Due diligence is key before buying an investment property, especially if you’re looking to buy an occupied one.  

Imagine you’ve closed on a beautiful duplex with tenants. Based on your calculations, you’ll now be getting $5,200 in monthly rent. However, a month after closing escrow on the property, you realize that you only got $4,600 from the two tenants. 

Additionally, they tell you that they paid the old landlord $2,300 as a security deposit for each unit. However, the paperwork you have only indicates a payment of $1,200 per unit. 

In haste, you try getting in touch with the old landlord for clarity. But unfortunately, he’s long gone after closing the escrow. So, what are you to do in such a situation? 

Luckily for you, requiring a tenant estoppel certificate can help you prevent such discrepancies and potential financial burden. 

What is a Tenant Estoppel Certificate? 

A tenant estoppel certificate is a legal document that a tenant fills out to clarify the specific terms and status of their lease. The purpose of this document is to simply affirm the details of the lease. 

After signing by the tenant, it acknowledges certain aspects of the lease agreement. The tenant cannot, deny or contradict the facts they acknowledged on the document. 

Home-for-sale-sign-in-front-of-house

As a new landlord, it can help protect both you and the tenant. Mortgage lenders require it as part of the loan qualification criteria to prevent potential fraud. 

What is The Purpose of a Tenant Estoppel Certificate? 

The certificate serves to provide precise and legally binding details regarding a tenant’s rights and responsibilities. As a potential buyer, you get to make informed decisions after verifying the details of the financial aspects. You also get to weigh the potential risks of investing in the property. 

What Does a Tenant Estoppel Certificate Contain? 

While no two estoppel certificates will ever be the same, certain basics are standard. Here are some important requirements for a tenant estoppel agreements: 

  • Details of The Lease: When the lease begins and ends, the rent amount and security deposit, any rent increment details, and any information on any unpaid rent or fees. 
  • Details About The Current Status of The Lease: The tenant must state whether there have been any modifications to the lease. For instance, if there is any addendum in force, any disputes regarding lease violations, or any tenant claims against the landlord. 
  • The Tenant’s Responsibilities: For example, when and where rent is due, and repair and maintenance responsibilities. 

Property-manager-shaking-hands-with-tenant.

  • The landlord’s Responsibilities: The tenant must also acknowledge whether the landlord has fulfilled their responsibilities under the lease or whether there are dispute areas. For instance, providing the amenities promised in the lease or making the agreed upgrades. 
  • Information on Any Subletting Rules: The tenant must provide information on whether they have sublet the unit. If so, they must indicate the details of the subleasing agreement (if any). 
  • Lease Renewal Details: The tenant must provide any details regarding their rights and options when it comes to lease renewal. If they have any special rights granted under the lease, they must provide the details in the certificate. 

Additional Items that Commonly Included

In addition to the before mentioned items, there may be other requirements in a standard tenant estoppel certificate. It’s possible that the old landlord may have made some verbal arrangements with the tenant and may not have included the details in the lease. 

The following are some examples of items that may be absent in the lease but should appeal on an estoppel certificate. 

  • Permission for the tenant to keep a pet. 
  • Use of a storage area by the tenant. 
  • Exclusive use of a certain space by the tenant. 
  • Permission to sublet the unit. 
  • Permission for the use of a particular parking space. 
  • An agreement for reduced rent in exchange for certain property repairs and maintenance. 

Are Tenants Obligated to Fill Out an Estoppel Certificate? 

This will depend on the requirements of the lease agreement. If there is no clause in the lease agreement, the tenant’s involvement will be purely voluntary. 

Person-signing-a-document

But if there is a clause requiring it, then the tenant is legally obligated to complete one if asked to. The clause usually requires the tenant to fill out the certificate on time, or otherwise be liable to a penalty fee. 

The landlord may also require the tenant to pay for any damages they may incur due to their refusal to complete the certificate on time. By providing the required details and signing it, the tenant confirms the information provided is accurate. 

What Types of Properties Require an Estoppel Certificate? 

Generally speaking, the types of rental properties requiring estoppel certificates include residential real estate, multi-family real estate, and commercial real estate. 

And they are more common in multi-family units and commercial real estate than they are in residential real estate. In multi-family real estate, for instance, tenant estoppel certificates are common because of the multiple leases involved. 

If there are any pending disputes involving multiple, or all tenants, the incoming landlord may be in for some potentially costly surprises. For example, if there are pending plumbing or electrical repairs. Or if there are disagreements about any other rental repairs about the amount being held for security deposits. 

Bottom Line

Due diligence is key before making a real estate investment. If planning to buy a property with tenants already in it, ensure you require a tenant estoppel certificate. This can help you know what exactly to expect before signing on the dotted lines. 

For expert help in this regard, look no further than East Bay Property Management. We are a trusted choice for existing investment property owners. Get in touch to learn more!