The word "estoppel" basically means "prevented from saying something different afterwards." Tenant estoppel letters should be used in the sale or purchase of any tenant-occupied real estate, whether residential or commercial. Once you read the explanation below, you will understand how REALLY bad things can be if you don't get the letters but go through with the purchase.
First, the owner/seller should have a clause in the lease requiring tenants to sign (or object to in writing) tenant estoppel letters if presented to them. That way, ignoring the letter doesn't tank your deal, it makes the tenant in default, so you have some pressure. If you don't have such a clause, add it. Until then, don't stress. Just do your best to get all tenants to sign the letters if a buyer asks for them.
Second, the purchase and sale agreement should spell out who writes the tenant estoppel letter--buyer, seller, or mutual agreement. Buyers want to get more information, sellers want to provide less information. It's not that sellers usually have anything to hide. It's just that more information means more work and tenants more anxious about what is going on. Sellers want themselves released from liability for some tenant issues after the sale happens.
With the background, what is a tenant estoppel letter? It is a letter created when a property goes under contract for sale. Each tenant signs their own letter. At a bare bones minimum, the letter confirms the start/end dates of the lease, monthly rent, paid-through date, absence of any prepaid rent other than the current month, and security deposit amount.
Better, it will include statements there are no unresolved claims or disputes or repair issues with the current landlord, and no verbal or written side agreements.
Better yet, it will include a copy of the tenant's lease, and a confirmation the lease is a true and correct copy with no amendments. Generally this is used only for commercial properties, or residential properties of a 10-plex or fewer. That's because it is a lot of work scanning and attaching each tenant's lease.
Best, it will include a statement the tenant will release the old landlord from security deposit refund liability when the sale goes through, and look only to the new owner for any refund.
Ideally, sellers should be required to counter-sign each letter, confirming the accuracy of the contents.
Exact wording of the letters, timing of when presented to tenants, and consequences to the sale itself if some letters are missing or contain negative reports, are all deal-specific.
Where does the "estoppel" come in? Once the tenant signs off, they are "estopped" or "prevented from saying otherwise" afterwards. In other words, they cannot later change their minds or memories and say something different.
