Tenant Estoppel Letters

[Denise Evans]

All buyers and sellers of rental real estate should require Tenant Estoppel Letters in their contracts. They help prevent after-sale tenant disputes or surprises about matters that originated with the former owner. "Estoppel" means what is sounds like. The signing parties are "stopped" from saying anything different after they sign the letter.

Each Tenant Estoppel Letter states the attached copy of the tenant lease is accurate and was signed by the tenant, there are no other written or verbal agreements, the tenant has paid rent through a certain date, and there is no prepaid rent other than the current month. It also confirms the amount of security deposit and the lease ending date. Yes, there is an end date in the lease itself, but it might have auto-renewed and the tenant was unaware. Or, it might have an early termination clause. The letter also states the total non-rent items currently owed by the tenant, such as accumulated late fees or repair charges.

Also very important, the tenant states they have no unresolved issues with their current landlord, except as listed in a space provided, and they have no current plans to cancel their lease under the Service Members Civil Relief Act or for any other reason.  Sellers should want a sentence in which the tenant confirms their security deposit will be transferred to the buyer, and the tenant will release the seller from liability for any deposit refund after the sale. If I represent buyers, I like to include my name and contact information along with a sentence that if anything changes after the signing but before the sale, the tenant is obligated to notify me in writing or it waives any of those changes.

Buyers might have other tenant concerns that are specific to a property. Do not overly complicate the letter, or you will scare sellers and tenants.

I want the tenant to sign, of course. I also want the seller to sign, just to add its own confirmation to the tenant's statements. That way, if somebody lies, I want my buyer to be able to sue everybody who lied, not just a probably judgment-proof tenant. If somebody sues the buyer, I want seller and tenant both stuck with the words in the Tenant Estoppel Letter, and not able to testify to anything different.

The exact wording of the Tenant Estoppel Letter should be negotiated between buyer and seller as part of the Purchase Agreement negotiations. Buyers want longer letters that cover more items. Sellers want shorter letters that are less scary and that don't expand the seller's liability. The Agreement should have a clause that buyer can cancel without penalty and with full refund of the security deposit if the signed letters are not returned to it by a certain deadline, or if subsequent tenant notifications materially change the economics of the deal. An example might be a commercial tenant with 50% of the space in a building sends an after-letter notice that it now plans to vacate at the end of its lease term in 6 months. Another might be a residential tenant whose child comes home from college and discovers black mold in her bedroom closet.

Ideally, Tenant Estoppel Letters will be sent to them after the inspection and financing contingencies have been cleared and within the last week before closing. Sellers do not want the letters sent out too early because the contract might be cancelled and tenants stirred up for nothing. For large apartment projects, it is not practical to demand the return of all letters before closing. Some tenants will just refuse to respond at all. Buyers and sellers should consider some amount of closing money be held in escrow after closing to cover potential problems with the non-responding tenants.

Does anybody have any experiences to share with successful use of a Tenant Estoppel Letter, or times they wish they'd know about this tool before entering a Purchase and Sale Agreement?