interlocutory injunction on the basis that there was no serious question to be tried. The court explained that Tilt waived its right of first refusal by signing the estoppel certificate and confirming that there was no default under the lease at the time the estoppel certificate was signed (i.e. the landlord was not in breach of any of its obligations relating to the right of first refusal). The Court stated that parties to a commercial real estate transaction are entitled to rely upon an estoppel certificate to prevent the party signing the certificate from taking a position that is contrary to the statements therein. By signing the estoppel certificate, Tilt must be taken to have known that the parties affected by the sale of the property would rely on the contents thereof.
This case is an important reminder of what can happen to tenants when they fail to review their lease before signing an estoppel certificate. Tenants can be viewed to waive their existing rights if they are not careful. In this situation, Tilt could have potentially prevented Brunswick from purchasing the property had it identified the landlord default in the estoppel certificate before signing.
This case is also a reminder that even though an estoppel certificate is addressed to a particular entity/individual, it does not necessarily prevent a non-addressee from relying on the estoppel certificate.
Tenants should always be mindful of all of their rights under their lease and ensure that they are aware of the purpose for which an estoppel certificate is being sought. This will allow tenants to see the “big picture” relative to their existing leasehold rights.