Estoppel Certificates: A Concept Whose Time Has Come

We’ve seen this scenario play out a thousand times.  A resident lives at the community for several years.  The resident never had a single issue with management, or the lease.  The resident always pays rent on time.  However, one month the resident doesn’t pay rent and so you evict.  When Hopkins Tschetter Sulzer files the eviction, the resident files a ten-page answer.  The resident’s answer lists a litany of complaints including various unresolved maintenance issues.  While this is news to you, the resident alleges that he has been requesting action for months or even years, and you simply ignored him or failed to resolve these serious issues.  To defeat a resident’s groundless claims, you should use estoppel certificates.

Estoppel certificates are based on the common law doctrine of promissory estoppel. The promissory estoppel doctrine evolved to prevent injustice in cases where there was no written contract.  Specifically, if Party A makes oral promises intended to induce Party B into action, and Party B detrimentally relies on Party A’s oral promise, Party A is “estopped” to deny or break the promise even though there is no written contract.  Similar to the common law doctrine of promissory estoppel, estoppel certificates prevent (estop) a resident from making certain claims or contentions.  In layman’s terms, an estoppel certificate is simply a piece of paper signed by a resident acknowledging the current state of the landlord tenant relationship.

Estoppel certificates are extremely useful in defeating groundless claims made by residents.  Estoppel certificates bar and prevent the resident from later on asserting a fact or a claim that is inconsistent with the facts acknowledged and agreed to by the resident in the estoppel certificate.  The most critical fact for a resident to acknowledge (admit) in an estoppel certificate is that the landlord is not in default of the lease.  Because the resident acknowledges in writing that the landlord is not in default of the lease, the resident cannot later make up a host of reasons (excuses) to either defend the landlord’s money claim or assert a countersuit against landlord.  Properly drafted estoppel certificates can be used to combat many common resident scenarios.  For examples, estoppel certificates can be used to address the bogus collection defense; the manufactured default because I’m buying a house gambit; and the you discriminated against me allegation.

The value of an estoppel certificate becomes obvious when a typical industry collection case is reviewed.  Resident defaults and moves out.  The resident’s account is sent to collection.  Two years later, when the collection suit goes to trial, the entire property management staff no longer works on the property.  In fact, the community is now managed by a different company.  The resident defends the case by contending that the landlord was in default and that the former onsite team made all sorts of promises and verbal agreements with the resident.  Without an estoppel certificate, this would be a difficult case to win.  You may not be able to produce any witnesses (the former onsite team) to deny and refute the resident’s allegations.  With an estoppel certificate, the resident’s case is dead in the water.

In fact, the resident’s case is now so weak that the resident might do the right thing and settle the case without a trial.  If the resident is represented by counsel, most attorneys would seriously consider whether it was worth going forward.  Estoppel certificates have the potential to positively impact resident recovery in a number of ways.  First, they cut off groundless claims.  Second, they save valuable staff time by decreasing trial length.  The collection trial is much shorter because no time is spent dealing with the resident’s litany of made-up allegations.  Third, estoppel certificates have the potential to increase resident recovery when all of the resident’s bogus bargaining chips (leverage to get you to lower your claim) are taken out of play.

You may think that your lease already covers some of these issues.  Specifically, you may think you’re protected because most leases contain a non-waiver clause coupled with a merger clause.  For example, this lease contains the entire agreement, there are no other agreements, verbal or otherwise, and the lease can only be modified or waived by a written document signed by the parties.  While these clauses are important, merger and non-waiver clauses by themselves do not address all problems because of Colorado case law.  Colorado courts have clearly held that every lease or lease provision can be modified or waived, even leases with no modification and no waiver clauses.  Similarly, an estoppel certificate will not cut off all claims, but will cut off all claims through the date the resident signs it.  For example, the resident has lived at the community for five years.  The resident signed an estoppel certificate three months ago.  The resident can now only raise claims that arose over the last three months, and is “estopped” to raise claims that arose over the previous four years and nine months.

Estoppel certificates also have value when you’re turning a property over, taking over a property, refinancing, or assisting the owner in buying or selling a community.  When you’re leaving a property, the last thing you need is to be continually dragged into problems involving residents on a property you no longer manage.  The solution – have all residents sign estoppel certificates before you turn the property over.  You can now move on with peace of mind.  When you’re taking over a property, you may not be well informed regarding resident status.   The solution is to have all residents sign estoppel certificates upon renewal.  Now, you don’t have to worry about what went on before you arrived.  Similarly, when all of the residents have signed estoppel certificates, buyers, sellers, and lenders have confidence that they are not dealing with a hidden mine field of resident complaints and lawsuits.

When should you use estoppel certificates?  You should require residents to sign an estoppel certificate upon renewal.  However, for maximum protection and benefit, your lease should also require every resident to execute and deliver an estoppel certificate with ten days of request.  If the right to request an estoppel certificate is built into your lease, you may request them when you need them.  If a resident refuses to sign, you know that you may have a potential problem.  Further, if the right to request an estoppel certificate is a lease obligation, you can enforce this obligation, through eviction if necessary.

Commercial landlords have been enjoying the tremendous benefits of estoppel certificates for years.  The use of estoppel certificates is rare in residential leasing. Because of the many potential benefits, the time has come for residential landlords and property managers to use estoppel certificates to defeat groundless claims and to alert you to serious potential litigation claims.  If you are a client with a current client login, example estoppel language is available for immediate download from our website.  If you’re not a client, you may register to receive future editions of Landlord News at htspc.com, and receive access to our example estoppel language.

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