What is an Estoppel Agreement?
An estoppel agreement is a legally binding document that is generally used in real estate and financing transactions. It usually has two main purposes: first, to provide an accurate status report of the existing obligations owed by the borrower to the lender for the benefit of the new lender; or, second, to clarify for the new owner/ purchaser of a property, the ongoing obligations of the property under the previous financing terms. As such , an estoppel agreement serves an important role in a transaction as the continued viability of the underlying mortgage loan agreement or the validity of the underlying lease can be a testament to the continued stability and value of the asset. It is a document that the new owner/lender is requesting from the previous owner of the property to confirm that it has no dispute regarding the terms of the loan or the relationship between the owner and the lender.
It is also in the best interest of the existing property owner and borrower to sign an estoppel agreement with acceptable language since the estoppel agreement usually contains acknowledgements from the owner of the property and essentially binds the owner to the statements made by the property owner, including but not limited to: (1) acknowledging the existence of the loan agreement, (2) confirming the validity of the loan agreement, (3) identifying the loan agreement payments to be correct, (4) confirming the owner is not in default under the loan agreement, (5) acknowledging the lender is not in default under the loan agreement, and (6) waiving the right to amend or modify the terms of the loan agreement.
Estoppel Agreement Essentials
The first essential element of an estoppel agreement is the identification of the parties involved in the transaction, including all persons who may be charged with equitable interests in the estopped property. All relevant persons should be named as parties to the agreement, leaving no areas of uncertainty regarding its application. The second is the representations made by them, which should include a determination of the extent of the property that is covered by the agreement and whether any exclusions apply. The third, and most frequently overlooked element, covers the extent of the indemnity provisions, if any, between the parties. Indemnity provisions, while not universally applicable as a means to allocate risk among the parties, may prove useful where one party is the consumer of some service that the other is obligating itself to perform, but in fact, a detailed analysis of the risks involved is essential to determine how best to allocate them. Extra care must also be taken to make sure that the agreement properly accounts for and addresses any changes in the legal or factual circumstances that may occur after the execution of the agreement. Any estoppel agreement should also specifically identify those aspects of the obligations of the parties that are subject to change either upon the occurrence of specified events or at the end of specified time periods, including descriptions of what those events may entail.
When to Use (and Not Use) an Estoppel Agreement
An estoppel agreement is not always needed or necessary, and it is not universally accepted. So under what circumstances would it be useful, or of benefit? As a practical matter, the estoppel agreement for real estate provides benefits for purchasers of less than fee simple ownership interests. For example, fractional interest owners, life tenants, lessees, easement holders, or mortgage borrowers are all situations when the estoppel agreement is of benefit to the party seeking the comfort of the estoppel agreement. If the prospective buyer desires an estoppel agreement, it may be that the seller will sign it simply because it is presented to him. Or, the seller may demand a $5, No Harm No Foul, consideration for the sale of the property, given the fact that the estoppel agreement is basically a cognovit note, whose terms cannot be modified or disputed post contract execution, without the consent of the other side to the transaction. Estoppel agreements are frequently used in the transfer of business leases, sales and transfers of partnerships and limited liability companies holding title to real estate or assets, and always requested by institutional lenders and prospective mortgage lenders in connection with a transfer of real estate subject to a mortgage. Institutional lenders require estoppel agreements as a condition precedent to the closing of a loan secured by a mortgage or deed of trust, because it assures that the leasehold estate to be mortgaged is valid and enforceable.
An Example of an Estoppel Agreement
In order to assist in making the concept of an estoppel agreement more understandable, I provide the following outline or template of a fairly standard estoppel agreement, which I have previously used.
- PROPERTY ADDRESS: This paragraph should state the tract address for the Property, as an estoppel requirement to contain and deal with an accurate description of the Property in question. Additionally, the definition of the Property often refers the parties and the court to the Condominum Plat Map and Declaration of Covenants, Restrictions and Easements for more detail to the Property’s legal description.
- PARTIES: This paragraph should state who the parties are as tenants and who the landlord is. The tenant should be referred to as the signatory of the estoppel agreement in order to make it clear who the tenant is related to this suit. The reference to landlord should refer to the entity on record with the trustees or condominium association to whom assessments have arguably been or have not been paid. It is important to note that the Condominium Association, or some such entity, is expressly included in this case, as the facts of a foreclosure suit often show that it is suing to collect assessments from the unit owners equally to the property previously owned by the unit owner.
- RECITALS: This paragraph should reflect the history and common practice of liens in general, and the way that the owners of condominiums, for example, in this case, often pay assessments, as the homeowners’ associations to which these properties are a part, often represent the unpaid debt to the property and other assessments applied to lawsuits, insurance, repair and maintenance, and other actions that extend directly to the property. The recital also states that the parties have read the specific documents that apply to the property and have attached them as exhibits to the estoppel agreement.
- PERSONAL REASONABLE BELIEF: The important thing here is that the tenant of the property must be attached to the exhibit clearly so that the tenant can be identified either by humans or any judgments filed as a result of the suit. The estoppel agreement should declaratively state that the tenant has a personal reasonable belief as to the tenant’s ownership interest in the property as well.
- UNPAID ASSESSMENTS: This paragraph should state that the tenant is aware of the amount of the association’s lien against the property, and that the tenant agrees to be personally responsible for these assessments. It also contains the tenant’s promise that it is not seeking to have the trustee obtain a deficiency against itself in order to satisfy its obligation, if such a deficiency exists.
- INDEBTEDNESS: This paragraph should state that the tenant is aware that it is personally responsible for the payment of the outstanding debt, if any, owed to the association that manages the property, and has assumed that responsibility as part of its ownership interest in the property.
