Due to a lender's reliance upon the income streams associated with real property to be used as security in a commercial mortgage financing transaction, the leases that exist upon a borrower's property are the most important assets of that borrower next to the value of the land to be mortgaged. As those leases are a key element of the security taken by a lender in connection with a financing, a lender would do well to carefully assess their value in evaluating the risk associated with the financing transaction.

An Estoppel Certificate, also known as a Tenant's Acknowledgement or Status Statement, serves as independent verification to a lender of the terms and status of a particular lease of land from the tenant's perspective, enhancing a borrower's disclosure to a lender. Although they are not immune from challenges, these documents can serve to prevent a tenant from making claims in the future which are inconsistent with the certificate regarding matters that existed prior to the date of the certificate.

The strength of a borrower's leases will factor into the decision to provide financing and an Estoppel Certificate can assist in assessing a lease's value by providing a lender with a current snapshot of a lease, confirming its terms, parties and any outstanding current obligations. They bolster the disclosure of the borrower by revealing whether a landlord borrower is liable for items such as completing "Landlord's Work" and making payments to the tenant in the form of a tenant improvement allowance. This information can be used by a lender as a baseline in assessing risk and provide a window into the operational realities of the landlord/tenant relationship that are not discoverable by a review of the lease documentation and rent roll alone. This allows a lender to have a clearer picture of the revenue streams it can expect to receive in the event it must enforce its security.

Estoppel Certificates also give information to a lender regarding whether there have been defaults by the landlord or the tenant, whether options to extend the term or expand the premises have been exercised, and give an indication of the level of cooperation between the parties. They also allow a tenant to provide its perspective regarding the landlord's ability and willingness to satisfy its obligations.

Subject to the limitations contained in a particular lease, an Estoppel Certificate should typically contain the following provisions:

  • Certification that the lease is valid, unmodified, in full force and effect and is presently in good standing
  • A statement as to whether the tenant has accepted and taken possession of the premises
  • Confirmation of the commencement date, the expiry of the term and any renewal rights the tenant may have
  • A statement as to whether the tenant has sublet all or any portion of the premises
  • An acknowledgement as to the basic rent for the term, whether there are any prepaid rent or security deposits and the date to which the rent has been paid
  • Confirmation as to whether there are defaults under the lease by the landlord or the tenant that remain outstanding or uncured
  • A statement that any improvements that the landlord is responsible for have been satisfactorily completed or, in the alternative, a list of outstanding items
  • A declaration as to whether the tenant has any expansion, contraction, renewal, termination or purchase options and whether such options have been exercised
  • A statement that there is no existing dispute, claim, set-off, defence or counterclaim by or against the landlord; and
  • A statement that there are no allowances, incentives, inducements, or benefits or money owing or which may become due to the tenant under the lease

Overall, having a number of comprehensive Estoppel Certificates prior to closing will provide a lender with a level of enhanced disclosure of the details of its borrower's income stream and lease obligations to supplement and support its mortgage security package.