- LIABILITY: This paragraph should state that the tenant has agreed to waive any requirement that the owner of the property remains personally liable for his or her indebtedness to the association, and that the tenant agrees that it is solely the tenant’s responsibility to pay assessments and other fees to the condominium association managing the property; as well as the fact that in the event that the Covenants, Restrictions and other conditions in the Declaration or the Condominium Association do not contain this agreement, the tenant remains responsible for the balance due to the association from the Property and even beyond that, it is further liable for the fees, assessments, and other traditional issues relating to the scope of the owner’s interests and assessments.
Legal and Business Advantages
Significantly, an estoppel agreement is a contract under the laws of California and is governed by the California Contract Act. For this reason, the signatory to an estoppel agreement must understand the legal implications of signing such a contract. In this respect, the provisions of the agreement, including the language within the agreement, should be carefully reviewed. Oftentimes, good faith or generally accepted business practice issues and understandings can become complicated and obscure when incorporated into an estoppel agreement. Generally, if a party signs an estoppel agreement (particularly a tenant) without fully understanding its terms and the legal ramifications, such a party may be trapped by the terms of the agreement that it did not understand or agree to even though the same were not expressly set forth in the fully-executed agreement. The reasons for this are clear. First, the party signing an estoppel agreement has, by nature, limited time in which to respond to the request of the landlord or mortgagee for the signing of the estoppel agreement. As a result, the party should examine the agreement carefully and request the necessary changes to any controversial provision in the agreement before signing. Second, it is clear that a party who signs a written agreement containing representations and warranties will be bound by the terms of the contract even if the party did not fully understand the terms or did not know that they were being included within the agreement . For example, a tenant will typically sign an estoppel agreement stating that it is current on its rent and has not received any notice to cure any default under the lease, even though the tenant may have past due rent or may have defaulted under the lease. In this example, the landlord or lender would be entitled to rely upon the representations of the party under the estoppel agreement even it was untrue. As a result, if a party chooses not to review the agreement carefully prior to signing the document, such party may be legally bound by all representations contained within the estoppel even if the party was unaware of the terms of the agreement or the false representations it made under the estoppel. It is accepted that the underlying concepts of estoppel will dictate that a party may not change his position to the detriment of another who justifiably relied upon the original representations of the party who is now attempting to change his position. In the case of an estoppel agreement, such concept will be generally enforced unless the terms and conditions of the estoppel are not incorporated within the signed agreement. A party signing an estoppel agreement should understand that such a document is binding and will have long-term legal ramifications if the person or entity does not exercise his or its right to review the agreement in detail before signing the document either as a tenant or as a property owner.
Common Errors to Avoid
The following are typical errors that parties make when dealing with an estoppel agreement, and ways in which these mistakes can be avoided:
(1) Failing to provide enough time for the parties to review the estoppel agreement and/or failing to provide all parties with a copy of the estoppel agreement.
The estoppel agreement is a contract, as such there should be no surprises for the parties when they are being asked to sign this document. To avoid hassles, or worse, litigation, it is advisable to allow the parties as much time as is reasonably allowed to review the terms of the agreement so that there will not be any unexpected surprise contained within the agreement that could lead to litigation.
(2) Not having the boars reviewed or approved the estoppel agreement.
While it is not always practical for the board to review or approve every estoppel agreement, it is advisable that the board should consider reviewing estoppel agreements for anything other than a simple or straightforward transaction. The board has a fiduciary duty to its members and it may be held liable to the association’s members for improperly approving an estoppel agreement that waives the assessment rights of a member or fails to collect late fees or collections costs.
(3) Failing to have a provision which allows for the collection of charges by the association for any costs, penalties, fines, attorneys’ fees, collection costs or the like incurred by the association in connection with the transaction.
This is a little known fact that the courts in your jurisdiction have basically ignored when it comes to collecting from a buyer or seller. The general rule is that the party who has incurred a cost is entitled to be reimbursed. However, in circumstances where the association is taking on the costs to provide an estoppel agreement, it is advisable for the parties to negotiate an agreed upon price for the estoppel agreement and include a provision entitling the association to collect the entire amount from the seller or buyer.
(4) Not advising the seller and/or buyer that a mortgage or lender may have a superior claim to the association’s assessment claims, and that the mortgage or lender may be entitled to a credit against those claims.
The new mortgage laws and their interpretation vary from state to state. However, generally speaking, it is likely that the assessment rights of an association and the creditors of the seller will be affected by the foreclosure and title policies. It is recommended that association members check with their local lenders for any amendments to the law that may affect this process or find other up to date methods to collect under their state’s laws.
(5) Failing to include a provision which prevents the seller and its agents from binding the association to pay any penalties, fees or costs associated with the buyer’s purchase of the property after closing.
While the seller and its agents in a real estate transaction are able to bind the buyer, it is possible that the buyer’s representations may bind the association. To avoid confusion over contractual obligations and liability, it is recommended to include a provision which explicitly prohibits the seller’s and buyer’s agents from binding the association to any penalties or late fees after closing.
Engaging a Legal Professional
The prospect of entering into an estoppel agreement can be a daunting proposition. The complex web of rights and responsibilities that need to be confirmed leads many to question the necessity of the additional documentation. What is more, there is wide disparity between the documents in circulation. Some are straightforward and speak plainly. Others, however, are replete with technical jargon that can leave you struggling to decipher your obligations .
Before committing to any form of agreement, it pays to first seek guidance from an experienced property lawyer. Given the potential ramifications of signing the document, it’s important to make sure you understand the terms before you put pen to paper. Having a legal expert at your side can help to simplify all that minutiae. A lawyer can decode confusing clauses into simple English, which in turn makes it easier for you to spot potential issues before it’s too late.